DISCLOSE THE UNDISCLOSED UNDER ICDS

The Income Computation and Disclosure Standards (for short the “ICDSs”) undoubtedly is a
beginning of a new epoch in the method of computation of income under the head of Profits and
Gains of Business or Profession and Income from Other Sources. The ICDS draws power from
Section 145(2) of the Act and accordingly every assessee (with certain exceptions) has to
compute taxable income under the said heads of income only after making appropriate
adjustments to the financial statements. Usually financial statements are prepared following the
Accounting Standards (for short the “AS”) prescribed by Institute of Chartered Accountants of
India (for short the “ICAI”) or the new set of standards called Ind-AS which have set the IFRS
regime rolling in India. While these standards are important to ensure consistent recognition,
measurement and disclosures in the general purpose financial statements; the ICDS overrides
them so far as computation of income for tax purposes is concerned.

There has been a lot of hue and cry by both the assessees’ as well as the Chartered
Accountants fraternity over the additional compliance burden instigated by the new standards
issued by the Tax Department. Meanwhile, the ICAI has come out with a fantastic technical
guide on ICDS in the month of July, 2017. The technical guide covers each of the aspect of the
10 ICDS so notified, in great detail and also explains the carve-ins and carve-outs with
reference to the accounting standards as well as the Ind-AS. As the name suggests ICDS are
not merely Computational Standards but they also require certain amount of disclosures. These
disclosures are required to be made in Para 13(f) of the Form 3CD. There has been a lot of
confusion over the nature and method of providing the required disclosures as per ICDSs. The
fields provided for disclosure in Form 3CD could not exceed 2000 characters and probably in
most of the cases the disclosures to be made may not fit in the allotted space. With the tax audit
due date drawing near, a simple guide to the disclosure requirements and sample disclosures
are the covered by this article.

In the clarifications issued by the CBDT on ICDS vide CIRCULAR NO. 10/2017, DATED: 23-03-
2017 (for short “FAQ”), has specifically dealt with the disclosure requirements as per ICDS in its
last question, which reads as under
“Question 25: ICDS-I requires disclosure of significant accounting policies and
other ICDS requires specific disclosures. Where is the taxpayer required to
make such disclosures specified in ICDS?

Answer: Net effect on the income due to application of ICDS is to be disclosed in the
Return of income. The disclosures required under ICDS shall be made in the tax
audit report in Form 3CD. However, there shall not be any separate disclosure
requirements for persons who are not liable to tax audit.”

While the assessee is obliged to disclose the net effect of ICDS in its return of income, the core
disclosures are required to me made in the Tax Audit Report. It is also clarified that no separate
disclosures are required to be made by persons not liable for tax audit even when they are
obliged to compute income as per the ICDS.

ICDS I: Accounting Policies

Para 6 All significant accounting policies adopted by a person shall be

disclosed
Explanation It is said that “Well begun is half done”. The para 6 of ICDS I is a superb
case of well begun in terms of confusion on part of the department. On one
hand, it has been clarified that ICDS would not apply for maintenance of
books but on the other hand it requires significant accounting policies to be
disclosed. In response to question 1 of the FAQ, the department has
clarified that the accounting policies mentioned in ICDS-I being fundamental
in nature shall be applicable for computing income under the heads "Profits
and gains of business or profession" or "Income from other sources".

Sample The company’s financial statements have been prepared in accordance

with the provisions of the Companies Act, 2013 and the Indian Accounting
Standards (“Ind AS”) notified under the Companies (Indian Accounting
Standards) Rules, 2015 issued by Ministry of Corporate Affairs. The
Company maintains accounts on accrual basis following the historical cost
convention, except for certain financial instruments that are measured at
fair value in accordance with Ind AS. The accounts comply with the ICDSs
referred to u/s. 145 of the Income Tax Act, 1961 except for matters reported
in notes to Clause 13(e) of Form 3CD. The accounting policies are
separately disclosed in Notes to Accounts forming part of Financial
Statements.

Para 7 Any change in an accounting policy which has a material effect

a.
shall be disclosed.
b. The amount by which any item is affected by such change shall
also be disclosed to the extent ascertainable.
c. Where such amount is not ascertainable, wholly or in part, the
fact shall be indicated.
d. If a change is made in the accounting policies which has no
material effect for the current previous year but which is
reasonably expected to have a material effect in later previous
years, the fact of such change shall be appropriately disclosed
in the previous year in which the change is adopted and also in
the previous year in which such change has material effect for
the first time.
Explanation An accounting policy once adopted must be followed consistently year after
year. However, a change may be required by law or if it leads to a more
 appropriate presentation of financial statement. In case of ICDS although a
change in policy could be made if there exists a reasonable cause. In case
change in policy is effected the assessee would have to disclose the 4
parameters of Para 7.

