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May 22, 2013

Pre Operative Expenses under Revised Schedule VI

As per para 56 of AS 26.

In some cases, expenditure is incurred to provide future economic benefits to an enterprise but no intangible asset or other asset is acquired or created that can be recognised. In these cases, the expenditure is recognised as an expense when it is incurred. For example, expenditure on research is always recognised as an expense when it is incurred (see paragraph 41). Examples of other expenditure that is recognised as an expense when it is incurred include:
(a) expenditure on start-up activities (start-up  costs), unless this expenditure is included in the  cost of an item of fixed asset under AS 10. 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  expenditures for commencing new operations  or launching new products or processes (pre- operating costs);
(b) expenditure on training activities;
(c) expenditure on advertising and promotional  activities; and
(d) expenditure on relocating or re-organising part  or all of an enterprise.

Share issue expenses, discount on shares, ancillary costs-discount/premium on borrowing, etc., being special nature items are excluded from the scope of AS 26 Intangible Assets (Para 5).

Paragraph 9.2 of AS 10, is reproduced below:

9.2 Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances,  such expenses as are specifically attributable to  construction of a project or to the acquisition  of a fixed asset or bringing it to its working  condition, may be included as part of the cost of the  construction project or as a part of the cost of the  fixed asset.

Expenses incurred on formation of an entity cannot be said to be attributable to bringing an asset/project into existence and, therefore, cannot also be included as part of cost of fixed assets.

The Revised Schedule VI does not contain any specific disclosure requirement for the unamortized portion of expense items such as share issue expenses, ancillary borrowing costs and discount or premium relating to borrowings. The Old Schedule VI required these items to be included under the head “Miscellaneous Expenditure.

The Revised Schedule VI does not deal with any accounting treatment and the same continues to be governed by the respective Accounting Standards/practices. Further, the Revised Schedule VI is clear that additional line items can be added on the face or in the notes. Keeping this in view, entity can disclose the unamortized portion of such expenses as “Unamortized expenses”, under the head “other current/ non-current assets”, depending on whether the amount will be amortized in the next 12 months or thereafter.

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