Deferred Revenue Expenditure/ Deferred Marketing Expenditure

As per para 2 of the announcement Published in ‘The Chartered Accountant’, November 2003 (pp. 479).

An issue has been raised as to what should be the treatment of the expenditure incurred on intangible items, which were treated as deferred revenue expenditure and ordinarily spread over a period of 3 to 5 years before AS 26 became mandatory and which do not meet the definition of an ‘asset’ as per AS 26. The examples of such items are expenditure incurred in respect of lump sum payment towards a Voluntary Retirement Scheme (VRS), preliminary expenses etc. In this context, it is clarified as below:

(i) The expenditure incurred on intangible items (referred to in paragraph 2 above) after the date AS 26 became/becomes mandatory (1-4-2003 or 1-4-2004, as the case may be) would have to be expensed when incurred since these do not meet the definition of an ‘asset’ as per AS 26.

(ii) In respect of the balances of the expenditure incurred on intangible items (referred to in paragraph 2 above) before the date AS 26 became/becomes mandatory, appearing in the balance sheet as on 1-4-2003 or 1-4-2004, as the case may be, paragraphs 99 and 100 of AS 26 are applicable.

On Accounting Standard (AS) 26, Intangible Assets, becoming mandatory, an enterprise cannot recognise any expenditure as ‘deferred revenue expenditure’.

 Thus, presently, for the purpose of preparation and presentation of the financial statements, expenditure will be recognised as an asset if it meets the criteria in this regard laid down in relevant standard, e.g. AS 10, AS 26, AS 13 etc.; otherwise it has to be expensed. In other words, for accounting purposes, the concept of ‘deferred revenue expenditure’ has ceased to exist unless otherwise specified in standard, e.g. voluntary retirement expenditure as a transitional measure in the revised AS 15, ‘Employee Benefits’.

Further as per para 56 of AS 26

56. In some cases, expenditure is incurred to provide future economic benefits to an enterprise, but no intangible asset or other asset is acquired or created that can be recognised. In these cases, the expenditure is recognised as an expense when it is incurred. For example, expenditure on research is always recognised as an expense when it is incurred (see paragraph 41). Examples of other expenditure that is recognised as an expense when it is incurred include:

(a) Expenditure on start-up activities (start-up costs), unless this expenditure is included in the cost of an itemof fixed asset under AS 10. Start-up costs may consist of preliminary expenses incurred in establishing a legal entity such as legal and secretarial costs, expenditure to open a new facility or business (pre-opening costs) or expenditures for commencing new operations or launching new products or processes (pre-operating costs);

(b) Expenditure on training activities;

(c) Expenditure on advertising and promotional activities; and

(d) Expenditure on relocating or re-organising part or all of an enterprise.