Sample In order to follow uniform accounting policy across all the group companies,
the company has changed the method of charging depreciation from SLM
to WDV method of charging depreciation during the year under
consideration. As a result of the change the depreciation charged in profit
and loss has reduced by Rs. 20 Lakhs and depreciation of the preceding
years amounting to Rs. 120 Lakhs has been reversed. Consequently, the
profit for the year and the reserves are higher by Rs. 140 Lakhs.

Para 9 If the fundamental accounting assumptions of Going Concern,

Consistency and Accrual are followed, specific disclosure is not
required. If a fundamental accounting assumption is not followed, the
fact shall be disclosed
Explanation Going Concern, Consistency and Accrual are the three fundamental
accounting assumptions. The method of accounting and/or presentation of
financial statements could undergo a change, if any, of these assumptions
is jeopardized. Disclosure is required only in event of deviation from the
fundamental assumptions and not otherwise.

Sample The company is unable to continue as a going concern in view of the

change in government policy on Liquor. It is required to realize assets and
settle liabilities otherwise than in the normal course of business. The
financial statements are accordingly drawn at realizable values instead of
historical costs.

ICDS II : Valuation of Inventories

Para 26(a) 1. The accounting policies adopted in measuring inventories

including the cost formulae used.
2. Where Standard Costing has been used as a measurement of
cost, details of such inventories and a confirmation of the fact
that standard cost approximates the actual cost
Explanation This is one of the most important ICDS. Its application has become a big
headache due to the “Inclusive Method” prescribed for taxes. The technical
guide in para 6.4 on page no. 45, has prescribed that the assessee should
prepare a Memorandum Account in order to demonstrate that following
exclusive method instead of inclusive, is tax neutral. The whole circus of
following inclusive method seems to be there in order to support
disallowance u/s. 43B(a) for unpaid duties and taxes. Usually, government
 doesn’t shy away from inserting deeming fictions. It would have been better
if a deeming fiction would have been added to 43B(a) instead of imposing
the inclusive method through ICDS-II.

Para 4 of the said ICDS requires all inventories to be measured at Cost or

Net Realizable Value, whichever is lower. Thus, in pt. 1 above the assessee
is required to disclose the accounting policy adopted in the measurement of
inventories.

Para 13-17 deals with Cost Formulae, which requires assessee to follow
Specific Identification method (for short “SIM) for the purposes of arriving
cost of inventory and where the application of SIM is not possible, the cost
may be assigned using the First-in First-out (FIFO) or the weighted average
cost formula. It may be noted that cost formula shall assume importance
only when inventories are valued at cost and not at net realizable value.

Para 18(1) and 18(2) provides for techniques for measurement of costs.
Thus, apart from calculating actual cost as enunciated in para 4-12 of ICDS
-2, an assessee could also use the Standard Cost Method or Retail Method,
if such methods provide a base which approximates actual costs. The
assessee thereby has the flexibility to adopt any of the techniques, of
course, subject to fulfillment of the conditions. In case the assessee follows
standard costing for measurement, the assessee would be required to
disclose and confirm that the standard cost approximates actual cost. No
such disclosure requirement is laid down for Retail Method.

Sample 1. Inventories are valued at lower of cost or net realizable value. Cost
of inventories comprises of all costs of purchase, cost of conversion
and other costs incurred in bringing the inventories to their current
location. Cost is determined by the Weighted Average Cost method.
The cost of purchase is exclusive and not inclusive of duties and
taxes that are subsequently recoverable. The net effect of such
deviation from ICDS – II is NIL and is duly supported by an inclusive
memorandum account attached separately.

2. Inventories are valued at lower of cost or net realizable value. Cost

of WIP and Finished Goods includes the cost of purchases, fixed
and variable production overheads and other costs incurred in
bringing the inventories to their present location. Cost is determined
using standard cost method that approximates actual cost.

