ICDS 1 Accounting Policies
ICDS I relates to significant accounting policies to be followed by an enterprise.
ICDS-I deals with the selection of accounting policies to be adopted by enterprises and the considerations to be followed in selecting and changing such accounting policies only for computation of taxable income under the heads “Profit & Gains from Business or Profession” and “Income from Other Sources”. Not applicable for the purpose of maintenance of books of accounts.
If while computing taxable income from PGBP & IFOS there is a conflict between the provisions of the Income-tax Act, 1961 and ICDS-1, provisions of the Act will supersede.
- ICDS -1 and AS -1 then ICDS -1 will supersede.
Explain accounting policies
Accounting policies – It means the specific accounting principles and methods of applying those principles to be adopted for the preparation and presentation of financial statements. The basic consideration for the selection of accounting principles, methods, policies, etc. should be to represent the true and fair view of the financial position of the organization for the year.
What are the major considerations in the selection of accounting policies?
The selection & application of accounting policy largely depends upon the judgment of management & circumstances in which an organization operates. There cannot be a predetermined list of accounting policies to be followed by an enterprise or an industrial sector. But Government has been trying to reduce(not eliminate totally) the options of alternative accounting policies to streamline accounting across the country.
Following are the major considerations in the selection of accounting policies based on ICDS -1 & AS -1 :
|As per ICDS -1||
As per AS -1
|Substance over form||The accounting treatment & presentation of transactions & events in financial statements will be governed by their substance and not merely by their legal form.||The accounting treatment & presentation of transactions & events in financial statements will be governed by their substance and not merely by their legal form.|
|Prudence||In order to avoid differential treatment for recognition of income and losses, no expected losses or mark-to-market (MTM) losses, shall be provided for. Unless it is specifically governed by the provisions of any other ICDS (viz. inventory valuation, forex difference, stock valuation).
A new section 40A(13) was introduced vide Finance Act 2018 which states that MTM loss and expected loss shall be disallowed except specifically permitted by other notified ICDS.
Another section 36(1)(xviii) was also introduced vide Finance Act 2018 which stated that MTM loss and expected loss shall only be provided and will be allowed if they are specifically permitted by notified ICDS.
|Keeping in view the uncertainty of the future, it precludes recognition of anticipated profits (i.e. profits are not recognized based on anticipation of earning in the future) but it calls for estimation & recognition of the uncertain amount of expected losses & provision for expected liabilities.|
|Materiality||There is no concept of materiality in ICDS unlike, AS-1.
But as the concept of materiality is excluded here, it would require a lot of trivial adjustments in net profit to arrive at the PGBP figure. because the authorities would insist on strict compliance with ICDS.
|Financial statements should disclose all the information, details which can influence the decision-making of a user of the financial statements. If the information, item or detail can influence alone or collectively put together the decision making it is considered as material.|
Can accounting policy once adopted be changed?
Yes, it can be changed.
An accounting policy shall only be changed if there is a reasonable cause. But the term “reasonable cause” is not defined in the Act.
CBDT has clarified that reasonable cause will constitute as an existing concept and has evolved well over a period of time conferring desired flexibility to the taxpayer in deserving cases. (vide a circular no. 10 dated 23rd march’17)
Explain Fundamental Accounting Assumptions
It means the accounting concepts which should be considered and followed while recording financial information. There are 3 fundamental accounting assumptions that are generally expected to be followed for the presentation & preparation of financial statements.
Name the generally accepted fundamental accounting assumptions.
The following are the generally accepted fundamental accounting assumptions:
Going Concern – It is presumed that the enterprise intends to continue its business, profession, or vocation for the foreseeable future. It neither has any intention nor any necessity of liquidation.
Consistency – It is presumed that accounting policies that are adopted will be followed consistently from one period to another.
Accrual – It is presumed that revenue and costs will be recorded in the year they are earned or incurred (and not when actual money is received or paid).
The same fundamental accounting assumptions are provided by AS -1 Disclosure of Accounting Policies.
Disclosure of fundamental accounting assumptions(Going Concern, Consistency or Accrual) is required only if they are not followed. Otherwise, it is presumed that they are followed by all the organizations.
Disclose all the significant accounting policies adopted by an organization.
If there is a change in any significant accounting policy & it has a material effect
- Disclosure of the fact is required in the year in which such change is adopted, it is immaterial whether the effect will be in the current year and/or in the future year. Disclosure is also required in the future year in which such change has a material effect.
- Disclosure of the fact & amount is also required in the future year in which such change has its effect will be in the current year and/or in the future year.
- The amount by which an item is affected by change shall also be disclosed
- Disclosure of the amount by which an item is affected due to change is also required to the extent it is ascertainable. If it is not ascertainable in part or whole, the fact that it is not possible to quantify or ascertain shall be disclosed.
Mere disclosure of accounting policies or change in policies adopted doesn’t warrant a remedy for wrong or inappropriate treatment for any item of income/expenses.
Important points relating to ICDS -1 clarified in circular no. 10 dated 23rd March 2017