Income Computation And Disclosure Standards (ICDS) - WIRC . - WIRC-ICAI
Income Computation and DisclosureStandards (ICDS)- WIRC of ICAIDivyang Thakker1
ICDS VI – The Effects of Changesin Foreign Exchange rates2
Structure - ICDS – VI (9 Paras)Paras3Coverage1Scope2Definitions3Foreign Currency Translations Initial Recognition4Conversion – Last date of Previous Year5Recognition of Exchange Difference6Exceptions to Para 3,4 and 57Financial Statements of Foreign Operations8Forward Exchange Contracts9Transactional Provisions
Scope [Para 1]CoverageTreatment ofForeign CurrencyTransactions4Foreign Operation’sFinancialStatementsForward ExchangeContracts
A. Foreign Currency TransactionsPara 3 to 65
Relevant DefinitionsForeign Currency – Currency other than reportingcurrency [Para 2(1)(e)]Monetary items [Para 2(1)(k)] Money heldAssets to be receivedin fixed or determinableamounts of moneyliabilities to be paide.g. Cash in hand, receivables, and payablesNon - Monetary items [Para 2(1)(l)] 6Assets / liabilities other than monetary itemse.g. Fixed assets, inventories, investments in equity shares
Treatment of Foreign Currency TransactionsForeign CurrencyTransactionsInitial Recognition7Recognition at the lastdate of year
Initial Recognition [Para 3]Initial recognition Foreign currency conversion at the rate on date of transactionAlternative – Average rate for a week / month thatapproximates actual rate on transaction date.Average rate cannot be applied if exchange rate fluctuatessignificantly- In such cases actual rate on the date oftransaction shall be usedAverage rate is the mean of exchange rates in force during theperiod [Para 2(1)(a)]8
Subsequent Year end conversion [Para 4]Year EndConversionMonetary ItemsNon-MonetaryItems (Other thanNRV stock)Converted at closingrateConverted attransaction date rateStock at NRVConverted at ratewhen NRV isdeterminedSection 43A / Rule 115 shall override Initial recognition /conversion as per ICDS [Para 6]9
Recognition of Foreign Exchange difference[Para 5] Monetary Items Exchange difference arising on account of settlement / yearend conversion to be recognized as income / expense in thatprevious yearNon-monetary Items 10Exchange difference arising on account of year end conversionshall not be recognized as income / expense in thatprevious year
Summary of effect on Monetary itemsForex Fluctuations – MonetaryItemsPre ICDSpositionCapitalRevenuePertaining to ImportedAssetsOthersSection 43A(Capitalization on payment)No effect in tax since capitalin nature *Post ICDSSubject to Section 43A, gains / losses to berecognized on MTM basisGains / Losses allowed onMTM basisNo change* Treatment under ICDS is in conflict with SC decision in case of Tata Iron & Steel (98 Taxman 459)11
B. Foreign Operation’s FinancialStatementsPara 712
Relevant Definitions Foreign Operation of a Person [Para 2(1)(f)] Reporting Currency [Para 2(1)(m)] Branch (by whatever name called), the activities of which areconducted in a country other than IndiaFor Indian operations – Indian rupeeFor foreign operations – currency of the country where theoperations are carried outIntegral foreign operation 13a foreign operation, the activities of which are an integral partof those of the reporting enterprise (Not defined in ICDS –definition as per AS-11)
Foreign Operation’s Financial Statements[Para 7] No difference between integral and non-integralforeign operationsAll foreign operations deemed as integralFinancial Statements of foreign operations to betranslated as if such transactions are those of theIndian entityPrinciples of initial recognition / conversion to befollowed as in all other cases14
C. Forward Exchange ContractsPara 815
Relevant Definitions Forward Exchange Contract [Para 2(1)(h)] Forward Rate [Para 2(1)(i)] Agreement to exchange different currencies at a forward rate,and includes a foreign currency option contract or anotherfinancial instrument of a similar naturespecified exchange rate for exchange of two Currencies at aspecified future datePremium / Discount [Para 8(4)]Forward rate specified in the contractLess: Exchange rate at the date of the inception of the contract Exchange Differences [Para 8(5)]Contract amount translated at last day rate / settlement rateLess: Translation at inception / last day of preceding year16
