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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??
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.
to be fully written off in the first year of operation(Indian AS)
Preliminary Expenses
(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.
(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.
(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.
Capitalise as deferred cost and then amortize over some years. industry practice is around5 years for amortization.
IAS 38.69 requires that start-up, pre-opening and pre-operating costs should be expensed as incurred.
Amortisation is not an option.