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What will be the treatment of preliminary expenses?? Will it treated as expenses fully in the year when it incurred??

Like company formation cost in2011-12 is $5000. Prelim expenses5000 Cash5000 Income State5000 Preliminary Exp5000 Is it correct??? What will be the treatment if there is a very significant amount?? Can it amortize over several years??

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Question added by Ashis Basak FCMA , Senior Finance Manager , TotalEnergies Bangladesh
Date Posted: 2013/06/12
Ashraf Ali
by Ashraf Ali , Chief Accountant , Sky Steel Systems LLC

it can be written off out of the P&L account equally over some period, for BS the total amount of preliminary expenses is reduced by the amount of expenses written off.
The balance left of preliminary expenses will be shown in the asset side of the BS of the company.

Shahbaz Hayder
by Shahbaz Hayder , Group Head of Finance , Sharif Group of Companies

According to IAS (Thirty Eight) Para (Sixty Nine)

 

The following costs should be recorded as an expense when these are incurred:

 

Expenditure on start-up activities (i.e., start-up costs), unless this expenditure is included in the cost of an item of property, plant and equipment in accordance with IAS. Start-up costs may consist of establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business (i.e., pre-opening costs) or expenditures for starting new operations or launching new products or processes (i.e., pre-operating costs).

 

It is no more treated as deferred cost and amortized over a number of periods.

Mrinal Deb
by Mrinal Deb , Manager - Finance and Accounts , Comfort Diagnostic & Nursing Home

Total amount can't incurred as expense in the year when it is made because it will not reflect the true picture of PL account of that particular year.
The best way to capitalized it and adjust over the years against P/L account at the end of each year depending on business nature & the size of preliminary expense.

Prince Ninan
by Prince Ninan , Audit Executive , Lewis & Pecker

to be fully written off in the first year of operation(Indian AS)

Rehan Qureshi
by Rehan Qureshi , Financial Consultant , Self Employeed

Preliminary Expenses

  1. Preliminary expenses are the expenses relating to the formation of an enterprise. For example, in the case of a company, preliminary expenses would normally include the following.

 

(a)    Legal cost in drafting the memorandum and arti­cles of association.

(b)    Fees for registration of the company.

(c)     Cost of printing of the memorandum and articles of association and statutory books of the company.

(d)    Any other expenses incurred to bring into exis­tence the corporate structure of the company.

 

  1. Paragraph55 of AS26 requires that expenditure on an intangible item should be recognised as an expense when it is incurred unless:

 

(a)    it forms part of the cost of an intangible asset that meets the recognition criteria laid down in para­graphs19‑54 of AS26; or

(b)    the item is acquired in an amalgamation in the nature of purchase and cannot be recognised as an intangible asset. If this is the case, this expen­diture (included in the cost of acquisition) should form part of the amount attributed to goodwill (capital reserve) at the date of acquisition.

 

  1. Paragraph56 ofAS26 provides some examples where the expenditure is recognised as an expense when it is incurred. The examples given include, expenditure on start‑up of activities (start‑up costs), unless the expenditure is included in the cost of an item of fixed asseet under AS10. Start-up costs may consist of preliminary expenses incurred in establishing a legal entity such as legal and secretarial costs, expenditure to open a new facility or business (pre‑opening costs) or expenditure for commencing new operations or launching new products or processes (pre‑operating costs).

 

  1. Preliminary expenses, therefore, incurred on or after, the date on which the Standard becomes mandatory for an enterprise or the preliminary expenses incurred on or after the date on which the enterprise opts to apply the Standard in the preparation and presentation of financial statements would be written off in the year in which they are incurred. The expenditure on preliminary expenses shall not be carried forward in the balance sheet to be written off in subsequent accounting periods.

 

  1. Preliminary expenses already shown in the balance sheet on the date the Standard is first applied would be required to be accounted for in accordance with the requirements laid down by paragraph99 of AS26.

 

  1. The auditor should verify these expenses with reference to supporting documents such as invoices and contracts relating to these expenses. In the case of a company, auditor should also examine that the reimbursement of such expenses to promoters is in accordance with disclosures made in the prospectus. Compliance with legal provisions regarding reimbursement of the promoters' expenses should he specifically examined. In addition to the audit procedures mentioned above, auditor should also apply the following audit procedures with regard to preliminary expenditure:

(a)     The auditor should verify whether the preliminary expenses incurred on or after the date Standard is applied by the enterprise are entirely charged to the profit and loss account in the year in which they are incurred.

(b)     In the case of preliminary expenses already appearing in the balance sheet on the date the Standard is applied, the auditor should satisfy himself that the estimate made by the management of the enterprise of the useful life preliminary expenses is appropriate.

(c)     The auditor should verify whether the carrying      amount of the preliminary expenses appearing in the balance sheet is eliminated with a corresponding adjustment to the opening bal­ance of the revenue reserve in case the amortisa­tion period determined under paragraph63 of AS26 has already expired.

(d)     The auditor should satisfy himself that the pre­liminary expenses already appearing in the bal­ance sheet are being amortised in accordance with the requirements of AS26 in case the amor­tisation period determined under paragraph63 of AS26 has not expired.

Preliminary expenses are basically are part of deferred assets in Balance Sheet.
These are amortized/ written off to P&L on a systematic base till the the balance goes to nill.

Nagoorammal Abdul Rahman
by Nagoorammal Abdul Rahman , Finance Manager , Vox Spectrum Limited

as per the international standard (IAS38) th preliminary expenses should be written off but if the expense relates to future year it needs to be deferred to that date.
Again it differs from Local GAAP vs IAS.
In India (as per local GAAP) preliminary expenses can be deferred and can be written off in3 years time.
But international standard says to be w.off in the same period.

Saqib Shehzad
by Saqib Shehzad , Audit Senior, I , Ernst & Young Ford Rhodes Sidat Hyder, Chartered Accountants

This amount can be amortized over some period (IFRS is silent about the time frame).
Remaining amount will be shown as an unamortized balance in the Statement of Financial Position (Balance Sheet).

Muhammad Hamid
by Muhammad Hamid , Manager Accounts and Taxation , Stancos Private Limited, Plastech Products Private Limited and Nature Sciences Private Limited

Capitalise as deferred cost and then amortize over some years. industry practice is around5 years for amortization.

saji sajisundersingh
by saji sajisundersingh , Senior Accountant-Payable & GL , Dubai Health

it is depending up on the register like if you register the company on MAY-2012 to MAY -2013 that expenses effecting2013.

Nijo Johnson
by Nijo Johnson , Assistant Manager , Deloitte and Touche

IAS 38.69 requires that start-up, pre-opening and pre-operating costs should be expensed as incurred.

 

Amortisation is not an option.

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