Regarding AS 26

This query is : Open

C.A. LINESH PATIL (Querist)
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11 July 2010 1)can some one tell me what is the treatment of Preliminary expenses in Accounts.

2)whether expenses made after incorporation but before the start of business is also considered as a preliminary expenses.n if not so what will be the treatment of these expenses.can i prepare put these in P&L accounts.

3.)how share and debenture expenses shall be treated in Accounts.are these also covered in AS 26.

Thanks

CA CS CIMA Prakash Somani

CA CS CIMA Prakash Somani (Expert)
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11 July 2010 Recognising preliminary expenses: Since the expenditure is incurred and paid by the promoters even before the company is incorporated, there is normally a clause that the promoters are reimbursed of all the expenditure. It would not be proper to treat these expenses as accrued as on the date of incorporation of the company and to show them as outstanding expenditure. There cannot be any transactions entered into by the company before it is incorporated.

Accounting treatment of preliminary expenses: Preliminary expenses are capitalised and amortised over a reasonable period of time. Format of balance-sheet of a company provides for disclosure of un-amortised preliminary expenses under the head "Miscellaneous items".

Accounting Standard on preliminary expenses: AS 26 dealing with intangible assets covers preliminary expenses as well. The period over which these preliminary expenses are to be amortised is best left to the judgment of the directors of the company. AS 26 suggests writing off intangible assets over a period of 10 years, though a different period is permissible if it is justified in the opinion of the management. It is a common practice to write off these preliminary expenses in a period of five years, though there is no legal provision to this effect. A company can as well write off its preliminary expenses in the same year as it incurs.

Preliminary expenses in other forms of organisation: Setting up other forms of organisation, such as partnership firms, does not involve much expenditure. Perhaps, for this reason, there is no provision of preliminary expenses under the Partnership Act

C.A. LINESH PATIL

C.A. LINESH PATIL (Querist)
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11 July 2010 thanks,
for your reply sir,but today i studied a case study on the same issue in institute site,the committee says if the preliminary expenses are before the incorporation than it should be written off immediately in the year in which these were incurred.for this purpose p&L A/c will have to prepared by the company even before the company start its business.because they do not satisfy assets recognition criteria. thats why cant be capitalized.

and if preliminary expenses are after the period of incorporation then these can be segregated into two parts-
1)Related to setup of a capital project(assets)then capitalized.

2)and if related to setup business like advertisement,training activity then also it should also be written off in the year of incurrence.
Thanks

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