1.1 What is ICDS IV?

• Full Form: Income Computation and Disclosure Standards - Revenue Recognition
• Notification: Notified on 31st March 2015, effective from 1st April 2015
• Purpose: To provide clarity on recognition of revenue for computation of income under the Income Tax Act, 1961
• Legal Basis: Section 145(2) of the Income Tax Act, 1961
• Applicability: Mandatory for all taxpayers following mercantile system of accounting

1.2 Objectives

• Standardization: To bring uniformity in computation of income
• Tax Revenue: To ensure timely recognition of revenue for tax purposes
• Clarity: To reduce disputes between taxpayers and tax authorities
• Compliance: To align accounting practices with tax requirements

2.1 Who Must Follow ICDS IV?

• All Taxpayers: Following mercantile system of accounting
• Companies: All companies irrespective of turnover
• Non-Corporate Entities: Firms, LLPs, AOPs, BOIs, etc.
• Professionals: Doctors, lawyers, consultants (if following mercantile system)

2.2 Exemptions

• Cash System: Taxpayers following cash system of accounting
• Individuals & HUFs: Not having business income (only professional income below threshold)
• Specified Persons: As per Income Tax Rules

3.1 Revenue

• Definition: Gross inflow of cash, receivables or other consideration arising in the course of ordinary activities
• Includes: Sale of goods, rendering of services, use of resources by others
• Excludes: Amounts collected on behalf of third parties (like taxes)

3.2 Sale of Goods

• Definition: Transfer of property in goods from seller to buyer for consideration
• Key Element: Transfer of ownership and possession
• Timing: Generally at the time of delivery

3.3 Rendering of Services

• Definition: Performance of contractually agreed tasks over an agreed period
• Recognition: As per percentage of completion method or completed service contract method

3.4 Fair Value

• Definition: Amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction
• Application: Used for valuing non-cash considerations

4.1 General Principles

• Reasonable Certainty: Revenue should be recognized when there is reasonable certainty of its ultimate collection
• Measurement: Revenue should be measured at fair value of consideration received or receivable
• Delivery: Revenue should be recognized when significant risks and rewards have been transferred

4.2 Essential Conditions (All Must be Satisfied)

• Condition 1: Seller has transferred significant risks and rewards of ownership to buyer
• Condition 2: Seller retains no continuing managerial involvement or effective control over goods
• Condition 3: Revenue amount can be measured reliably
• Condition 4: It is reasonable to expect ultimate collection
• Condition 5: Costs incurred or to be incurred can be measured reliably

5.1 When to Recognize Revenue?

• General Rule: When property in goods passes to buyer
• Delivery: Usually coincides with delivery of goods
• Legal Transfer: As per Sale of Goods Act, 1930
• Risk & Reward: When significant risks and rewards of ownership are transferred

5.2 Special Scenarios

• Sale on Approval: Revenue recognized when buyer approves or approval period expires
• Consignment Sales: Revenue recognized when goods are sold by consignee to end customer
• Installment Sales: Revenue recognized at the time of sale, not when installments are received
• Bill & Hold Sales: Revenue recognized when delivery is delayed at buyer's request and specific conditions are met
• Sale with Right of Return: Revenue recognized when return period expires or goods are not returned

6.1 Methods of Recognition

• Percentage of Completion Method: Revenue recognized based on stage of completion when outcome can be estimated reliably
• Completed Service Contract Method: Revenue recognized only when service is completed
• Choice: Percentage completion preferred; completed contract only when outcome cannot be estimated reliably

6.2 Percentage of Completion Method

• Condition 1: Amount of revenue can be measured reliably
• Condition 2: Reasonable certainty of collection
• Condition 3: Stage of completion can be measured reliably
• Condition 4: Costs incurred and to be incurred can be measured reliably

6.3 Methods to Determine Stage of Completion

• Survey Method: Physical surveys of work performed
• Cost Method: Proportion of costs incurred to total estimated costs
• Milestone Method: Achievement of specific milestones
• Time Method: Proportion of time elapsed to total time

7.1 Interest Revenue

• Recognition Basis: Time proportion basis using effective interest rate method
• Accrual: Interest accrues on day-to-day basis
• Formula: Principal × Rate × Time
• Example: Loan of ₹10,00,000 at 10% p.a. → Interest of ₹10,000 accrues every month

7.2 Royalty Revenue

• Recognition Basis: On accrual basis as per terms of agreement
• Types: Based on production, sales, or time period
• Measurement: As per substance of relevant agreement
• Example: Royalty at ₹50 per unit → If 1,000 units sold, recognize ₹50,000

7.3 Dividend Revenue

• Recognition Timing: When right to receive dividend is established
• For Listed Companies: When dividend is declared (ex-dividend date)
• For Private Companies: When shareholder's right to receive is established
• Tax Implication: Subject to dividend income taxation rules

8.1 Major Deviations

Note: ICDS IV is largely based on AS 9 but has certain key differences for tax purposes

8.3 Impact on Tax Computation

• Book Profit vs Tax Profit: May lead to differences requiring adjustments in tax computation
• Reconciliation: Companies need to maintain reconciliation between books and tax returns
• Disclosure: Specific disclosures required in tax audit report

• Objective: ICDS IV provides clarity on revenue recognition for tax purposes
• Key Principle: Revenue should be recognized when reasonably certain and measurable
• Differences: Important to understand differences between ICDS IV and accounting standards
• Compliance: Mandatory for all taxpayers following mercantile system
• Documentation: Proper documentation and disclosures are essential
• Professional Help: Consult tax professionals for complex situations