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II - Valuation of inventories (w.e.f. AY 2017-18)

ICDS - 02 - Rule - Income computation and disclosure standards - w.e.f. AY 2017-18 - Other Direct Tax / Income Tax - ICDS - 02 - B. Income Computation and Disclosure Standard II relating to valuation of inventories (Vide notification no. 87/2016 dated 29-9-2016 w.e.f. Assessment Year 2017-18) Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of Business or profession" or "Income from other .....

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ch is dealt with by the Income Computation and Disclosure Standard on construction contracts; (b) Work-in-progress which is dealt with by other Income Computation and Disclosure Standard; (c) Shares, debentures and other financial instruments held as stock-in-trade which are dealt with by the Income Computation and Disclosure Standard on securities; (d) Producers' inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at n .....

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ss of production for such sale; (iii) in the form of materials or supplies to be consumed in the production process or in the rendering of services. (b) "Net realisable value" is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 2(2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to .....

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he acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase. Costs of Services 6. The costs of services shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads. Costs of Conversion 7. The costs of conversion of inventories shall include costs directly related to the units of production and a systematic allocation of fixed and variable produ .....

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rmal capacity of the production facilities. Normal capacity shall be the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production shall be used when it approximates to normal capacity. The amount of fixed production overheads allocated to each unit of production shall not be increased as a consequence of low production or idle plant. .....

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multaneously and the costs of conversion of each product are not separately identifiable, the costs shall be allocated between the products on a rational and consistent basis. Where by-products, scrap or waste material are immaterial, they shall be measured at net realisable value and this value shall be deducted from the cost of the main product. Other Costs 10. Other costs shall be included in the cost of inventories only to the extent that they are incurred in bringing the inventories to thei .....

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iod in which they are incurred, namely:- (a) Abnormal amounts of wasted materials, labour, or other production costs; (b) Storage costs, unless those costs are necessary in the production process prior to a further production stage; (c) Administrative overheads that do not contribute to bringing the inventories to their present location and condition ; (d) Selling costs. Cost Formulae 13. The Cost of inventories of items (i) that are not ordinarily interchangeable; and (ii) goods or services pro .....

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graph 13, shall be assigned by using the First-in First-out (FIFO), or weighted average cost formula. The formula used shall reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. 17. The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or .....

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ost method or the retail method, may be used for convenience if the results approximate the actual cost. Standard costs take into account normal levels of consumption of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of the current conditions. (2) The retail method can be used in the retail trade for measuring inventories of large number of rapidly changing items that have similar margins and for which it i .....

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' relating to the same product line having similar purposes or end uses and are produced and marketed in the same geographical area and cannot be practicably evaluated separately from other items in that product line, such inventories shall be grouped together and written down to net realisable value on an aggregate basis. 20. Net realisable value shall be based on the most reliable evidence available at the time of valuation. The estimates of net realisable value shall also take into consid .....

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sold at or above the cost. Where there has been a decline in the price of materials and it is estimated that the cost of finished products will exceed the net realisable value, the value of materials shall be written down to net realisable value which shall be the replacement cost of such materials. Value of Opening Inventory 22. The value of the inventory as on the beginning of the previous year shall be (i) the cost of inventory available, if any, on the day of the commencement of the busines .....

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