Introduction

The Income-tax Act, 1961 provides a specific framework for computation of taxable income. While financial statements are prepared in accordance with the applicable accounting framework, taxable income is also governed by the provisions of the Income-tax Act and the Income Computation and Disclosure Standards (ICDS) notified under Section 145(2).

ICDS were introduced to bring consistency in the computation of income for tax purposes. In certain cases, the treatment followed in the books of account may differ from the treatment required under ICDS, resulting in differences in the computation of taxable income.

Form 3CD therefore contains specific requirements for reporting matters relating to ICDS, including the disclosure requirements covered under Clause 13(f).

What are ICDS?

Section 145(2) empowers the Central Government to notify accounting standards to be followed for computation of income.

Accordingly, 10 ICDS were notified with effect from the financial year beginning on or after 1 April 2016, corresponding to Assessment Year 2017-18.

ICDS I – Accounting Policies

ICDS II – Valuation of Inventories

ICDS III – Construction Contracts

ICDS IV – Revenue Recognition

ICDS V – Tangible Fixed Assets

ICDS VI – Effects of Changes in Foreign Exchange Rates

ICDS VII – Government Grants

ICDS VIII – Securities

ICDS IX – Borrowing Costs

ICDS X – Provisions, Contingent Liabilities and Contingent Assets

These standards apply for computation of income chargeable under the heads “Profits and gains of business or profession” and “Income from other sources”, subject to the applicable conditions.

Where there is a conflict between the Income-tax Act and ICDS, the provisions of the Income-tax Act prevail.

What Does Clause 13(f) Cover?

Clause 13 of Form 3CD deals with matters relating to the method of accounting and computation of income.

In particular, Clause 13(f) requires reporting of the disclosures prescribed under ICDS.

The auditor therefore needs to identify the ICDS applicable to the assessee's transactions and verify whether the disclosures required under the relevant standards have been considered.

It is important to distinguish between ICDS adjustments and ICDS disclosures. While adjustments arising from ICDS are considered separately under the relevant provisions of Clause 13, Clause 13(f) specifically focuses on the disclosures prescribed under ICDS.

ICDS-wise Key Disclosure Areas

ICDS I – Accounting Policies

The assessee is required to disclose significant accounting policies adopted. Where a change in accounting policy has a material effect, the nature of the change and its monetary effect are also relevant.

ICDS II – Valuation of Inventories

The accounting policies adopted for inventory valuation, including the cost formula used, along with the carrying amount and appropriate classification of inventories, are relevant for disclosure.

ICDS III – Construction Contracts

For construction contracts, disclosures include contract revenue recognised during the period, the method used to determine the stage of completion and specified information relating to contracts in progress, including costs, recognised profits or losses, advances and retentions.

ICDS IV – Revenue Recognition

The auditor should examine transactions covered by ICDS IV, including sale of goods and rendering of services, and consider the applicable revenue recognition and disclosure requirements.

ICDS V – Tangible Fixed Assets

The treatment of tangible fixed assets for tax purposes should be reviewed with reference to the requirements of ICDS V and the disclosures prescribed therein.

ICDS VI – Foreign Exchange Rates

Foreign currency transactions, exchange differences and relevant forward exchange contracts should be examined to ensure that the applicable treatment and disclosure requirements are considered.

ICDS VII – Government Grants

Where government grants, subsidies, incentives, duty drawbacks or similar assistance are received, the recognition and related disclosure requirements under ICDS VII should be examined.

ICDS VIII – Securities

For securities held as stock-in-trade, the classification and valuation should be reviewed in accordance with ICDS VIII, along with the applicable disclosure requirements.

ICDS IX – Borrowing Costs

The auditor should examine borrowing costs relating to qualifying assets and verify the required treatment and disclosures, including the amount of borrowing costs capitalised during the year.

ICDS X – Provisions and Contingencies

Provisions, contingent liabilities and contingent assets falling within the scope of ICDS X should be examined for recognition and disclosure. Relevant details may include the nature of the obligation, opening and closing amounts, additions, utilisation and reversals.

Practical Approach for Tax Auditors

A simple transaction-based approach can be followed while completing Clause 13(f):

Identify the nature of business → Identify applicable ICDS → Review relevant transactions → Check ICDS requirements → Verify prescribed disclosures → Report in Form 3CD

The auditor should review the books of account, financial statements, tax computation and relevant supporting workings to identify transactions covered by ICDS.

Not every ICDS will necessarily apply to every assessee. The focus should therefore be on identifying the standards relevant to the actual transactions of the assessee.

Common Areas Requiring Attention

• Inventory valuation – ICDS II

• Revenue recognition – ICDS III and IV

• Foreign exchange transactions – ICDS VI

• Government grants – ICDS VII

• Valuation of securities – ICDS VIII

• Capitalisation of borrowing costs – ICDS IX

• Provisions and contingencies – ICDS X

The auditor should also ensure that the relevant ICDS adjustments, wherever applicable, are appropriately considered in the computation of taxable income separately from the disclosure requirements under Clause 13(f).

Conclusion

Clause 13(f) of Form 3CD requires the auditor to consider the disclosures prescribed under the applicable ICDS. Proper reporting therefore requires an understanding of the assessee's transactions and identification of the ICDS relevant to those transactions.

A practical review of the books, tax computation and supporting workings, followed by an ICDS-wise check of the prescribed disclosures, can help ensure appropriate reporting under Clause 13(f).

ICDS reporting is therefore an important part of the tax audit process, particularly where the accounting treatment and tax computation require consideration under the specific provisions of the Income-tax Act and ICDS.