Regarding AS 26

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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

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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20 July 2025 Great question! Let me clarify the treatment of Preliminary Expenses with reference to AS 26 and accounting practices, integrating the points you mentioned and standard accounting principles.

1️⃣ What are Preliminary Expenses?

These are expenses incurred to set up a company — like legal fees, registration fees, prospectus expenses, etc.
They occur before the company starts business — either before incorporation or after incorporation but before commencement of business.
2️⃣ Treatment of Preliminary Expenses in Accounts

a) Expenses incurred before incorporation:
These expenses are technically incurred before the company exists legally.
Since the company cannot enter into transactions before incorporation, these are not assets of the company and cannot be capitalized.
As per the Institute’s case study and ICAI guidance, these should be written off immediately in the year incurred.
To do this properly, the company should prepare a Profit & Loss account even before business starts, just to reflect these expenses.
Reason: They do not satisfy the asset recognition criteria (no future economic benefits).
b) Expenses incurred after incorporation but before start of business:
These can be classified as:

Expenses related to setting up capital assets or projects (e.g., feasibility studies, site surveys):
These can be capitalized as part of the cost of the asset.
Eventually, these are depreciated over the useful life of the asset.
Expenses related to business operations setup (e.g., advertising, training):
These should be written off immediately to the P&L account in the year incurred.
They are revenue expenses.
3️⃣ AS 26 (Intangible Assets) and Preliminary Expenses

AS 26 deals primarily with intangible assets and their amortization.
Preliminary expenses can be treated as intangible assets, provided they satisfy recognition criteria (identifiable, controllable, future benefit).
If capitalized, AS 26 suggests amortizing over 10 years, but management judgment may vary (e.g., 5 years is common).
However, as noted, expenses before incorporation generally fail to meet criteria and should not be capitalized.
4️⃣ Treatment of Share and Debenture Expenses

Expenses incurred on issue of shares or debentures (like underwriting fees, brokerage, printing of share certificates) are often called share issue expenses.
These are deferred revenue expenses and should be written off over a period.
AS 26 covers such expenses as intangible assets only if they meet recognition criteria.
However, per standard practice and Companies Act, these are written off in the year of issue or spread over a few years (usually 3–5 years).

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