This is with regard to a partnership firm which is already established. They are starting a new project for which estimates are made for preoperative expense (Upfront fee, Interest during construction etc..) The project financials were made for the purpose of term loans. The treatment shown in the financials : - The preliminary expense was amortised over a period of 5 years and shown in the P&L account. The unwritten off portion of the preliminary expense was shown in the asset side of the balance sheet. But, the bank disagrees with this: The reason : In ur case u have already formed the partnership wherein u may not be in a position to take up the TL upfront fees and interest on the TL during construction/modification/ renovation. These items are required to be charged to ur P & L only. pls recalculate the CMA data after charging these items to the P & L only.
Dear experts, Can you provide light on what can be done now? Is it allowable in the balance sheet or not?
If not, how can the accounting be complete? and Will it not inflate the other assets?
Kindly provide some light on this - my email umahcc@gmail.com Thanks a ton
20 October 2009
Strictly, preoperative expenses are revenue in nature and should normally be written off as such in the profit and loss account.
If, however, a huge time lag separates the setting up of the plant and machinery and other infrastructure and the actual commencement of production due to some valid and compelling reasons, the same can be accumulated as Project implementation expenses to be apportioned and added to the cost of respective assets on completion of the project.
But for tax purposes, pre-operation expenses qualify as revenue expenditure because they qualify for deduction the moment the business is set up and one need not wait till the actual commencement of production to be eligible for claiming them as expenses, no matter whether there is a revenue stream or not.
Coming back to accounts, there must be a compelling reason to justify accumulation as deferred revenue expenditure.
20 October 2009
Dear Mr.Chakrapani Thanks for your immediate response. If a portion is amortised in the p&l account for 5 years,where will the remaining unwritten off amount appear? Can you pls clarify. Kind regards Uma
20 October 2009
The remaining portion may be shown in the balance sheet (assets side- last item) as "preoperative expenses a/c pending for amortization.
20 October 2009
Hello again True. We have shown it in the assets side of Balance sheet. But the bank doesnot allow this to be shown in the balance sheet. They only suggest to write off in the p&L. Is there an allowability clause on the preliminary expense? I donot understand how accounts can tally without the balance shown in the balance sheet? Kind regards Uma
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