Friday , 15 December 2017
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Accounting treatment for Preliminary and Share Issue Expenses

· 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.

About CA Karishma

I am a Chartered Accountant by profession and an avid teacher. Writing is my hobby and this blog is a platform to share knowledge and interact with prospective Chartered Accountants. I locate my work at the intersection of Chartered accountancy & education. I teach among others, Taxation at Tapasya Academy for CA, one of the premier institute for Chartered Accountancy course in Andhra Pradesh.

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  1. very thank ful to u maam

  2. thnx 4 clearing a few of my doubts maam…:)

  3. thanq madam, actually i am looking for a site to learn, because i will sit on the computer for min 6 hrs a day so this is helping me to enjoy and learn the subject very well

  4. thank u so much mam all the confusion regarding this issue has been solved …..and i even remembered your PGBP class.

  5. CA Pardeep Rohilla

    very nice…..its appreciable.

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