ICDS I (Revised) : Accounting Policies - Income Tax - Ready Reckoner - Income Tax

ICDS - 01 - I - Accounting policies (w.e.f. AY 2017-18) Accounting Standards U/s 145(2) ICDS I (Revised) : ACCOUNTING POLICIES 1. Scope:- The scope of the ICDS is limited to significant accounting policies applied while computing income under the head Profits and gains of business or profession or Income from other sources . ICDS I does not deal with maintenance of books of account. It is concerned with application of accounting policies and assumptions while computing income for the purposes of income-tax. Note: Significant accounting policies are those policies whose impact on financial statements is of significant magnitude. They often influence the judgement of the readers and users of financial statements. While it recognizes the fundamental accounting assumptions of going concern, consistency and accrual, it does not recognize the concepts of materiality and prudence in selection of accounting policies. Treatment and presentation of transactions have to be governed by their substance and not merely by the legal form. Marked to market loss or an expected loss is not to be recognized unless recognition of such loss is in accordance with the provisions of any other ICDS. 2. Fundamental accounting assumptions:- Certain fundamental accounting assumptions form the basis of preparation and presentation of financial statements. They are usually not specifically stated, because their acceptance and use are assumed. They are stated only when they are not followed. The ICDS defines three such assumptions for the purposes of computation of income (a) Going Concern:- Going concern refers to an assumption that the person has neither the intention nor the necessity of liquidation or curtailing, materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future. This assumption is concerned with the ability to continue business or profession. When computing the total income, an evaluation of the assessee s ability to continue as a going concern has to be made. Note: The ICDS however does not provide specific guidance as to the manner of computation in the event that the assumption of going concern is not met. In the absence of specific mandate in this ICDS, an assessee may rely upon this treatment prescribed by the Framework of Financial Statements issued by ICAI. (b) Consistency:- It is assumed that accounting policies are consistent from one period to another. The import of this assumption is that the same policies will be used from one period to another, unless they or some of them are changed for reasonable cause. (c) Accrual:- The third assumption is that revenues and costs accrue as they are earned or incurred and recorded in the previous year to which they relate. Actual receipt or payment is not a relevant. Income accrues when there arises a corresponding liability of the other party from whom the income becomes due to pay that amount. [CIT v Excel Industries Limited] 2013 (10) TMI 324 - SUPREME COURT Note:- ICDS provides that 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. Revised Form 3CD of tax audit report provides necessary columns for such disclosures. 3. Accounting Policies:- Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. [International Accounting Standard - 8] Accounting policies are the guidelines under which businesses prepare their financial statements. They are important for financial reporting analysis. There is no single list of accounting policies applicable to all circumstances. The choice of appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise calls for considerable judgement by the management of the enterprise. In the context of this ICDS, accounting policies would mean the principles and methods of computation of total income. 4. Selection and Change of Accounting Policies:- ICDS states that the accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. To achieve this true and fair status of an assessee s financial status, the ICDS prescribes twin considerations: The treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form. This phenomenon demands faithful representation of income. The financial information should represent the substance of an economic phenomenon rather than merely representing its legal form. Representing a legal form that differs from the underlying economic phenomenon would not result in a faithful representation. Marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard. Note:- The ICDS prohibits change in accounting policies unless there is a reasonable cause for such a change. The expression reasonable cause has not been defined and would have to be examined on a case to case basis. If the change in accounting policy is found to be bona fide, imperative and driven by commercial, contractual or statutory compulsions, such a change should be construed as a reasonable cause . Any change in accounting policy should be adjudged as reasonable if it satisfies the criterion outlined in AS 5. 5. Disclosure of Accounting Policies:- All significant accounting policies adopted by a person shall be disclosed. Any change in an accounting policy which has a material effect shall be disclosed. The amount by which any item is affected by such change shall also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact shall be indicated. Note:- 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. 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. The ICDS deviates from the disclosure norms of Accounting Standard 1. As per AS 1 if a change is made in the accounting policies which has no material effect for the current period but which are reasonably expected to have a material effect in later periods, the fact of such change shall be appropriately disclosed in the periods in which the change is adopted. While ICDS provides for disclosure of such change in two years namely, the year in which change is adopted and when it takes effect for the first time. Fundamental Accounting Assumptions, ICDS I (Revised) vs AS-1 Sr No. ICDS I (Revised) AS-1 1. Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. 2. The following are the fundamental accounting assumptions namely :- Going Concern Going concern refers to an assumption that the person has neither the intention nor the necessity of liquidation or curtailing, materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future. Consistency Consistency refers to assumption that accounting policies are consistent from one period to another. Accrual Accruals refers to assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred and not as money is received or paid and recorded in previous year in which they relate. The following have been generally accepted as fundamental accounting assumptions, namely :- Going Concern The enterprise is normally viewed as a going concern, that is as continuing in operation in the foreseeable future. It is assumed that the enterprise neither has intentions nor the necessity of liquidation or of curtailing materially the scale of operations. Consistency It is assumed that accounting policies are consistent from one period to another. Accrual Revenues and costs are accrued, that is, recognised as they are earned or incurred and not as money is received or paid and recorded in the financial statements of the periods to which they relate. 3. If the fundamental accounting assumptions of going concern, consistency accruals are followed, specific disclosures are not required. If fundamental accounting assumption are not followed, the fact shall be disclosed. If the fundamental accounting assumptions of going concern, consistency accruals are followed in the financial statements, specific disclosures are not required. If fundamental accounting assumption are not followed, the fact shall be disclose