Comparison of ICDS III, AS-7 & IndAS-115 - Income Tax - Ready Reckoner - Income Tax

Topic ICDS Indian GAAP Ind AS Construction Contracts ICDS III relating to construction contracts AS 7 Construction Contracts Ind AS 115 Revenue from Contracts with Customers Ind AS 109 Financial Instruments Scope AS 7 deals with construction contracts and AS 9 deals with the recognition of revenue arising in the course of ordinary activities of the entity sale of goods, rendering of services and use by others of entity resources yielding interest, royalties and dividend. Ind AS 115 applies to contract with a customer and establishes principles on reporting the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with customer. Revenue Recognition Under ICDS III , percentage of completion method is applicable, except during early stages of a contract when the outcome of the contract cannot be estimated reliably. In this case, revenue is recognised to the extent of costs incurred. This is possible only when up to 25% of the work is completed otherwise proportionate method will apply. Thus, profit recognition has to start compulsorily once 25% stage is completed. Contract costs are to be recognised as an expense in the period in which they are incurred. Expected loss should be recognised in proportion of work completed Under AS 7 , contract revenue and contract costs are recognised by reference to the percentage of completion method if the outcome of the contract can be estimated reliably; else, revenue is recognised only to the extent of costs incurred if recovery is probable. When it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately The core principle under Ind AS 115 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the following steps are applied: 1) Identify the contract(s) with a customer. 2) Identify the performance obligations in the contract (account for a distinct good or service). 3) Determine the transaction price. 4) Allocate the transaction price to the performance obligations in the contract. 5)Recognise revenue when (or as) the entity satisfies a performance obligation. Identification of contracts ICDS III is similar to Indian GAAP Under AS 7 , a construction contract is a contract which is specifically negotiated for the construction of the asset or a combination of assets that are closely interrelated or interdependent in terms of design, technology, and function of their ultimate purpose or use A contract falls within the scope of Ind AS 115 , when all the following conditions are met: a) The contract has commercial substance (that is, the risk, timing, or amount of future cash flows is expected to change as a result of the contract) b) The parties to the contract have approved the contract c) Each party s rights regarding the goods or services to be transferred can be identified d) Payment terms can be identified for the goods or services to be transferred e) The parties are committed to perform their respective obligations and they intend to enforce their respective contractual rights f) It is probable that the entity will collect the consideration to which it expects to be entitled