IFRS Diary 13: ICDS Ã¢â‚¬â€œ Right Step?

Published on Mon, Feb 02,2015 | 20:47, Updated at Mon, Feb 02 at 20:47Source : Moneycontrol.com

REVISED INCOME COMPUTATION AND DISCLOSURE STANDARDS (ICDS) - A STEP IN THE RIGHT DIRECTION

By: Jamil Khatri, Global Head – Accounting Advisory Services, KPMG

In continuation of the Ind AS transition journey, the Ministry of Finance (MoF) released the revised drafts of the ICDS on 8 January 2015. It is expected that the ICDS will become applicable for computation of taxable income for the year commencing 1 April 2015. Accordingly, once the ICDS are notified, companies may have a very short period of time to fully evaluate the impact of ICDS on their tax liabilities and related advance tax payment obligations during the previous year 2015-16.

The MoF had received several representations and comments in response to the previous draft of the ICDS (2012 ICDS). The MoF has incorporated certain representations in the current draft (2015 ICDS). Key changes include:

• The 2012 ICDS required recognition of revenues even when there was uncertainty in ultimate collection of the debt. This was inconsistent with the requirements of the accounting standards and would also have posed practical difficulties for companies. The 2015 ICDS aligns the requirements of the ICDS with the accounting standards and provides that revenue from sales of good and provision of services shall be recognised when there is reasonable certainty of collection. However, this change does not extent to interest income. Accordingly, disputes between NBFC's and the tax department relating to taxation of interest on Non Performing Assets are likely to continue

• The 2012 ICDS required that foreign exchange rates used for translation should be the actual rate on the date of the transaction, and did not permit use of average weekly/monthly rates as a practical expedient (which is permitted by the accounting standards). The 2015 ICDS provides for such a practical expedient. This is a relief for companies that may have used weekly/monthly rates

• The 2012 ICDS provided that inventory of a service provider shall be measured at cost, which was inconsistent with the general inventory valuation principles of lower of cost or net realisable value. The 2015 ICDS aligns the valuation of such inventory with the general inventory valuation principles

• The 2015 ICDS amends the formula for calculating borrowing costs that can be capitalised to factor in the impact of qualifying assets that did not exist either at the first or the last day of the previous year. This seeks to adjust the capitalisation for such assets, which may not have been considered under the 2012 ICDS.

Importantly, the 2015 ICDS also provide for transition provisions (except for the ICDS on Securities). The transition provisions require prospective application in most cases, but provide for retrospective application (with a cumulative catch up adjustment) in certain cases. For example, the requirements on assets acquired on finance leases would only apply to leases entered into after the ICDS are notified. On the other hand, if a construction contractor that previously followed the completed contract method is now required to follow the percentage completion method, profits relating to the percentage of work completed prior to the implementation date of the ICDS would be offered for tax in the first period post implementation. This approach would ensure that income does not escape taxation or is not taxed twice.

Companies need to gear up for the implementation of ICDS. While ICDS do not require maintenance of separate books of accounts, each company needs to evaluate the specific differences between its accounting practices and the requirements of ICDS, to determine the changes to systems and processes that would enable it to capture the differences for the purposes of tax records. As companies evaluate their approach to implementation of Ind AS, it may be useful to simultaneously formulate an implementation plan for ICDS. This will help to synergise the efforts for implementation of both Ind AS and ICDS, and address the requirements to changes in systems and training in a cohesive manner.

The MoF has provided a window of 30 days (till 8 February 2015) for comments on the 2015 ICDS. If your company is impacted by the ICDS, I would encourage you to participate in the debate and provide your inputs to the MoF for consideration.