issued in accordance of section 145 (2) of the income-tax ...€¢method of accounting •for pgbp...

Issued in accordance of

Section 145 (2)

of the

Income-tax Act,1961

Category Relevant AS to be followed for Accounting Purpose

Relevant AS to be followed for Income Computation

Proprietorship AS issued by ICAI ICDS

Partnership Firm AS issued by ICAI ICDS

Company AS issued under Companies(Accounting Standards) Rules

ICDS

Company havingHigher Net Worth

Ind – AS issued under Companies (Accounting Standards) Rules, 2015

ICDS

• Method of Accounting

• For PGBP & IOS

• Cash Basis or Mercantile Basis

Sub- Section

1

• Central Government may Notify

• Income Computation and Disclosure

Standards

Sub- Section

2

• If Sub-Section 1 and 2 not followed

• Assessment u/s 144 (Self Assessment Section)

Sub- Section

3

•Not for Accounts

•Only for Computation

of PGBP & IOS incomes

Income

Computation

• Form 3 CDDisclosure

Standards

Act

ICDS

Issued on 29.09.2016 vide Notification No. 87/2016

Applicable from 01.04.2016

Applicable from Asst. Year 2017-18

Will first be applied in Advance Tax Calculation for the First Quarter

Corresponding Accounting Standard – 1 on Disclosure of Accounting Policies

Fundamental Accounting

Assumption

Going

ConcernConsistency Accrual

Factors Governing Selection of Accounting Policy

1. Substance over Form

2. Prudence (Mark to Market loss not to be recorded unless permitted)

3. True and Fair

ICDS – I :: Accounting Policies

Marked to market loss or an expected loss shall not be recognised

unless

the recognition of such loss is permitted by any other ICDS


No Change in Accounting Policy without

REASONABLE CAUSE(Reasonable Clause not defined)


Question 9:

ICDS – 1 provides that an accounting policy shall not be changed without reasonable cause. The term reasonable cause is not defined. What shall constitute ‘reasonable cause’?

Answer:

Under the Act, ‘reasonable cause’ is an existing concept and evolved well over a period of time conferring desired flexibility to the tax payer in deserving cases.

All contracts or transactions existing on the1st April, 2016 or entered after the dateshall follow the ICDS after taking note of theadjustments already made earlier, if any.

Disclosure of Accounting Policies

All significant accounting policies must be disclosed.

Any significant change in accounting policy must be disclosed. (Two times)

Disclosure of accounting policies cannot remedy a wrong treatment.


Valuation Principal similar to AS – 2

Lower of Cost or NRV

Corresponding Accounting Standard – 2 on Valuation of Inventories

Cost shall include:

All costs incurred to bring the goods to its present location and condition

Cost of manufacturing will include all costs including systematic allocation of Fixed Cost.

All duties and taxes paid

ICDS – II :: Valuation of Inventories

Cost shall NOT include:

Storage Cost

Administrative Costs

Selling Costs

Abnormal Loss

Trade Discount

(i.e. Valuation at Purchase less Trade Discount)


•Valued at Respective Purchase Price lot to

which the Inventories belong to

When Specific

Identification of

Inventories is Possible

viz – a – viz its Purchase

Lot

•Either valued at FIFO Basis

•or valued at Weighted Average Basis

•Or Valued under Retail Price Method (Only

applicable for retail traders)

•Standard Cost

When Inventories

present cannot be

identified with the

respective Purchase

Invoice

Cost Formula


Raw Material Valuation

Primarily at Cost

(If Finished Goods are sold at Profit)


Dissolution of Partnership Firm, whether business is continued or not

Valuation of Inventory to be done compulsorily

at

Net Realisable Value.


For a continuing Firm

Closing Stock of Preceding Year

For a New Firm

Cost of Inventory available on the day of commencement of business

Accounting Policies adopted in measuring inventories including cost formula used.

Details of Inventories for which Standard Costing has been used (A confirmation of the fact that Standard Cost approximates the actual cost)

Total Carrying Amount of Inventories

Scope:

Applicable for the computation of Income of Contractor of Construction Contract

Provisions of this ICDS shall be applied to each Construction Contract Separately.

Corresponding Accounting Standard – 7 on Accounting of Construction Contracts

Revenue and Cost Recognition

Percentage of Completion Method

(POCM)

ICDS – III :: Construction Contracts

Percentage of Completion is assessed under either of three ways:

Cost Incurred till date to Total Estimated Cost

Physical Completion Method

Survey Method

Progress payments and advances received from customers are

not determinative of the stage of completion of a contract.


Profit & Loss Account

To Contract Cost XXXXX By Contract Revenue XXXXXX

(Total Est. Cost * % of Completion)

(Total Est. Revenue * % of Completion)

To Profit XXXXX

Note: Contract Revenue should be recognised when there is reasonable certainty of its ultimate collection.


When Percentage of Completion is below 25%

Contract Revenue = Contract Cost

(i.e. Contract Revenue is not recognised as per POCM)

No Profit and No Loss


Major Deviation from Existing AS – 7

AS -

7

100% Loss to be

provided in P&L at

the moment it is

realised that the

loss will be suffered

whether or not

Project has begun. ICD

S -

3

Recognize Loss on

the Basis of

Percentage of

Completion Method.

