Income Computation and Disclosure Standard (ICDS) I – Accounting Policies
ICDS-I governs the significant accounting policies for computing taxable income under the heads “Profits and Gains of Business or Profession” and “Income from Other Sources.” It does not apply to the maintenance of books of account. In case of a conflict with the provisions of the Income-tax Act, the Act prevails.
- Fundamental Accounting Assumptions– Unless stated otherwise, the following assumptions are presumed to be followed:
Going Concern: The entity is expected to continue its operations in the foreseeable future.
Consistency: Accounting policies must be consistently applied over the years unless changed for a valid reason.
Accrual: Income and expenses should be recognized when they accrue, not when received or paid, except where specific provisions of the Income-tax Act apply (e.g., Section 43B, Section 40, and Section 40A).
If any of these assumptions are not followed, disclosure is required.
- Significant Accounting Policies
Definition: Accounting policies refer to the principles and methods applied in financial statements. However, for taxation purposes, deviations due to ICDS are considered adjustments rather than changes in accounting policies.
Selection Criteria: Policies should reflect the true and fair view of income and financial position. Transactions must be accounted for based on their substance over form principle.
Mark-to-Market Losses: These are not recognized unless permitted by another ICDS (e.g., ICDS VIII on securities).
- Change in Accounting Policy– An entity can change its accounting policy only for a reasonable cause. ICDS does not specify whether the change should be applied prospectively or retrospectively. However, it is generally applied prospectively since the income of a past year cannot be recomputed once reported.
- Disclosure Requirements– As per Form 3CD, the following must be disclosed:
Significant accounting policies adopted.
Changes in accounting policies with material impact, including the financial effect if quantifiable.
Changes expected to impact future years, even if they do not materially affect the current year.
Non-compliance with fundamental accounting assumptions, if any.