Forward Exchange Contracts Treatment[Para 8(1)]Forward ExchangeContractsPremium / Discount atinceptionAmortized over the life of contractExchange DifferencesRecognized in year when exchangerate changesTreatment to apply only on case of fulfillment of certain conditions17
Forward Exchange Contracts – Conditions[Para 8(2)] On-Balance Sheet item Contracts entered into toestablish the amount of reporting currency required atthe settlement dateContract is not intended for trading / speculationpurposesContract is not entered to hedge foreign currency risk of Firm commitment; orHighly probable forecast transactionPremium, Discount or exchange difference on contract intendedfor trading / speculation or to hedge foreign currency risk of firmcommitment or highly probable forecast transaction recognizedonly at the time of settlement [Para 8(5)]18
Transitional Provisions [Para 9] ICDS to apply to all transactions undertaken on or after 1April 2016Exchange rate differences on monetary and nonmonetary items during the first year or first year end tobe recognized after talking into account the amountrecognized on 31 March 2016Foreign Operation’s financial statements for first year tobe translated taking into account the amount recognizedon 31 March 2016Forward exchange contracts existing on 1 April 2016 tobe dealt considering income / expenses recognized on 31March 201619
Case Study – Forward Contract Indian Company has entered into a contract with foreign enterprise forexport of services worth USD 1,00,000On 1 January 2018, the contract was partly executed to the extent of USD50,000 and therefore debtors were recorded and is outstanding in thebooks as on 31 March 2018Balance USD 50,000 is firm commitment to be exported before 31 July2018Indian Company enters into forward contract with bank to hedge itscurrency exposure of USD 1,00,000 on 1 January 2018What will be the amount of MTM to be allowed for tax purposes?20DateSpot RateForward Rate1 January 20181 USD Rs.621 USD Rs.6431 March 20181 USD Rs.631 USD Rs.66
Case Study – Forward ContractItemTreatment in booksICDS treatmentPremium on forwardcontractRs.1,00,000[(64-62) * 50,000]To be amortized over the lifeof the forward contractExchange differences onmonetary item i.e. debtorsLoss of Rs.50,000[(63-62) * 50,000]Exchange differences onforward contractGain of Rs. 50,000[(63-62)*50,000)]On-balance Sheet ItemsGain and losswould offset eachother with noimpact on the P&L A/cOff-Balance Sheet itemsMTM gain / loss21MTM gain Rs.1,00,000[(66-64) * 50,000]Not to be allowed / taxed
Treatment of derivatives - SummaryDerivativesForward ExchangeContracts – for Trading/ SpeculationForward ExchangeContracts – To hedgeforeign currency risk ofa firm commitment ora highly probableforecast transactionPremium or discounton contracts andexchange differenceshall be recognizedat the time ofsettlementPremium or discounton contracts andexchange differenceshall be recognizedat the time ofsettlement(AS 11 permitsMTM on year end)22(AS 11 permitsMTM on year end)Other ForwardExchange Contracts(such as hedging foron-Balance Sheetitems) Premium ordiscount arising atinception shall beamortized over thelife of the contract Spot exchangedifference shall berecognized on yearend basis(Same as AS 11)Other Derivativecontracts (Covered inICDS-I on Accountingpolicies)MTM shall not berecognized unlesspermitted by otherICDS. MTM deferredtill settlement
Extract of FAQs issued by CBDT on 23March 2017 Question 10 : Which ICDS would govern derivativeinstruments? 23ICDS -VI (subject to para 3 of ICDS-VIII) provides guidance onaccounting for derivative contracts such as forward contractsand other similar contracts. For derivatives, not within thescope of ICDS-VI, provisions of ICDS-I would apply
