Understanding Income Computation & Disclosure Standards (ICDS)

BDO INDIA – INCOME COMPUTATION DISCLOSURE STANDARDS (ICDS)

CONTENTS A. Applicability B. ICDS III – Construction Contracts C. ICDS IV – Revenue Recognition D. ICDS VIII – Securities E. ICDS X – Provisions, Contingent Liabilities and Contingent Assets.

Applicability Client name - Event - Presentation title

Applicability • Reframed as “Income Computation & Disclosure Standards” • Applicable to all the assessees following mercantile system of accounting • No separate books of accounts required to be maintained. • To be followed in computation of income & disclosure purpose • In case of conflict between Act or ICDS, Act will prevail • Applicable with effect from 1st day of April, 2015. • Applicability to assessee covered by presumptive taxation? Transitional Provisions – Applicability to all transactions existing as on 01 April 2015.

ICDS III – Construction Contracts Client name - Event - Presentation title

ICDS III- Construction Contracts • Applies to a fixed price, cost plus, or to a hybrid of fixed & cost plus contract • Mandates recognition of revenue under Percentage of Completion Method (POCM) • Mandatory to recognize profit/loss on POCM basis beyond 25% • Foreseeable losses • Future/anticipated losses are not allowed • Contract cost relatable to proportion of work completed are allowed Not applicable to real estate developers

ICDS III: Construction Contracts

ICDS III- Construction Contracts Taxpayer ends up paying tax in two years on income of INR 12,000 where as actual income is INR 2,000. There is no carry back of losses or MAT credit.

ICDS III- Construction Contracts • Components of revenue recognition on POCM basis • Contract revenue to be recognised if there is reasonable certainty of ultimate collection • Reconcilable with real income theory as per present position • Retention money to be included as part of contract revenue

ICDS IV – Revenue Recognition Client name - Event - Presentation title

ICDS IV- Revenue recognition • ICDS on revenue recognition will not cover revenues dealt by other ICDS; say, • Construction contracts, • Government grants, • Foreign exchange fluctuation, • Contingent Assets • Whether ICDS on Revenue recognition applicable to Leases, BOT projects, Real estate development? • Revenue from sale of goods recognised upon transfer of property or upon transfer of significant risk/rewards of ownership to buyer. • Sale of immovable - Controversy in VAT and service tax. • Service sector following mercantile method to recognise revenue on POCM basis • No need to recognise profit if stage of completion < 25% • Foreseeable loss may also be on POCM basis. • Valuation of inventory of service covered by ICDS on valuation of inventory

ICDS-4: Revenue Recognition

ICDS IV- Revenue recognition • Revenue to be recognised only if there is reasonable certainty of its ultimate collection. • ICDS not materially different from AS-9 • ICDS is in line with current judicial thinking which aligns also with real income theory! • But ICDS is ambiguous whether condition of reasonable certainty of ultimate collection applies also to interest and royalty income

ICDS VIII – Securities Client name - Event - Presentation title

ICDS VIII- Securities • Deals with securities held as stock-in-trade • Currently, ICAI AS-13 principles on “current investments” apply to securities held as stock-in-trade • ‘Securities’ defined to have meaning assigned in S.2(h) of SCRA except derivatives referred in S.2(h)(1a) • ICDS does not apply to securities held by • Insurance Companies; Mutual Funds; Venture Capital Funds; Banks; Public Financial Institutions • FIIs/FPIs, since securities are deemed to be capital assets in their hands • Coverage of ICDS will illustratively affect • Stock-Brokers; NBFCs; Others engaged in securities trading • Computation of ‘deemed speculation’ loss under Explanation to s.73

ICDS VIII- Securities • Securities to be classified into following buckets • Shares; Debt Securities; Convertible Securities; Any Other Securities

ICDS VIII- Securities Stock value on Bucket valuation Itemised Valuation • Impact analysis • Bucket approach virtually results in accelerated taxation with reference to the security (at item (5) above) which appreciates in value • May also create mismatch with MAT

ICDS X – Provisions, Contingent Liabilities and Contingent Assets Client name - Event - Presentation title

ICDS X - Provisions, Contingent liabilities and Contingent assets • Unlike existing AS, ICDS requires recognition of provisions only if it is ‘reasonably certain’. It excludes from its ambit onerous contracts. • In addition, ICDS also requires recognition of contingent assets when the inflow of economic benefits is reasonably certain. • These changes are presumably made with the intention to bring in consistency to the tax treatment of losses and gains. • Reasonably certain • As per dictionary/judicial exposition - fair and reasonable; being free from reasonable doubt • Yardstick of ‘reasonable certainty’ needs to be uniform in case of provision for liability as also asset, but, is prone to subjective considerations by different assessees in identically placed situation • In either case, opinion of experts and events after balance sheet date may be relied upon by Tax Authority

ICDS X - Provisions, Contingent Assets and Contingent Liabilities

THANK YOU& QUESTIONS Budget 2015

Understanding Income Computation & Disclosure Standards (ICDS)