Preliminary Expenditure

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kaushik

kaushik (Querist)
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05 August 2008 What is the method for accounting Preliminary Expenditure and amortization as per GAAP

CA N RAJA

CA N RAJA (Expert)
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06 August 2008 Preliminary expenses are capitalised and amortised over a reasonable period of time. Format of balance-sheet of a company provides for disclosure of un-amortised preliminary expenses under the head "Miscellaneous items".

Reference can be made to AS 26:

Amortisation period can be decided by the management. AS 26 provides for amortising intanbigle assets over a period of 10 years, though different period can be provided if it is justified.

Normal practice:

Write off over a period of 5 years. (Not a legal requirement)

Company can also opt to write off in the year of commencement of business operation.

An another view on the same issue:

We have to test whether preliminary expenses fit under the definiton of Intangible Asset. If it does not fit under the definiton, it becomes intangible item, which as per AS 26 has to be written off immediately in the year of commencement of the business.