Para 26(b) The total carrying amount of inventories and its classification
appropriate to a person.
Explanation Ideally, the carrying amount of inventories would be the amount at which
 such inventories are carried in books of accounts and not the amount as
determined under ICDS – II. However, there would no use of reiterating
what has already been disclosed as per AS – 2. Since the disclosures are
to be made in point 13(f) of Form 3CD, it could reasonably be construed
that what should be disclosed here is the amount determined as per ICDS –
II. However, in a case where the carrying amount under AS – 2 and ICDS –
II is equal a reference to the relevant note prepared as per AS – 2 should
be sufficient to comply with the disclosure requirement under this para of
ICDS.

Sample The total carrying amount of inventories computed as per ICDS – II and its
classification is as under:
Classification of Inventories Carrying Amount
as on 31.03.20XX
Raw Materials xxx
Packing Materials xxx
Work-in-Progress xxx
Finished Goods xxx
Traded Goods xxx
Stores and Recurring Spares xxx
Total xxx

ICDS III : Construction Contracts

Para 23(a) The amount of contract revenue recognized as revenue in the period
and
Para 23(b) The methods used to determine the stage of completion of contracts
in progress.
Explanation Both contract revenues, as well as contract costs, are to be recognized by
reference to the stage of completion of contract at the reporting date. Thus,
the method used for determining the stage of completion becomes
important. The para 18 provides for 3 methods of determining the stage of
completion which is similar to para 29 of AS-7 issued by ICAI. The
contractor could choose any of three methods, however, a suitable
disclosure would have to be made about the method opted by the
contractor. There could still be a difference between the contract revenue
recognized as per ICDS-III and AS-7 on account of terminologies used in
both the standards for recognition of contract revenue. Hence, a separate
disclosure of contract revenues recognized as per ICDS – III is required to
be made in clause 13(f) of Form 3CD. It may be noted that the disclosure
requirements have to be fulfilled separately for each construction contracts
in terms of Para 5 of ICDS – III.
Sample Revenues from contracts are recognized when there is a reasonable
certainty of its ultimate collection on the percentage of completion method
in proportion that the contract costs incurred for work performed up to the
reporting date bears to the estimated total contract costs. The total amount
of contract revenue so recognized amounted to Rs xxx

Para 24 A person shall disclose the following for contracts in progress at the
reporting date, namely:
(a) amount of costs incurred and recognized profits (less recognized
losses) upto the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions.
Explanation In addition to the disclosures made vide para 23, a contractor shall also be
required to make the disclosures provided in para 24(a),(b) and (c) of ICDS
- III. All the clauses require amounts to be disclosed and hence the
amounts as determined under the ICDS should be disclosed for each of the
contracts so identified.

Sample The disclosure of contracts in progress as at the reporting date as per the
ICDS – III is as under:
Sr Particulars 31st March 20XX
1 Contract revenue recognized during the Rs xxx
year in respect of contract in progress
as on 31.03.XX
2 Method used in determination of Stage Completion of physical
of Completion proportion of contract
work
3 Cost incurred and recognized profits Rs xxx
(less recognized losses)
4 Amount of advances received Rs xxx
5 Amount of retentions Rs xxx

ICDS IV : Revenue Recognition

Para 13(a) In a transaction involving sale of good, total amount not recognized as
revenue during the previous year due to lack of reasonable certainty
of its ultimate collection along with nature of uncertainty;

Explanation The assessee is required to report not the amount of revenue recognized
by virtue of ICDS but the amount of revenue not recognized by the
assessee due to lack of reasonable certainty. It may be difficult for an
auditor to figure out what has not been recognized as revenue as no book
entry would generally be available for an amount not recognized. The
auditor would have to rely on representation provided by the management
in this regards. Unlike AS-9, under the ICDS – IV revenues may have to be
 recognized, even if there is an element of uncertainty in the measurement
of the amount of such revenues. Thus, what is disclosed as per para 14 of
AS-9 may not be equal to the disclosure required under ICDS – IV.

Sample Revenues from the sale of goods have been recognized on accrual basis.
However, in respect of transaction of sales amounting to Rs. xxx, there
could not be a substantial recovery in spite of the best effort by the
company due to the quality dispute raised by the customer. The recovery of
such amount is considered to be remote and accordingly, it has not been
recognized as revenue, as per Para 4 of ICDS – IV.

