Deferred Revenue Expenditure: Deferred revenue expenditure is that expenditure for which payment has been made or a liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods. In short, it refers to that expenditure that is, for the time being, deferred from being charged against income. Such suspension of ‘charging of’ operation may be due to the nature of expenses and the benefits expected there from.
Deferred revenue expenditure should be revenue expenditure by nature in the frst instance. But its matching with revenue may be deferred considering the benefts to be accrued in future.
AS 26 – Intangible Asset does not accept this view. Para 56 states, ―Expenditure incurred to provide future economic benefit to an enterprise that can be recognized as an expense when it is incurred. e.g., expenditure incurred on Scientific Research is recognized as an expense when it is incurred‖. In short, the whole amount of expenditure is treated as expense for the current year only and will not proportionately be transferred as deferred charge.
Deferred Revenue Expenditure
A thin line of difference exists between deferred revenue expenses and prepaid expenses. The benefts available from prepaid expenses can be precisely estimated but that is not so in case of deferred revenue expenses. For example, insurance premium paid say, for the year ending 30th June, 2015 when the accounting year ends on 31st March, 2015 will be an example of prepaid expense to the extent of premium relating to three months’ period i.e. from 1st April, 2015 to 30th June, 2015. Thus the insurance protection will be available precisely for three months after the close of the Year and the amount of the premium to be carried forward can be calculated exactly.
There are certain expenses which may be in the nature of revenue but their benefit may not be consumed in the year in which such expenditure has been incurred; rather the benefit may extend over a number of years, for example, heavy advertising expenditure incurred in introducing a new line or developing a new market. Charges of these expenses are deferred because such expenses benefit more than one accounting period. The matching principle demands this. The basis of charge is usually proportionate to the benefit consumed/reaped.
The practice which varies considerably is to write off the amount over the period of years in which the benefit is expected to accrue say 3 to 5 years. If the expenditure can be ear-marked as being in respect of a specified object, the expenditure should be written off during the life of that object. Example: Heavy advertising expenses on a new product, accidental losses like loss arising from a fire or an earthquake; the loss may be spread over a few years. The deferred revenue expenditure not yet written off is shown on the assets side of the balance sheet. In the case of joint stock companies, it is deducted from reserves.
Thus, deferred revenue expenditure is revenue in character but —
(i) the benefit of which is not exhausted in the year of expenditure, or
(ii) is applicable either wholly or in part to the future years, or
(iii) is accidental with heavy amount and it is not prudent to charge it against the profit of one year.
The deferred revenue expenditure may be classified into the following three categories:
(i) Expenditure partly paid in advance, where a portion of the benefit has been derived within the accounting period and the balance will be reaped in a number of future years. Therefore, the benefit to be reaped in future is shown in the balance sheet as an asset e.g. special advertising expenditure for a new product.
(ii) Expenditure in respect of service rendered which for any sound reason is considered as an asset or more properly not considered to be allocable to the one accounting period e.g. cost of experiments, discount on issue of debentures etc.
(iii) Amounts representing loss of an exceptional nature e.g. property confiscated in a foreign country, loss on uninsured assets, etc.