The concept of deferred revenue expenditure may soon become a thing of the past. A recent clarification to Accounting Standard 26 (relating to intangible assets) calls for deferred revenue expenses — like voluntary retirement scheme and preliminary expenses — to be written off at the time they are incurred as these do not fulfil the definition of an asset under the standard.
Chartered accountants (CAs) say that the proposed change will go against the basic characteristic of deferred revenue expenditure, making the term lose its relevance. Deferred revenue expenses are those expenses which are neither completely revenue nor capital in nature, and hence are written off over their useful life. These expenses are not exactly capital in nature, implying that a physical asset did not come into existence, nor are they purely revenue as they did not pertain to a particular time period. The benefit from these expenses are spread over a period of time and hence they were written off over a time period based on their usefulness.“The deferred revenue concept in India will now be a thing of the past. Internationally, the concept has since long become extinct,� says Rahul Roy, former president of the Institute of Chartered Accountants of India (ICAI).
One of the best known items under this head is the expense on voluntary retirement schemes, where the benefit of cost savings is expected to continue over a period. Other examples are preliminary expenses, cost incurred on feasibility study or advertising. The benefits of all these are expected to accrue to the accounting entity over a period of time in the future and, hence, they have to be written off over a period spanning more than a year.
The new norms stipulate that unless it is very clearly shown that these expenses fall under the head of a fixed asset or an intangible asset, it will have to be written off as and when the expenditure is incurred.
If there is ambiguity as to whether an asset has been created, the expenses will have to be written off when they are incurred.
“We are finding it increasingly difficult to classify such expenditure as fixed, and even grey areas would need complete write-off impacting the financials,� said a partner at an accounting consultancy firm in Mumbai.Apart from implications for various industries and entities, another interesting fallout will be on students. One of the most important lessons in accountancy relates to identifying different expenses and then giving an appropriate accounting treatment to these items. While this may simplify matters as far as studies are concerned, things will get quite complicated in real life.
“Till now, when there were heavy expenses, one could spread them over the future benefit and then effectively write them off. The deferred revenue category will more or less vanish. In fact, the accounting standard on research and development is being withdrawn with the introduction of this standard,� says Sanjeev Pandit, a CA.
Chartered accountants (CAs) say that the proposed change will go against the basic characteristic of deferred revenue expenditure, making the term lose its relevance. Deferred revenue expenses are those expenses which are neither completely revenue nor capital in nature, and hence are written off over their useful life. These expenses are not exactly capital in nature, implying that a physical asset did not come into existence, nor are they purely revenue as they did not pertain to a particular time period. The benefit from these expenses are spread over a period of time and hence they were written off over a time period based on their usefulness.“The deferred revenue concept in India will now be a thing of the past. Internationally, the concept has since long become extinct,� says Rahul Roy, former president of the Institute of Chartered Accountants of India (ICAI).
One of the best known items under this head is the expense on voluntary retirement schemes, where the benefit of cost savings is expected to continue over a period. Other examples are preliminary expenses, cost incurred on feasibility study or advertising. The benefits of all these are expected to accrue to the accounting entity over a period of time in the future and, hence, they have to be written off over a period spanning more than a year.
The new norms stipulate that unless it is very clearly shown that these expenses fall under the head of a fixed asset or an intangible asset, it will have to be written off as and when the expenditure is incurred.
If there is ambiguity as to whether an asset has been created, the expenses will have to be written off when they are incurred.
“We are finding it increasingly difficult to classify such expenditure as fixed, and even grey areas would need complete write-off impacting the financials,� said a partner at an accounting consultancy firm in Mumbai.Apart from implications for various industries and entities, another interesting fallout will be on students. One of the most important lessons in accountancy relates to identifying different expenses and then giving an appropriate accounting treatment to these items. While this may simplify matters as far as studies are concerned, things will get quite complicated in real life.
“Till now, when there were heavy expenses, one could spread them over the future benefit and then effectively write them off. The deferred revenue category will more or less vanish. In fact, the accounting standard on research and development is being withdrawn with the introduction of this standard,� says Sanjeev Pandit, a CA.
