· Preliminary expenses are defined as expenses relating to formation of an enterprise. These include legal, accounting, and share issue expenses incurred for formation of enterprise. (eg; Legal consultant expenses, Registrar of companies fees, stamp duty etc)
· Schedule VI to Companies act allowed the following costs to be carried forward under the head miscellaneous expenditure.
o Preliminary expenses
o Share issue expenses
o Discount allowed on the issue of shares or debentures
· AS 26 specified that preliminary expenses should be expensed when incurred, hence these should be charged to Profit and Loss account.
· With the introduction of the Companies Accounting standard Rules, 2006, accounting Standard 26 has been notified.
· The conflict between Schedule VI of Companies Act 1956, and Accounting standard 26 has been resolved, now all preliminary expenses need to be written off in the year when incurred.
· What about Share issue expenses including public issue expenses, stamp duty paid on increase in Authorized Share Capital?
o AS 26 is not applicable to such expenses.. This gives scope for Companies to defer the cost related to share issue expenses under the head Miscellaneous expenditure as permitted by Schedule VI
· However under Income tax, if Preliminary and share issue expenses are for the first time issue and falling under section 35D, it is to be claimed in 5 installments as expenditure, this requires accounting of deferred tax asset/liability due to timing difference.
· In case of subsequent increase in authorized share capital, stamp duty paid is treated as capital expenditure and disallowed under Income tax act.