Difference in ICAI and Income tax Standard : Contstruction Cost

The CBDT has now notified the Income Disclosure and Tax Accounting Standards vide notification no. 32/2015, F. No. 134/48/2010-TPL, dated March 31, 2015. Comparative study of Accounting Standard issued by ICAI, and notified TAS has been given hereunder

Income Computation and Disclosure Standard III relating to construction contracts

Accounting Standards issued by ICAI	Income Computation and Disclosure Standards (ICDS)
CONSTRUCTION CONTRACTS
A. Retention money
AS-7 is silent about treatment of accrual of income in respect of the retention money.		Contract revenue in respect of retention money shall be recognized on basis of percentage of completion method. [Para 10 and 16]
B. Reversal of revenue
AS-7 provides for reversal of revenue on account of uncertainty arising on realisability of contract revenue which was already recognized as income.		Where contract revenue already recognized as income is subsequently written-off in books, it shall be recognized as an expense and not as an adjustment of contract revenue. [Para 11]
C. Borrowing costs relatable to construction costs
Costs that may be attributable to contract activity in general and can be allocated to specific contracts also includes borrowing costs as per Accounting Standard (AS) 16, Borrowing Costs		Allocated borrowing costs in accordance with ICDS shall form part of contract costs [Para 12(d)]
D. Pre-construction interest income, dividend income & capital gains
AS 16 provides that in determining the amount of borrowing costs eligible for capitalization during a period, any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred.		These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue.[Para 12] Remarks : interest, dividends or capital gains shall be treated and taxed as income in accordance with the applicable provisions of the Act
E. Recognition of losses including probable/expected losses
To be recognized fully and not in proportion to the percentage of completion		Future or anticipated losses shall not be allowed unless such losses are actually incurred.  Further, the losses incurred shall be allowed only in proportion to the stage of completion. [Para No 18,19]
F. Early stages of a contract
Revenue shall not be recognized during early stages of contract. What is "early stages" is not defined in the AS – 7. However, Guidance note on real estate transactions requires that, apart from other mentioned conditions, at least 25% of the total construction and development cost should be incurred before revenue is recognized.		During early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognized only to the extent of cost incurred. The early stages of contract shall not extend beyond 25% of the stage of completion.[Para 20]
G. Recognition of incentive payments
Only when (i) contract is sufficiently advanced that it is probable that specified performance standards shall be met or exceeded (ii) amount of incentive payment is reliably measurable		ICDS omits the requirement that contract is sufficiently advanced that it is probable that specified performance standards shall be met or exceeded. Contract revenue shall be recognised when there is reasonable certainty of its ultimate collection  As per percentage of completion method. [para 9,16]
H. Recognition of claims
Only when (i) negotiations are sufficiently advanced that it is probable that customer will accept the claim and (ii) amount is reliably measurable		ICDS omits the requirement that negotiations are sufficiently advanced that it is probable that customer will accept the claim. Contract revenue shall be recognised when there is reasonable certainty of its ultimate collection  As per percentage of completion method. [para 9,16]
I. Transitional Provisions
		Revenue and costs associated with construction contract, which commenced on or before 31-03-2015 but not completed by the said date, shall be recognised as revenue and costs in accordance with this standard. The amount of contract revenue, contract costs or expected loss, if any, recognised for the said contract for any previous year commencing on or before 01-04-2014 shall be taken into account for recognizing revenue and costs of the said contract for previous year commencing on 01-04-2015 and subsequent previous years. [para 22]