09 January 2014
An asset represent such nature of expense which assume to have ability to contribute in revenue in one or more accounting period.
If this ability to contribute in revenue exhausted or lost then such expense also have to lost its existence in Balance Sheet.
Depreciation, amortization, impairment or revaluation are made to make fair amount of such expense in books of accounts.
Such expense fall in the category of capital nature accordingly the profit of the concerned period not reduced by such expense, instead a portion only in form of depreciation etc. is reduce from the profit according to the accounting policies of the entity.
The consideration in amalgamation is comprising of all assets at pre determined value and its excess over such assets is called goodwill.
This goodwill represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life.
if fictitious assets are not written off then profit and loss of the transferor company will represent fictitious profit and after amalgamation will form part of general reserve or profit and loss of amalgamated company.
while the transferee company is about to paying for "An anticipation" in form of goodwill then there is no need to furtherance of such expenses by way of having such expenses in form of fictitious assets of transferor company.
This is why fictitious assets are written off at the time of amalgamation.
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