(This is illogical and

against the concept

of Provision for

Onerous Contract

which is globally

Accepted)


Question 11:

Whether the recognition of retention money, receipt of which is contingent on the satisfaction of certain performance is yet to be recognised as revenue on billing?

Answer:

Yes, subject to reasonable certainty of its ultimate collection.

Amount of Contract Revenue recognised as Revenue

Method used to determine stage of completion

Costs + Recognised Profit – Recognised losses

Advances Received

Retentions

Disclosure

Revenue on sale of Goods to be recognisedwhen

Transfer of Property takes place or

Transfer of Risks and Rewards of ownership takes place

And, Reasonable certainty of its ultimate realization exists.

Corresponding Accounting Standard – 9 on Revenue Recognition

Revenue on sale of services to be recognised

On

Percentage of Completion Basis.

(The provisions of ICDS on Construction Contracts shall apply Mutatis Mutandis for sales of services.)

Duration of Service Contract is 90 days or less

Service comprise of number of acts to be performed; then revenue may be recognised on SLM basis

•On Time Basis

•Premium or Discount to be amortised over the

period of maturityInterest

•As per Agreement

•On some systematic and rational basisRoyality

•As per provisions of ActDividend

Treatment of Other Revenue Items

Total amount of sale not recognised due to lack of reasonable certainty of its collection

Amount of revenue from Service Transaction recognised as revenue

Method used to determine Percentage of Completion

For Service Transaction in progress at end

- Costs + Recognised Profits – Losses

- Amount of Advance Received

- Amount of Retentions

Tangible Fixed Assets : Cost Includes

Purchase Price

Duties & Taxes (Excluding those which are recoverable)

Other Directly Attributable Expenses

Price Adjustment

Start up and Commissioning Expenses

Test Run Expenses (Till Commercial Production)

Corresponding Accounting Standard – 10 & 6 on Fixed Assets & Depreciation

Tangible Fixed Assets: Cost excludes/ is deducted

Trade Discount & Rebates

Price Adjustment

General Overheads

Accounting for Improvements and repairs are similar to normal accounting norms.

Depreciation as per provisions of Act

Income from sale / transfer of Tangible Fixed Assets as per the provisions of Act

Description of Asset or block of Assets

Rate of Depreciation

Actual cost or WDV

Additions and deductions with dates

Depreciation Allowable

Closing WDV

(Generally mentioned in Clause 18 of Form 3 CD)

Initial Recognition of a Transaction made in Foreign Currency is recorded at the rate existing on the date of transaction.

Monthly /weekly average exchange rates can be taken for all

transactions of the month / weeek if these rates are approximately similar to the actual rates on the transaction date.

Corresponding Accounting Standard – 11 on Foreign Exchange Rates

Conversion on Closing Dates

• At the Closing Rate

• Difference is treated as income or

expense

Monetary Items

(Cash, Debtors etc)

• Continued at the rate of date of

transaction

• Inventory valued at NRV; date of

determination of NRV

Non-Monetary Items

(Stock, Plant &

Machine etc)

Subject to Section 43A of the Act

It requires recognition of Government Grants only when there is a reasonable assurance that the person shall:

- Comply with the conditions attached to them;

- Receive the Grant.

Condition of receipt of Grant are not to be seen once the Grant is received.

Corresponding Accounting Standard – 12 on Accounting of Government Grants

Grant Related to

Dep Fixed Assets

• Deducted from

the Fixed Assets

Grant Related to

Expenses

• Recognised as

Income in the

matching period

of Incurred

Expenses

Misc. Other Grant

• Treated as

Income

• (Deviation from Supreme

Court Judgement of Ponni

Sugal Mills (2008)

Treatment of Government Grant

Recorded at the price atwhich it has been recevied(i.e. Concessional Price)

Nature & Extent of Government Grants recognised by way of Deduction from Actual Cost

Nature & Extent of Government Grants recognised as Income

Nature & Extent of Government Grants not recognised as Income and reason thereof

It deals with Securities held as Stock in Trade only.

Corresponding Accounting Standard – 13 on Investments

Valuation of Securities

Lower of Cost or Net Realisable Value

Comparison of Cost or NRV is to be done on the basis of

Category Wise not Individual basis.

(Deviation from Supreme Court Judgment in case of UCO Bank Limited (240 ITR 355)

Corresponding Accounting Standard – 16 on Borrowing Costs

Borrowing Cost includes:

Commitment Charges on Borrowing

Amortised amount of Discount & premium

Amortised amount of ancillary cost

Finance Charge under Finance Lease

Qualifying Assets

Land, building, machinery, plant or furniture being tangible assets

Know how, patent, copyrights etc being intangible assets

Inventories that require more than one year in its coming into saleable condition

Borrowing Cost

incurred on Qualifying

Asset acquisition

• Capitalised till put to

Use

• Section 36 (1) iii

amended

Other Borrowing Cost

• Charged to revenue

Treatment of Borrowing Cost

Accounting Policy adopted for borrowing cost

Amount capitalised during the year

A Provision is recognised when:

There is present obligation

Arising out of Past Event

Of which reliable estimate can be made

Reasonable certainty (Not Probable) of outflow of resources

Corresponding Accounting Standard – 29

Contingent Liability and Contingent Assets are not to be recognised.

Thank

You

All.

CA. Aditya Kumar MaheshwariSiliguri

[email protected]

97330 44550

issued in accordance of section 145 (2) of the income-tax ...€¢method of accounting •for pgbp...

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