Pre-Operative Expenses — Meaning and Treatment
Friday Jun 30, 2017

Most foreign investors venturing into Indian markets have questions as to the optimal financing methodology. A Wholly Owned Subsidiary (‘WOS’), takes times and cost from the date of initiation till the time the Indian entity could be brought to a stage of functionality. Usually, until incorporation, followed by reporting of capital subscription money, such WOS is supported financially from the headquarters. The capital subscription money is technically available for use only after the WOS is incorporated and has an operative bank account. Until then, invariably the headquarters invests its time in planning and also spends towards the initial set-up costs & execution of preliminary tasks, which are necessarily to be undertaken on behalf of WOS. These expenses are often referred to as pre–incorporation and pre–operative expenses.

Pre-incorporation expenses are those expenses which are incurred by the promoters till the time the Indian entity obtains its legal existence and is registered with the government authorities. While pre–operative expenses are expenditures incurred by the promoters after the entity is set up and till the time the company commences actual production / operation.

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