· Section 145(2) gives power to the Central Government to notify accounting standards to be followed by assessees. Exercising that power, the Central Government introduced 10 Income Computation and Disclosure Standards (ICDS) on 31.03.2015 vide Notification no. 33 which were made applicable from A.Y. 2016-17.
· As per this notification, the ICDS were applicable to all the assessees following mercantile system of accounting. Also, the said ICDS were not applicable for the purpose of maintenance of books of accounts.
· However, on 06.07.2016, it was decided to defer the applicability of these standards by a year to A.Y. 2017-18. Therefore, on 29.09.2016, the CBDT re-notified ICDS vide Notification no. 87/2016, which will be applicable from A.Y. 2017-18.
· The CBDT has also amended Form No. 3CD vide its Notification no. 88/2016, wherein details like adjustment and disclosure relating to ICDS are not to be reported under Clause 13 of the Form.
· As per the revised ICDS notified by CBDT, the said standards are now applicable to all assessees following mercantile system of accounting except individuals and HUFs who are not required to get their accounts audited under Section 44AB of the Act.
· The key amendments made in the revised ICDS are as under:
(i) ICDS II : Valuation of Inventories
The techniques for measurement of cost specified in the original standards were FIFO or Weighted Average Cost Method and Retail Method (in cases where it was impracticable to use FIFO or Weighted Average Cost). However, in the revised standards, the techniques for measurement of cost now include Standard Cost Method also. The inclusion of the standard cost method shows that the Board has tried to remove the inconsistency between the existing Accounting Standards and the earlier ICDS.
(ii) ICDS III : Construction Contracts
The transitional provisions of the original standard provided for recognizing the contract revenues and contracts costs associated with the contracts which commenced on or before 31st March 2015 but not completed by the said date, in accordance with the provisions of the standard. Now, as per the revised standard, the contract revenue and contract costs associated with contracts which commenced on or before 31st March 2016 but not completed by the said date, shall be recognized on the basis of the method regularly followed by the assessee in the previous year.
(iii) ICDS IV : Revenue recognition
The original standards provided for recognizing revenue of service transactions by using percentage completion method in all cases. However, in the revised ICDS, a new Para 7 has been inserted, which provides that revenue from service contracts with a duration of not more than 90 days may be recognized only when the rendering of services under that contract is completed or substantially completed, and not on the basis of percentage completion method.
Exemption from percentage completion method has also been provided for in the revised standard in cases when services are provided by a number of acts over a specific period of time. As per the revised standard, revenue in such cases may be recognized on a straight line basis over the specific period.
(iv) ICDS VI : Effect of changes in Foreign Exchange Rates
As per the original ICDS, an entity was required to segregate all its foreign operations into integral and non-integral operations on the basis of their respective definitions. However, under the revised standard, the segregation between integral and non-integral has been removed. Now, the financial statements of a foreign operation shall be translated using the principles and procedures applicable to a normal entity.
(v) ICDS VIII : Securities
Under the revised standard, the securities have been segregated into two parts:
(a) Part A: securities held as stock-in-trade
(b) Part B: securities held by a scheduled bank or public financial institution
The revised standard specifies that the securities held by a scheduled bank or public financial institutions shall be recognized in accordance with the guidelines issued by RBI in this regard. The standard further states that any claim in excess of the said guidelines shall not be taken into account.
(vi) ICDS IX : Borrowing Costs
The costs for the funds borrowed for acquisition, construction or production of a qualifying asset are to be capitalized to the cost of the asset. Under the original standard, there was no mentioning of time frame on the basis of which the asset could have been segregated between a qualifying or a non-qualifying asset. Under the revised standard, an Explanation has been added, which provides that a qualifying asset shall be such asset that necessarily requires a period of 12 months or more for its acquisition, construction or production.
· By bringing out above amendments, the Government has tried to resolve various concerns raised by various stakeholders.
· As many companies had already adopted the ICDS from April 1, 2016, the impact of the said amendments also needs to be identified and reviewed.
Further Reading