Para 13(b) The amount of revenue from service transactions recognized as

revenue during the previous year;

Para 13(c) The method used to determine the stage of completion of service
transactions in progress;

Explanation The requirement of disclosure is similar to that in ICDS – III on Construction

Contracts. Para 6 of ICDS – IV also requires the revenues from service
transactions to be recognized in accordance with principles laid in ICDS –
III. Although other options for recognition of revenues are also available
with the assessee under ICDS – IV in respect of the following

a. Service transactions involving indeterminate number of acts over a

period of time

b. Service contracts with a duration of not more than 90 days.

Sample Revenues from service transactions (other than contracts with a duration of
not more than 90 days) are recognized when there is a reasonable certainty
of its ultimate collection on the percentage of completion method in the
proportion that the costs incurred for work performed up to the reporting
date bears to the estimated total service transaction costs. Revenue from
short term service contracts, with duration of upto 90 days, is recognized on
completion of such transaction.

The total amount of revenue from service transaction so recognized during

the year amounted to Rs xxx

Para 13(d) For service transactions in progress at the end of the previous year:
(i) amount of costs incurred and recognized profits (less
recognized losses) upto end of previous year;
(ii) the amount of advances received; and
(iii) the amount of retentions.
Explanation Additional disclosures are required in respect of ongoing execution of
service transactions as on the reporting date. The disclosure would not be
required in respect of the contract with duration of upto 90 days where
 revenues are recognized on completion basis.

Sample The disclosure of service transactions in progress as at the reporting date

as per the ICDS – IV is as under:
Sr Particulars 31st March 20XX
1 Service transaction revenue recognized Rs xxx
during the year in respect of
transactions in progress as on
31.03.XX
2 Method used in determination of Stage Completion of physical
of Completion proportion of contract
work
3 Cost incurred and recognized profits Rs xxx
(less recognized losses)
4 Amount of advances received Rs xxx
5 Amount of retentions Rs xxx

ICDS V : Tangible Fixed Assets

The disclosure requirement under this standard is provided in para 19 of ICDS – V. The
disclosures required by the standard are exactly similar to the requirements of clause 18 of
Form 3CD. Thus providing a reference to particulars of depreciation furnished in Clause 18(a) to
18(f) of Form 3CD should be sufficient compliance, in respect of disclosures required by this
ICDS.

ICDS VII : Government Grants

Para 14(a) Nature and extent of Government grants recognized during the
previous year by way of deduction from the actual cost of the asset or
assets or from the written down value of block of assets during the
previous year;

Explanation Disclosure is required in respect of nature of government grant recognized

by way of deduction from the actual cost of asset or from WDV of the block.
Thus, only grants which relates to assets as provided in Para 5 and Para 7
of the ICDS have to be reported under this clause.

Sample The company has recognized grant received from DRDO of Rs. 50 Lakhs
towards reimbursement of cost of the new asset. The amount of grant is
reduced from the actual accost of the respective asset.

Para 14(b) Nature and extent of Government grants recognized during the
previous year as income
Explanation Disclosure would be required in respect of government grants to be
recognized as income as provided in Para 6, 8 and 9 of the ICDS. Thus, the
nature and extent of following grants would have to be disclosed:
a. Grant related to non-depreciable assets or assets with certain
obligations
b. Grant for compensation of losses or expenses or for financial
support
c. Other monetary grants not covered elsewhere.

Sample The company is eligible for Interest subsidy from TUFS. The amount of
such interest subsidy recognized as income during the year amounted to
Rs. xxx. The same has been reduced from the relevant interest expense.

Para 14(c) Nature and extent of Government grants not recognized during the
previous year by way of deduction from the actual cost of the asset or
assets or from the written down value of block of assets and reasons
thereof

14(d) Nature and extent of Government grants not recognized during the
previous year as income and reasons thereof.
Explanation The recognition criteria are duly provided in para 4 of ICDS. The amount of
grant not recognized due to the conditions existing in para 4(1) should be
disclosed along with the reason for the existence of such conditions. It is
difficult for the auditor to verify disclosures under this clause, as the same
would not find any mention in the accounting records of the assessee. The
auditor would be required to rely on the management representation for
disclosure of grants not recognized.

Sample The company has applied for a subsidy for setting up of the unit in
backward district to the extent of Rs. xxx. In view of the agitation of the
public led by local leaders, it would not be possible commence the
production activity, which is an important condition attached for accrual of
grant. In view of such uncertainty, the grant is not recognized during the
year under consideration.

No disclosures are required for refund of government grants and treatment thereof in financial
statements.

