This question was raised by my partnr under whom I am currently doing my Articleship. A director/Promoter of a Company personally incurred the Preliminary expenses before incorporating his company. He however does not want to show it in the Books of Accounts. Is he right or wrong in doing so? What stand has to be taken by an Auditor in this case? Is he correct in doing so?
14 June 2012
SO far as what I understand from your question is that the directors do not want to carry the amount so spent on formation of company in the balance sheet and wish to write off 100% in the same year. If so then they are doing absolutely correct and there is no violation of any provisions. Even AS-26 does not allow to deferred and carry such expenses but same should be written off in the same year.
14 June 2012
No it needs to be w/off over the five years or such suitable number of years after commencement of business biginning with the year of preparation of its first annual accounts. Auditor will have to qulalify this fact in his audit Report.
14 June 2012
I think AS=26 must be looked into. How could you make intangible asset where AS-26 specifically bars.. None of the conditions set outs in the AS for Intangible asset is not fulfilled.
16 June 2012
Mr. Yogesh is right. Preliminary expenses should be written off fully as definition is not being satisfied by concerned Expense. According to Income tax, it can be claimed 1/5 every year.
18 June 2012
First of all thank you all for replying. My question was that the directors dont want to show the expense at all so there is no question of writing off. He wants to incur those expenses personally out of his own pocket.
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