ICDS X -Provisions, Contingent Liabilities and Contingent Assets

Scope

      Deals with provisions, contingent liabilities and contingent assets, except those:

(i)                  Resulting from financial instruments;

(ii)                Resulting from executory contracts;

(iii)               Arising in insurance business from contracts with policy holders; and

(iv)               Covered by another ICDS.

Does not deal with:

(i)                  Recognition of revenue

The term provision is also used in the context of items such as Depreciation, impairment of assets and doubtful debts which are adjustments to the carrying amounts of assets and doubtful debts which are adjustments in the carrying amounts of assets and are not addressed in this ICDS.

 

Definitions

      Provision : is a liability which can be measured only by using a substantial degree of estimation.
      Liability: is a present obligation of the person arising from past events, the settlement of which is expected to result in an outflow from the person of resources embodying economic benefits
      Obligating event:  is an event that creates an obligation that results in a  person having no realistic alternative in settling that obligation
      Contingent Liability: is

(i)                  possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the person; or

(ii)                a present obligation that arises from past events but is not recognised because:

(a)     it is not reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation; or

(b)    a reliable estimate of the amount of the obligation cannot be made.

      Contingent Asset: is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the person.
      Executory contracts: are contracts under which neither party has performed any of its obligation or both parties have partially performed their obligation to an equal extent
      Present obligation: is an obligation if,based on the evidence available, its existence at the end of the previous year is considered reasonably certain.

 

Recognition

ICDS 10_1

 

Measurement

ICDS 10_2

 

 

Disclosure

  • Description of nature of obligation
  • Carrying amount at the beginning and end of the previous year.
  • Additional provisions/amount made including increases to existing provisions/(contingent assets/contingent liabilities)
  • Amounts used (incurred and charged against provisions) during the year.

Key difference with AS

  • AS 29 Contingent asset can be recognised when there is virtual certainty and in ICDS X it can be recognised even when there is reasonable certainty.
  • AS 29 provides for recognising losses on onerous and executory contracts, whereas ICDS ignores all onerous and executory contracts.

ICDS IX – Borrowing Costs

Scope

Deals with treatment of borrowing cost.

Does not deal with the actual or imputed cost of owner’s equity and preference share holder.

 

Definitions

      Borrowing cost: are interest and other costs incurred by a person in connection with the borrowing of funds and include:

(a)    Commitment charges on borrowings;

(b)    Amortised amount on discounts or premiums relating to borrowings;

(c)     Amortised amount of ancillary costs incurred in connection with the arrangement of borrowings;

(d)    Finance charges in respect of assets acquired under finance leases or under other similar arrangements.

      Qualifying asset : means

(a)    Land, building, machinery, plant or furniture, being tangible assets;

(b)    Know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets;

(c)     Inventories that require a period of twelve months or more to bring them to saleable condition.

 

Eligible for Capitalisation

ICDS_9.jpg

Disclosure

  • Accounting policy followed for treatment of borrowing cost
  • Amount of borrowing cost capitalised during the period

Key difference with AS

  • Qualifying asset are specifically defined in IcdS whereas in AS 16 it is any asset that takes substantial period (12 months) of time to ready for its intended use.
  • Income from temporary investments of borrowing is treated as income as per the ACT, in AS 16 it is reduced from the borrowing cost to be capitalised.
  • ICDS uses proportionate method for capitalisation whereas AS uses weighted average method.

ICDS VIII – Securities

Scope

Deals with securities held as stock in trade.

This ICDS does not deal with:

(a)    The bases for recognition of interest or dividend;

(b)    Securities held by a person engaged in the business of insurance;

(c)     Securities held by mutual funds, venture capital funds, bank and public financial institutions formed under a Central or State Act or so declared under the companies act 2013

 

Definitions

      Fair Value: is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction.
      Securities : shall have the meaning assigned to in clause (h) of Section 2 of securities Contract (Regulation) Act, 1956 other than derivatives referred in sub-clause (1a) of that clause.

 

Recognition and Initial Measurement

ICDS 8

Subsequent measurement of Securities

ICDS 8_1

Key differences with AS

ICDS VIII deals with only securities held as stock-in-trade thereby concentrating only on part of AS 13 which deals with both long term and short term investments of all types:

  • ICDS requires securities to be valued at ‘global basis’ (category wise) and not on piecemeal basis.
  • Cost of acquisition in case of acquisition of security by issue of security or by giving up an asset is fair value of securities issued and fair value of asset given up (if clearly available) respectively.
  • Unlisted or thinly traded securities shall be value at cost in ICDS but in AS every security has to be accounted at cost or Fair value whichever is lower.