ICDS IX : Borrowing Costs

Para 11(a) The accounting policy adopted for borrowing costs

Explanation ICDSs purportedly do not deal with the accounting of transactions. Then
one may wonder why a disclosure of accounting policy is required. An
assessee has to deal with borrowing costs in accordance with principles
provided in ICDS – IX for the purposes of computation of income and hence
disclosure of accounting policy is totally irrelevant. In my opinion a mere
 reference to the significant accounting policies disclosed by virtue of AS – 1
should be sufficient compliance with this disclosure requirement.

Sample The accounting policy adopted for borrowing costs is duly disclosed in point
no. xx of note on accounts attached to the financial statements.

Para 11(b) The amount of borrowing costs capitalized during the previous year

Explanation This is possibly a simple disclosure to be made under all ICDS. What is
required to be disclosed is the amount of borrowing cost capitalized as per
the terms of ICDS. There would be certainly a difference in cost capitalized
as per AS – 12 and ICDS IX. The para 9.2 of the technical guide issued by
ICAI also requires only the aggregate amount of interest capitalized as per
ICDS. The assessee may keep block-wise details of capitalization as
working note.

Sample The total amount of capitalization of borrowing costs as per ICDS – IX

amounted to Rs. xxx.

ICDS X : Provisions, Contingent Liabilities & Contingent Assets

Para 21(1) Following disclosure shall be made in respect of each class of
provision, namely:
(a) a brief description of the nature of the obligation;
(b) the carrying amount at the beginning and end of the previous year;
(c) additional provisions made during the previous year, including
increases to existing provisions;
(d) amounts used, that is incurred and charged against the provision,
during the previous year;
(e) unused amounts reversed during the previous year; and
(f) the amount of any expected reimbursement, stating the amount of
any asset that has been recognized for that expected reimbursement.
Explanation The requirement for disclosure in respect of provisions made by an assessee
is similar to the disclosure in AS – 29 issued by ICAI. A similar view is
contained in para 7.10 on pg. 209 of the technical guide issued by ICAI.
Thus, a reference to the disclosures made in notes to accounts may be
treated as sufficient compliance of ICDS X.

Sample The disclosures required for each class of provision is as under

Class of Opening Addition Utilization Reversal Expected

Provision Reimburs
ements
Provision for xx xx xx xx xx
Warranties
Provision for xx xx xx xx xx
GST
Provision for xx xx xx xx xx
Other
 expenses

Para 21(2) Following disclosure shall be made in respect of each class of asset and
related income recognized as provided in para 11, namely:

(a) a brief description of the nature of the asset and related income;
(b) the carrying amount of asset at the beginning and end of the previous
year;
(c) additional amount of asset and related income recognized during the
year, including increases to assets and related income already
recognized; and
(d) amount of asset and related income reversed during the previous
year
Explanation Para 10 of ICDS X clarifies that Contingent Assets are not to be recognized.
But then recognition is required as soon as the contingencies removed and
inflow of resources becomes reasonably certain. In such cases not only the
asset has to be recognized along with related income but also disclosures are
required to be made under ICDS. The disclosures are useful as what is
recognized as income as per ICDS X may not be recorded as income as per
AS-29 or Ind AS 37 due to the difference in the recognition principles. Such a
disclosure would help reconcile the probable mismatch.

Sample The company has made a claim of about Rs. xxx against the contractors for
laxity in the provision of services. The Company has already invoked the
dispute resolution mechanism and issued a Notice of Arbitration to the
Contractor on xx/xx/20xx. The arbitration proceedings are in the last leg as on
the reporting date and it is reasonably certain that the company would receive
an amount of Rs. xxx. The brief particulars of the assets so recognized is as
under

Sr Particulars Amount (Rs.)

1 Carrying Amount at Asset Recognized as
per ICDS
- Opening Balance xxx
- Closing Balance xxx
2 Additional amount of asset and related xxx
income recognized
3 Amount of asset and related income xxx
reversed during the previous year
Readers may feel that ICDS-VI and ICDS-VIII have been skipped in the article. However,
fortunately for the assessee, there are no disclosure requirements prescribed by the two ICDS.
The department seems to have used a pick and choose policy so far as the ICDSs are
concerned. It like the old Indian adage “Chit bhi meri aur pat bhi”, heads I win, tails you lose.
Now that ICDS is a reality, we got to live with it and keep disclosing the undisclosed.

(Author is a Chartered Accountant and can be reached at drj@icai.org) As published on Taxguru.com on

09.09.2017