Prelim expense - doubt
This query is : Resolved
14 June 2012
Hi,
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?
Mohit
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?
Mohit
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.
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.
Thanks
Mihir Doshi
Thanks
Mihir Doshi
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.
10 August 2024
In the context of preliminary expenses incurred before the incorporation of a company, there are several key points to consider regarding how these expenses should be handled and the auditor's responsibilities:
### **1. **Handling of Preliminary Expenses:**
**a. **Recognition and Recording:**
- **Preliminary Expenses:** These are the expenses incurred in the initial stages of forming a company, such as legal fees, registration fees, and other expenses related to the formation of the company. According to accounting standards and practices, these expenses should be recognized in the books of the company once it is incorporated.
- **Director’s Personal Incurrence:** If a director or promoter incurs preliminary expenses personally before the company is officially incorporated, these expenses can be reimbursed by the company after incorporation. However, these expenses should be properly documented and disclosed to ensure transparency.
**b. **Accounting Treatment:**
- **Reimbursement:** If the director or promoter personally pays for these expenses, the company should record these expenses in its books of accounts once it is incorporated. The company can then reimburse the director/promoter for these expenses.
- **Non-Recognition:** If the expenses are not recognized in the company's books, it can lead to incomplete financial statements and a lack of transparency. This can be problematic for auditing and regulatory compliance.
### **2. **Auditor’s Stand:**
**a. **Audit Responsibilities:**
- **Verification:** As an auditor, it is your responsibility to verify that all preliminary expenses are accounted for in the company's books of accounts. This includes checking that any expenses incurred by the directors/promoters before incorporation are properly documented and recorded once the company is formed.
- **Disclosure:** The auditor must ensure that all relevant expenses are disclosed in the financial statements. If the preliminary expenses are not shown in the books, the auditor should report this as a matter of concern.
**b. **Reporting:**
- **Audit Report:** If the preliminary expenses are not included in the company's books, the auditor should highlight this issue in the audit report. The lack of recording preliminary expenses could be mentioned as a qualification or a note to the financial statements.
### **3. **Best Practices and Recommendations:**
**a. **Documentation:**
- **Invoices and Receipts:** Ensure that all preliminary expenses are supported by proper documentation such as invoices, receipts, and agreements.
- **Reimbursement Policy:** Establish a clear policy for reimbursing promoters/directors for pre-incorporation expenses. This policy should be followed consistently to maintain proper financial controls.
**b. **Legal and Compliance:**
- **Regulatory Requirements:** Ensure compliance with relevant accounting standards and regulatory requirements regarding the treatment of preliminary expenses.
- **Consultation:** If there is uncertainty about how to handle preliminary expenses or any related issues, consult with a legal or accounting professional to ensure compliance and best practices.
### **Summary:**
The director's decision to personally incur preliminary expenses without recording them in the company's books is not advisable. Preliminary expenses should be recorded in the company's books once it is incorporated, and the company should reimburse the director or promoter for these expenses. As an auditor, you must ensure that all preliminary expenses are properly documented, recorded, and disclosed in the financial statements. Failure to do so can lead to issues with transparency and compliance.
### **1. **Handling of Preliminary Expenses:**
**a. **Recognition and Recording:**
- **Preliminary Expenses:** These are the expenses incurred in the initial stages of forming a company, such as legal fees, registration fees, and other expenses related to the formation of the company. According to accounting standards and practices, these expenses should be recognized in the books of the company once it is incorporated.
- **Director’s Personal Incurrence:** If a director or promoter incurs preliminary expenses personally before the company is officially incorporated, these expenses can be reimbursed by the company after incorporation. However, these expenses should be properly documented and disclosed to ensure transparency.
**b. **Accounting Treatment:**
- **Reimbursement:** If the director or promoter personally pays for these expenses, the company should record these expenses in its books of accounts once it is incorporated. The company can then reimburse the director/promoter for these expenses.
- **Non-Recognition:** If the expenses are not recognized in the company's books, it can lead to incomplete financial statements and a lack of transparency. This can be problematic for auditing and regulatory compliance.
### **2. **Auditor’s Stand:**
**a. **Audit Responsibilities:**
- **Verification:** As an auditor, it is your responsibility to verify that all preliminary expenses are accounted for in the company's books of accounts. This includes checking that any expenses incurred by the directors/promoters before incorporation are properly documented and recorded once the company is formed.
- **Disclosure:** The auditor must ensure that all relevant expenses are disclosed in the financial statements. If the preliminary expenses are not shown in the books, the auditor should report this as a matter of concern.
**b. **Reporting:**
- **Audit Report:** If the preliminary expenses are not included in the company's books, the auditor should highlight this issue in the audit report. The lack of recording preliminary expenses could be mentioned as a qualification or a note to the financial statements.
### **3. **Best Practices and Recommendations:**
**a. **Documentation:**
- **Invoices and Receipts:** Ensure that all preliminary expenses are supported by proper documentation such as invoices, receipts, and agreements.
- **Reimbursement Policy:** Establish a clear policy for reimbursing promoters/directors for pre-incorporation expenses. This policy should be followed consistently to maintain proper financial controls.
**b. **Legal and Compliance:**
- **Regulatory Requirements:** Ensure compliance with relevant accounting standards and regulatory requirements regarding the treatment of preliminary expenses.
- **Consultation:** If there is uncertainty about how to handle preliminary expenses or any related issues, consult with a legal or accounting professional to ensure compliance and best practices.
### **Summary:**
The director's decision to personally incur preliminary expenses without recording them in the company's books is not advisable. Preliminary expenses should be recorded in the company's books once it is incorporated, and the company should reimburse the director or promoter for these expenses. As an auditor, you must ensure that all preliminary expenses are properly documented, recorded, and disclosed in the financial statements. Failure to do so can lead to issues with transparency and compliance.
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