Reviewing the ICDS-versus-Ind AS reconciliation means testing each line item where the two frameworks diverge — unrealised foreign exchange gains and losses, the treatment of borrowing costs during a temporary suspension of a qualifying asset's construction, retention money on construction contracts, and the point at which marked-to-market gains and losses on certain financial instruments are recognized for tax purposes — independently against the Ind AS financial statements and the entity's own ICDS computation, rather than accepting the net reconciling figure in Form 3CD as a single checked total.
The repeatable list of divergence items
| Item | Ind AS treatment | What to test in the reconciliation |
|---|---|---|
| Unrealised foreign exchange gain/loss | Recognized in profit or loss as the exchange rate moves | Confirm the ICDS adjustment reverses the unrealised component correctly, and that it unwinds on actual settlement in the right subsequent year |
| Borrowing costs during suspension of construction | Capitalisation generally continues through temporary suspension in certain cases | Confirm ICDS-based capitalisation period used for tax matches the ICDS rule, not the Ind AS rule, where the two differ |
| Retention money on construction contracts | Recognized based on Ind AS 115 performance obligation satisfaction | Confirm retention money is included in contract revenue for tax purposes per the applicable ICDS even where Ind AS 115 timing differs |
| Marked-to-market loss on financial instruments | Recognized through profit or loss or OCI depending on classification | Confirm only losses computed per the applicable ICDS method are allowed, and gains are not deferred beyond what ICDS permits |
Testing approach
- Start from the Ind AS profit before tax and build the ICDS-adjusted computation independently, item by item from the table above, rather than starting from the client's Form 3CD reconciliation and checking its arithmetic.
- For each adjustment, trace to the underlying ledger or schedule — a forex adjustment, for instance, should trace to the foreign currency monetary item revaluation working, not to a plug figure in the tax computation.
- Check for consistency year over year in which items are treated as reconciling — an item reconciled last year but silently dropped this year, without a change in the entity's fact pattern, needs explanation.
Regulatory requirement
The Income Computation and Disclosure Standards are notified under section 145(2) of the Income Tax Act and apply for computing income under the heads of profits and gains of business or profession and income from other sources. Confirm the current notified standards and any amendments before relying on a reconciliation item list from a prior year.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Bank, cash & treasuryInd AS 21: effects of changes in foreign exchange ratesMonetary items get retranslated every reporting date. Non-monetary items, carried at historical cost, generally don't. The distinction decides almost everything else.
- Fixed assets & capexInd AS 23: borrowing costs, and which ones actually get capitalisedNot every loan funding construction gets its interest capitalised automatically — the asset has to qualify, and capitalisation has to actually stop at a specific point.
- Audit documentationInd AS 8: accounting policies, estimates and errors — and why they're treated so differentlyThe same-looking number change gets a completely different accounting treatment depending on WHY it changed. Getting that classification wrong is its own error.
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
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