Comparison – ICDS VI, AS 11 and Ind AS 21ParticularsInitial RecognitionICDS – VIAS – 11Ind AS 21No difference in the principles of Initial recognitionYear end recognition No difference in the principles of year-end recognitionForeign OperationsNo bifurcationbetween integraland non-integraloperations. Alldifferences chargedto P & L Account Integraloperations – Sametreatment as ICDS Non-integraloperations –Differencerecognized as FCTRand recognized asincome/expenseonly on disposal ofnet investmentsNo bifurcationbetween integraland non-integraloperations.Exchange differenceinitially recognizedin OCI andreclassified fromEquity to P & L A/con disposal of netinvestmentsExchange differencearising from foreigncurrency borrowingfor24capital purposesTreatment in ICDS– IX (Part ofincidentalborrowing cost)Borrowing cost forqualifying assetsincludes exchangedifferences alsoBorrowing cost forqualifying assetsincludes exchangedifferences also
Comparison – ICDS VI, AS 11 and Ind AS 21ParticularsICDS – VIAS – 11Forward exchangecontracts for onbalance sheet itemsNo difference in the principles of recognitionForward exchangeintended for trading/ speculation or tohedge foreigncurrency risk of firmcommitment orhighly probableforecast transactionPremium, Discountor exchangedifferencerecognized only atthe time ofsettlement.However, ICDS VI issubject to Section43A25MTM approachfollowed – Gain /Loss is recognized inP & L AccountInd AS 21Recognized instatement of Profitand Loss except incase of EquityInstrumentsdesignated as fairvalue through OCIand Equitycomponent of Cashflow hedge
Case Study – Adjusting itemsExtract of details of XYZ Pvt. Ltd. Profit for the previous year 2017-18 as per books – Rs.80lakhs Profit and Loss A/c includes loss on forward contract heldfor trading – Rs.6 lakhs Translation gain of foreign operation as on 31 March 2018credited to Foreign Currency Translation Reserve A/c –Rs.9 lakhs26
Case Study – Adjusting itemsComputation of Profit & Gains from Business or professionParticularsAmountAmount(Rs. In lakh) (Rs. In lakh)Profit as per books of Account80Adjustment under ICDS – VIAdd: Loss to be allowed at the time of settlementon forward contract [Para 8(5)]6Add: Translation Gain in foreign operations[Para 7]9Income from Business or profession after ICDSadjustments271595
Delhi High Court’s verdict on ICDSIn the Chamber of Tax Consultants v. Union of India(2017) 87 Taxmann.com 92, the Delhi HC held that:“ICDS-VI whish states that MTM loss / gain in case offoreign currency Derivates held for trading or speculationpurposes are not to be allowed, is not in consonance withthe ratio laid down by the Supreme Court in Sutlej CottonMills Ltd. v. CIT (1979) 116 ITR 1, in so far as it relates toMTM loss arising out of forward exchange contracts heldfor trading or speculation purposes. It is, therefore, held tobe ultra virus the Act.” Accordingly, ICDS-VI was struck down as such.28
New section inserted – Finance Act 2018 To overcome the above judicial precedent, a new Section43AA has been inserted to provide as below:“Any gain or loss arising on account of effect of changes inforeign exchange in respect of specified foreign currencytransactions shall be treated as income or loss, which shall becomputed in the manner provided in ICDS”29
ICDS X – Provisions, Contingentliabilities & Contingent Assets30
Structure - ICDS – X (21 erageContingent Liabilities10 - 11Contingent Assets12 - 13Measurement14 - 16Reimbursements17 - 18Review19Use of Provisions20Transitional Provisions21Disclosure
Scope [Para 1]CoverageProvision ngent Assets
Scope Exclusions [Para 2 and 3] ICDS X will not apply to: Provision for Items dealt in ICDS – IV i.e. Revenue RecognitionProvisions / liabilities resulting from 33DepreciationImpairment loss of assetsDoubtful debtsFinancial instrumentsExecutory contractsInsurance business (Contracts with policy holders)Any other ICDS
Scope Exclusions ICDS also not to apply to specific provisioning treatmentsdealt with in the Act such as Section 36(1)(viia) dealing with provision for bad and doubtfuldebts,Section 40(A)(7) dealing with provision for gratuity, etc.CBDT Clarification - provisioning for employee benefitcovered by AS 15 to be governed by specific provisions ofAct and are not dealt with by ICDS-X34
A. ProvisionsPara 5 to 835
Relevant Definitions Provision Liability Liability which can be measured only by using a substantialdegree of estimationPresent obligation arising from past events, the settlement ofwhich is expected to result in an outflow from the person ofresources embodying economic benefits.Present Obligation 36An obligation whose existence is considered reasonablycertain based on the available evidence.
