Income Computation & Disclosure Standards (ICDS)

The Central Government has vide Notification dated 29 September 2016 released a new set of ICDS. The revised ICDS are made applicable from Assessment Year 2017 -18 and would have bearing on the taxable income of all the subsequent financial years.

The revised ICDS are applicable to all taxpayers following mercantile system of accounting, except individual and Hindu Undivided Family not required to get his/its accounts of the previous year audited in accordance with the provisions of section 44AB of the Act.

The key changes that have been brought about by the revised ICDS issued on 29th September, 2016 are as under –

(a) ICDS –II – Inventories

– ICDS defined cost of inventories to, inter alia, include cost of services. ICDS provided that in case of service providers, cost of services shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads.

– It was unclear whether the aforesaid requirement of inclusion of cost of services in cost of inventories applied only to services providers. The words “in case of a service provider” have been deleted in the revised ICDS. In other words, the aforesaid requirement of including cost of services in inventory valuation applies to all entities who fall within the ambit of ICDS.

– Further, standard costing has also been permitted for valuation of inventories in addition to the retail method of valuation.

(b) ICDS-III –Construction contracts

– In terms of original ICDS, income from construction contract was required to be recognized by following percentage of completion method (“POCM”).

– The revised ICDS provides that in relation to construction contracts under progress as on 31.3.2016, the method of accounting being regularly followed by an entity in respect of the same, even if different from POCM, may continue to be followed.

(c) ICDS-IV- Revenue recognition

– The revised ICDS now additionally provides that revenue is required to be recognised on a straight line basis over the specific period where the services are provided by an indeterminate number of acts over a specific period of time.

– However, revenue from service contracts with duration of not more than 90 days may be recognised when the rendering of services under that contract is completed or substantially completed.

– The interest on refund of any tax, duty or cess shall be recognised as income on receipt basis.


(d) ICDS-V – Tangible Fixed Assets

– The requirement of maintaining the details of jointly owned fixed assets in the fixed asset register separately has been done away with.

(e) ICDS –VI- Effects of changes in foreign exchange rates

– It is now provided that on the last day of each previous year, non-monetary item being inventory which is carried at net realisable value denominated in foreign currency shall be reported using the exchange rate that existed when such value was determined.

– The requirement of classification of foreign operations into integral and non-integral foreign operations has been done away with.

(f) ICDS- VIII- Securities

– This ICDS has now been bifurcated into two parts – Part A, relating to securities held as stock in trade, and Part B, relating to securities held by a scheduled bank or public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956 or the Companies Act, 2013.

– In relation to entities covered under Part B, it has been provided that the securities shall be classified, recognised and measured in accordance with the extant guidelines issued by Reserve Bank of India in this regard.

– Option of applying weighted average cost formula is now provided for determining cost of security, where the actual cost initially recognised cannot be ascertained by reference to specific identification. Earlier only option of first-in-first-out method was provided.

(g) ICDS-IX- Borrowing Cost

– The revised formula for general borrowing seeks for capitalisation of interest cost, irrespective whether such borrowing has been utilized for acquisition of asset, whereas the erstwhile ICDS provided for capitalisation of “funds borrowed generally and utilised for the purpose of acquisition…….. of a qualifying asset”.

– For the purpose of computing the borrowing cost eligible for capitalisation in relation to general borrowing, only the amount of qualifying asset, to the extent, it is funded out of specific borrowing is to be reduced, as against the full value of such asset as per the erstwhile ICDS.

– In connection with the borrowing costs eligible for capitalisation, it has now been provided that such cost shall only be capitalised till the date when the asset is first put to use and in case of inventory, when substantially all the activities necessary to prepare such inventory for its intended sale are complete.