Q:
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What kind of expense does it refer to?
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A:
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It mainly concerned with revenue expenses that are paid in advance of the periods to which they are related such as insurance premiums, car licence fees, rates and subscription fees. Normally, the period covered by a prepaid expense extends beyond the end of the accounting year in which it is paid and the expense is apportioned and charged to the profit and loss accounts of more than one year.
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Q:
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What is the tax treatment for the deductions of prepaid or deferred revenue expenses?
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A:
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A taxpayer is not allowed to claim deduction for the full amount of a prepaid expense in the year of payment if any part of the expense is deferred to a subsequent year or prepaid. Deduction for a particular year is only granted for that part of the prepaid expense that is charges to the profit and loss account of that year, provided that the accounts are prepared in accordance with the relevant financial
reporting standards.
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Q:
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How does the Inland Revenue Department (“IRD”) decide what accounting treatment for a prepaid expense is acceptable?
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A:
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IRD would accept the accounting treatment of a prepaid expense as correct if it complies with the relevant financial reporting standards prescribed by the Hong Kong Institute of Certificated Public Accountants and is not inconsistent with any provision of the Inland Revenue Ordinance.
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Q:
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Does the tax treatment of a prepaid expense will follow the accounting treatment as long as the said accounting treatment complies with the relevant financial reporting standard?
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A:
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Besides the accounting treatment, it should also be consistent with the tax law. Therefore, it still necessary to consider whether the expense is incurred in the production of chargeable profits.
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Q:
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What if the accounting treatment for a prepaid expense does not comply with the relevant financial reporting standard?
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A:
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Adjustment would be made to the accounting profit to compute the profit that should have been arrived at had the relevant financial reporting standard been applied in the accounts.
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FAQ
