deferred charges

Deferred Charge

An asset on a balance sheet that comes about from a business making payment for a good or service it has not yet received, but will in the near future. Prepaid expenses are expensed over time as the goods or services are received. A common example of a prepaid expense is an insurance policy. Another example is a lump sum payment for rent; if a company pays for a year's worth of rent in advance, it is recorded as a deferred charge. A deferred charge is also called a prepaid expense.

deferred charges

An accounting and tax concept in which nontangible costs that are expected to provide value over a number of years are booked as assets and then reduced each year by a pro rata amount as they are charged to expenses.

Example:

Acme Inc. pays a broker $75,000 to negotiate a 10-year lease on very favorable terms.

Year 1, day 1: Acme writes a check for $75,000 and books an asset for $75,000.

Year 1, day 2: Acme enters an expense for $7,500 (one-tenth of the total amount) and reduces the asset by $7,500. The net result is that, at the end of year 1, Acme has $75,000 missing from its bank account, but this is balanced by an asset of $67,500 and an expense of $7,500.

Years 2 through 10: Continue the same process as year 1, day 2 until the deferred charge is finally $0 and the last $7,500 is expensed.

If you do not properly account for such deferred charges on your taxes, you risk an audit, disallowance of expenses, penalties, and interest.

References in periodicals archive ?
The rules likewise clarify that the finance charges will be computed based on the unpaid amount of the outstanding balance as of statement cut-off date and should not include current and deferred charges.
There is a need for disclosure of information concerning movements in certain assets, namely, (a) land and buildings; (b) plant and equipment; (c) assets under construction; (d) long-term investments; (e) long-term receivables; (f) purchased goodwill; (g) patents, trade marks and similar intangibles; (h) deferred charges of a long-term nature.
First, the Company was required to record an income tax expense charge of $86 million in the quarter to establish a valuation allowance on its US deferred tax assets and other deferred charges. In addition, the Company recorded an additional $12 million in expenses, net of tax, primarily associated with the resumption and catch-up of depreciation and amortization on Wolfspeed's long lived assets, which was partially offset by the Infineon termination fee.
The banks balance sheet position is now stronger than ever with deferred charges already written-off, sale of big-ticket non-performing assets, and more than adequate capital despite a more stringent regulation."
Section 6 of the ERC Rules on the sale of sub-transmission assets has specifically provided that "for acquiring electric cooperatives (ECs), any uncollected TransCo/NGCP's connection and residual charges resulting from the deferred charges as approved by the ERC shall be capitalized or included in the acquisition cost of the subject assets."
* Before New Standards: Reported as deferred charges (assets).
Accordingly, it will pay a call premium of USD6.5m for early redemption of the notes and incur a non cash charge of USD8.7m as expenses for the deferred charges relating to the existing credit facility and senior unsecured notes.
Deferred charges for SPV notes continue to press the bank's capital base but most of them will be repaid in the next two years.
"Instead," he wrote, "we set up an asset called 'deferred charges applicable to assumed reinsurance,' in an amount reflecting the difference between the premium we receive and the (higher) losses we expect to pay (for which reserves are immediately established).We then amortize this asset by making annual charges to earnings that create equivalent underwriting losses.
Specifically we estimated regressions between 1995 and 2003, and used the R as a metric to evaluate the explanatory power of the variables, finding: (i) the explanatory power of earnings and net equity; and (ii) the incremental explanatory power of deferred charges, in which the stock price is a function of net earnings and equity minus deferred charges.
However, though the FASB did not object to AcSEC's undertaking this project on start-up costs, board members expressed concern that the FASB might not be able to support AcSEC's conclusions because the board had not specifically decided how its conceptual framework on assets applies to deferred charges.
Long-term prepayments that are chargeable to several years are presented on the balance sheet as deferred charges. Typical examples are prepaid rent, prepaid insurance, and supplies.