ICDS VII – Government Grants

Scope

Deals with the treatment of Government grants. (government grants includes subsidies, cash subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements,etc.

Does not deal with:

(a)    Government assistance  other than in the form of government grants;

(b)    Government participation in the ownership of the enterprise.

Definitions

  • Government grants are assistance by Government in cash or kind to a person for past or future compliance with certain conditions. They exclude those forms of Government assistance which cannot have a value placed upon them and the transactions with government which cannot be distinguished from the normal trading transactions of the person.

Recognition & Treatment

ICDS 7_1

ICDS 7_2

Refund of the above grants to be added to the cost of the asset and depreciated prospectively

 

Refund of the above grants are to  be adjusted against any unamortised deferred credit. To the extent the amount refundable exceeds deferred  credit or when no such deferred credit exists, the amount shall be charged to the profit and loss account

 

 

Disclosures

Nature and extent of government grants :

Recognised 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

Recognised during the previous year as income

Not Recognised during the previous year by way of deduction from actual cost of the asset or assets or from the written down value of block of assets and reasons thereof; and

Not Recognised during the previous year as income and reasons thereof

 

Key difference with AS

      ICDS VII does not recognise Capital approach to recognise grant

ICDS explicitly states that recognition of grant shall not be delayed once the actual receipt has taken place

Grants relating to non depreciable assets are to be deducted from asset in AS but treated as income in ICDS

ICDS VI – Effects of changes in foreign exchange rates

Scope

This ICDS deals with :

(a)    Treatment of transactions in foreign currencies;

(b)    Translating the financial statements of foreign operations;

(c)     Treatment of foreign currency transactions in the nature of forward exchange contracts

Definitions

Average rate :

Is the mean of the exchange rates in force during the period.

Closing Rate:

Is the exchange rate at the last day of the previous year

Exchange difference:

Is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates

Exchange rate:

Is the ratio of exchange of two currencies

Foreign currency:

Is a currency other than the reporting currency of a person

Foreign operations of a person:

Is a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India.

Foreign currency transactions:

Is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when a person-

(i)                  Buys or sells goods or services whose price is denominated in a foreign currency; or

(ii)                Borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or

(iii)               Becomes a party to an unperformed forward exchange contract; or

(iv)               Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in foreign currency.

Forward exchange contract:

Means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature.

Forward rate:

Is the specified exchange rate for exchange of two currencies at a specified future date

Indian Currency:

Shall have the meaning assigned to it in Section 2 of the FEMA Act 1999

Integral foreign operations

Is a foreign operation, the activities of which are an integral part of the operations of the person

Monetary Items

Are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables and payables are examples of monetary items

Non-Integral foreign operations

Is a foreign operation that is not an integral foreign operation

Non-monetary items:

Are assets and liabilities other than monetary items. Fixed assets, inventories and investments in equity shares are examples of non-monetary items.

Reporting currency:

Means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out.

 

Foreign Currency transactions

ICDS 6

Financial Statements of Foreign Operation

ICDS 6 _2

The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to a person. Hence it is classified in to:

When the operation does not impact the Cash flow?

ICDS VI provides following indications that a foreign operation is a non-integral foreign operation rather than integral:

  • The activities of foreign operation are conducted with a significant degree of autonomy from the activities of the person;
  • Transactions with the person are not a high proportion of the foreign operation’s activities;
  • The activities of the foreign operations are financed mainly from its own operations or local borrowings;
  • Cost of labour, material and other components of the foreign operation’s products or services are primarily paid or settled in the local currency;
  • The foreign operation’s sales are mainly in currencies other than Indian currency;
  • Cash flows of the person are insulated from the day-to-day activities of the foreign operation;
  • Sales price for the foreign operation’s products or services are not primarily responsive on a short term basis to changes in exchange rates but are determined more by local competition or local government regulations;
  • There is an active local sales market for the foreign operation’s products or services, although there also might be significant amounts of exports.

Forward Exchange contracts

 ICDS _6 _3

Note:

Premium or discount arise on the contract is measured by difference between:

Exchange Rate at the date of inception of the contract – the Forward rate specified in the contract

Exchange difference on the contract is difference between :

(a)    The foreign currency amount of the contract translated at the exchange rate at the last day of the previous year, or the settlement date where the transaction is settled during the previous year; and

(b)    The same foreign currency amount translated at the date of inception of the contract or the last day of the immediately preceding previous year, whichever is later.

 

Key Difference with AS

       Removal of Accumulation of FCTR

For  non integral operations AS requires creation of FCTR to part the difference in exchange. This is because the profits and gains from non-integral operations are unrealised and are realisable only when the company is wound up.  However ICDS suggests that such profit/loss be recognised on par with integral operations

Removal of Mark to Market

For trading and speculation transactions AS provides for recognising gains/losses on account of exchange differences on the basis of MTM. But ICDS requires gains/losses on such transactions should be realised only at the time of settlement.

