Company formation expenses

This query is : Resolved

Gaurav (Querist)
Follow

24 September 2013 The filing fees and professional fees paid during incorporation of company is shown as expense in the year of incorporation and loss is carried forward or is written off over a period of five years. Kindly clarify

Rohit Agarwal

Rohit Agarwal (Expert)
Follow

24 September 2013 Dear Gaurav,

All expenses incurred for incorporation of a company are accounted for in the head preliminary expenses and written off over a period of 5 years

Gaurav

Gaurav (Querist)
Follow

24 September 2013 But as per new schedule VI, it is written off in year in which it is incurred. Kindly clarify

Upgrade to CAclubindia Pro. Subscribe Now!

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

19 July 2024 The treatment of filing fees and professional fees paid during the incorporation of a company depends on the accounting standards applicable and the tax regulations governing such expenses. Here's how it generally works:

1. **Accounting Treatment (As per Accounting Standards):**
- As per accounting standards, expenses like filing fees and professional fees incurred during the incorporation of a company are typically treated as **preliminary expenses**.
- These expenses are initially capitalized (recorded as an asset) on the balance sheet of the company because they are considered to be incurred to bring the company into existence and are expected to benefit the company over multiple accounting periods.

2. **Amortization of Preliminary Expenses:**
- Traditionally, under accounting principles, preliminary expenses were amortized (expensed) over a period of time, generally up to five years. This means that a portion of these expenses would be expensed in each subsequent accounting period.
- For example, if a company incurred filing and professional fees of ₹1,00,000 during incorporation, it might amortize ₹20,000 each year for the next five years as an expense in its income statement.

3. **New Schedule VI (Revised Schedule VI of Companies Act, 1956):**
- The Revised Schedule VI and subsequently the Schedule III under the Companies Act, 2013, prescribe a different treatment. According to these schedules, expenses like filing fees and professional fees incurred during incorporation are generally written off (expensed) in the year in which they are incurred.
- This means that the entire amount of these expenses is expensed and reported in the income statement for the year of incorporation itself, rather than being amortized over future periods.

### Clarification:

- **Traditional Accounting Practice:** Preliminary expenses were amortized over several years.
- **Revised Schedule VI (Schedule III under Companies Act, 2013):** These expenses are expensed in the year of their incurrence.

### Conclusion:

The treatment of filing fees and professional fees during incorporation has evolved with changes in accounting standards and regulatory requirements. Under current norms (Revised Schedule VI/Schedule III), these expenses are expensed in the year they are incurred. Therefore, if you are preparing financial statements under the current regulations, these expenses should be shown as an expense in the year of incorporation itself, rather than being spread over subsequent years. Always consult with a qualified accountant or financial advisor to ensure compliance with the latest accounting standards and regulations applicable to your company.