Provisions Provision is recognized when: Present Obligation There is a present obligation as a result of a past event;It is reasonably certain that outflow of resources embodyingeconomic benefits will be required to settle the obligation; andA realistic estimate can be made of the amount of obligationProposed new law yet to be finalized, obligation arises onlywhen legislation is enactedNo provision for cost to be incurred to operate in futurePast Event 37Past event to be independent of person’s future actions
ICDS X – Pre-ICDS v Post-ICDS Recognition of Provisions Pre-ICDS - Provisions recognized if it is probable that outflowof economic resources will be requiredPot-ICDS - Provision to recognized if it is reasonably certainthat outflow of economic resources will be requiredProvision for warranty possibly satisfies all conditions 38Present Obligation – to service / replace without considerationPast event – sale of goods / servicesReasonably certain – to have some casesRealistic estimate – based on past trend
B. Contingent Assets and LiabilitiesPara 9 to 1139
Contingent Asset and Liability Recognition of Contingent Liability Recognition of Contingent Assets Not recognized in both pre and post ICDS scenarioNot recognized as incomeContingent assets are assessed continuallyRecognized when it becomes reasonably certain that inflow ofeconomic benefit will arise – in the year in which changeoccursComparison pre / post ICDS 40Pre-ICDS - Recognition only in case of virtual certaintyregarding inflow of economic benefit (100% sure)Post ICDS - Recognition even in case of reasonable certaintyregarding inflow of economic benefit (MLTN)
Reimbursements [Para 14 – 16] Where expenditure required to settle a provision is expectedto be reimbursed by another party, the reimbursement shall berecognized when it is reasonably certain that reimbursementwill be received if the person settles the obligation.The amount recognized for the reimbursement shall notexceed the amount of the provision.Where a person is not liable for payment of costs in case thethird party fails to pay, no provision shall be made for thosecosts.An obligation, for which a person is jointly and severally liable,is a contingent liability to the extent that it is expected thatthe obligation will be settled by the other parties.41
Year end Review of Provisions/assets [Para17 and 18] Provisions shall be reviewed at the end of each previousyear and adjusted to reflect the current best estimate.If it is no longer reasonably certain that an outflow ofresources embodying economic benefits will be requiredto settle the obligation, the provision should be reversed.An asset and related income recognized shall be reviewedat the end of each previous year and adjusted to reflectthe current best estimate.If it is no longer reasonably certain that an inflow ofeconomic benefits will arise, the asset and related incomeshall be reversed.42
Transitional provisions [Para 20] All the provisions or recognition of assets / relatedincome after 1 April 2016 to be made considering theamount recognised for the same on or before 31 March2016.43
Disclosure - Provisions [Para 21(1)] Brief description of the nature of the obligation;Carrying amount at the beginning and end of the year;Additional provisions made during the previous year,including increases to existing provisions;Amount incurred and charged against the provision,during the year (provisions used)Unused amounts reversed during the year; andThe amount of any expected reimbursement and theamount of asset that has been recognized for theexpected reimbursement.44
Disclosure - Assets [Para 21(2)] Brief description of the nature of the asset / relatedincome;Carrying amount at the beginning and end of the year;Additional asset / income recognized during the year,including increases to existing asset /income; andAmount of asset / income reversed during the year.45
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Initial Recognition [Para 3] Initial recognition Foreign currency conversion at the rate on date of transaction Alternative ² Average rate for a week / month that approximates actual rate on transaction date. Average rate cannot be applied if exchange rate fluctuates significantly- In such cases actual rate on the date of transaction shall be used
computation of income chargeable to income-tax under the head "Profitand gains of business or profession"or " Income from other sources". 2. It shall apply to all person whether Resident or Non resident. 3. The ICDS to be followed for the purpose of Computation of Income and not for the purpose of maintenance of Books ofAccounts. 4.
Income Tax Act 2007 2007 No 97 BC 6 Income tax liability of filing taxpayer 106 BC 7 Income tax liability of person with schedular income 106 BC 8 Satisfaction of income tax liability 108 Subpart BD—Income, deductions, and timing BD 1 Income, exempt income, excluded income, non- 108 residents' foreign-sourced income, and assessable income
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