ICDS V – Tangible Fixed Assets

Scope

Deals with the treatment of Tangible Fixed Assets

 

Definitions

      Tangible Fixed Asset:

IS an asset being land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.

 

      Fair value

Is the value of an asset, i.e. is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

 

Identification of Tangible Fixed Assets

  • Definition stated above provides criteria for determining whether an item is to be classified as a tangible fixed asset.
  • Stand-by equipment and servicing equipment are to be capitalised
  • Machinery spares shall be charged to the revenue as and when consumed. When such spares can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, they shall be capitalised.

Computation of cost of Fixed Asset

ICDS 5

Note :

  • In self constructed assets, component of internal profit has to be removed.
  • Depreciation would be as per provisions of the Act.
  • Sales/ Transfer would be as per provisions of the Act.

Disclosure

      Block of asset

Rate of depreciation

Actual cost or WDV as the case may be

Additions for the year:

(i)                  With date of put to use

(ii)                CENVAT credit claimed and allowed

(iii)               Change in exchange rate of currency

(iv)               Subsidy or grant received.

Deductions during the year

Depreciation allowable

WDV at the end of the year.

 

Key differences with AS 10

      When assets are acquired by exchanging another asset, AS requires that the cost of the asset shall be the fair value of the asset acquired or given up whichever is clearly evident. However ICDS requires such transactions to be recorded at the fair value of the asset acquired.

AS specifies accounting treatment in circumstances of revaluation of asset, ICDS is silent on that as Income tax does not recognise the concept of revaluation.

ICDS IV – Revenue Recognitions

Scope

Deals with bases for recognition of revenue arising in the course of the ordinary activities of a person from:

·         The sale of goods;

·         The rendering of services;

·         The use by others of the person’s resources yielding interest, royalties or dividends.

 

Definition

Revenue:

·         Is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of a person from the sale of goods, from the rendering of services, or from the use by others of the person’s resources yielding interest, royalties or dividends.

·         In an agency relationship, the revenue is the amount of commission and not gross inflow of cash.

 

Criteria for recognition of revenue

         ¨          Sale of goods:

(i)      Seller of the goods has to transfer “property” in the goods and significant “risks and rewards” of ownership and the seller retains no effective control of the goods transferred to a degree usually associated with ownership.

(ii)    Revenue to be recognised when there is reasonable certainty about ultimate collection.

(iii)   Postpone the recognition of revenue in following situations:

(a)      When transfer of property does not coincide with transfer of significant risk and rewards of ownership, recognise revenue when risks and rewards are transferred.

(b)    When the ability to  assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition should be postponed to the extent of uncertainty involved.

         ¨          Rendering of Services:

(i)                  Shall be recognised by the percentage completion method. Revenue from service transactions is matched with the service transaction costs incurred in reaching the stage of completion resulting in the determination of revenue, expenses and profit which can be attributed to the proportion of work completed.

(ii)                The requirements of ICDS III will mutatis mutandis apply to the recognition of revenue and the associated expenses for a service transaction.

         ¨          Interest:

Recognise on time proportion basis. Discount or premium on debt securities held is treated as though it were accruing over the period to maturity

         ¨          Royalties

Shall accrue in terms of the relevant agreement and shall be recognised on the basis unless, having regard to the substance of the transaction, it is more appropriate to recognise revenue on some other systematic and rational basis.

         ¨          Dividends

Are recognised in accordance with the provisions of the Act.

 

Disclosures

         ¨          In a transaction involving sale of goods, total amount not recognised as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with the nature of uncertainty;

¨          The amount of revenue from service transactions recognised as revenue during the previous year;

¨          The method used to determine the stage of completion of service transactions in progress; and

¨          For a service transactions in progress at the end of previous years:

(a)    Amount of costs incurred and recognised profits (less recognised losses) upto the end of previous years;

(b)    The amount of advances received; and

(c)     The amount of retentions.

 

Key differences from AS 9

         ¨          AS 9 recognises completed contrct method for certain services, whereas ICDS requires that every service transaction revenue to be recognised only under the percentage of completion method.

¨          AS 9 provides for deferment of revenue recognition of any claim whose ultimate collection is not certain. In ICDS IV it merely states that claims in respect of price escalation and export incentives, which are uncertain of its ultimate collection, can be deferred.

¨          AS 9 recognises dividend income when right to receive is established. ICDS does not provide for any recognition principles as it is dealt in the IT act