FICTITIOUS ASSETS

Fictitious assets are deferred revenue expenditures with no resale value. These intangible assets are unclaimed expenses incurred in running a business and are amortized, hoping that they will benefit the company in the long run .

Fictitious assets are the assets that have no tangible existence but are represented as actual cash expenditure

The main purpose is to create this account for expenses that are not placed in any account heading

Features of Fictitious Assets

1) No physical existence

These assets have no tangible existence, they are part of intangible asset

2) Expenses incurred in running business

These assets will give back returns to the organization over a extended period

3) No resale value

Since these items are expenses incurred in running the company, the business cannot recover them, this these expenses have no realisable value

4) Amortized over several years

The recognition of these expenses is delayed and deferred to future accounting periods, they are not accounted for in a single year but get spread over multiple years

Examples of Fictitious Assets

1) Promotional expenses of a business

Firms see Marketting expenditure as an investment in the company that will fetch returns for more than a year

They are amortized on a systematic basis over many years to reduce their value periodically

2) Preliminary Expenditures

Cost of incorporation, legal and licensing fees and other expenses made to get the company up and running

3) Discount on issue of shares

When the company issuer shares to individual investors and institutions, they do not treat the discount on them as any expense or a loss

4) Loss in issue of debentures

When a company issues debentures, any loss is treated as a fictitious asset and amortized in the books of account

Goodwill is not fictitious asset

Goodwill is not an expense and it takes times to build

It cannot be touched or felt, ie intangible, but goodwill has a realisable value

Depreciation is not a fictitious asset

In the end, fictitious assets will be zero, all expenses are recognized over the appropriate accounting period

Treatment of fictitious assets

No physical existence

Intangible asset

These are expenses with no realisable value

Fictitious assets are amortized or written off in one or more profitable year

Fictitious assets in balance sheet

Fictitious assets are shown on the asset side of the balance sheet of a company under the heading Miscellaneous Expenditure

The incidental expenses which cannot be classified as manufacturing, selling and administrative expenses are called as Miscellaneous expenditure

Amortizing period for fictitious assets

This is very subjective and depends on actual benefit

The context of business plays a crucial role in determination of the period

So, there is no predetermined formula for that

Verification of fictitious assets

That’s expenses are shown in the balance sheet

These expenses are written off during a span of time of 3 to 10 years

The auditor should verify that un-written amount is shown in the balance sheet

Fictitious assets class 11

Fictitious assets cannot be realised in cash or no future benefit can be derived from those assets

These assets include a debit balance of profit and loss account and the expenditure not yet written off such as advertising expenses etc

Fictitious Liabilities

CBDT has said such fictitious liabilities can be in the nature of loans, creditors, advance received, share capital, payables etc, that are disclosed in the audited balance sheet but are fictitious in nature

Prepaid expenses and fictitious assets

Prepaid expense is not a fictitious asset

Prepaid rent is not a fictitious asset

Fictitious value

A value not linked to an asset or liability, but created sorry for accounting purpose

Critics of capitalism contend that a disproportionate amount of the value the market creates is arbitrary

Arbitrary value is also called fictitious value

Fictitious assets deducted from shareholders fund

Shareholders fund means that book value of the company which belongs to shareholders after deducting all the external liabilities

All the value that would be left for shareholders if the company is liquidated

Fictitious assets do not have any value they are deducted

Transfer of fictitious assets

Fictitious assets are to be transferred to the partners capital account

Fictitious assets are considered as losses that are not transferred to the realization account

Fictitious assets are intangible in nature

They are not assets butcher shown in financial statements

Compiled by

Avinash Kulkarni

Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer