What is a deferred cost? with examples

A deferred cost is a cost that you have already incurred, but which you will not charge to expense until a later reporting period. The period in-between, it appears on the balance sheet/Statement of Financial Position as an asset.

The details for deferring recognition of the cost as an expense is that you have not yet fully consumed the item. You may also defer recognition of a cost if you wish to make out it at the same time as related revenue is recognized, under the matching principle.

For example, if you pay Rs. 1,000 for March rent in February, then it is a deferred cost in February, and you in the beginning record it as a prepaid asset. Once March arrives, you consume the asset, and change the asset into rent expense. Other examples of deferred costs are:

• The cost of an intangible asset (Goodwill, Copyrights, Patents etc) that is charged to expense over time as amortization
• Interest cost that is capitalized as part of a fixed asset under IAS 23 borrowing cost
• The cost of a fixed asset that is charged to expense over time in the form of depreciation
• Insurance paid in advance for coverage in future periods
• The costs incurred to register a debt issuance

You should defer the costs of some expenditure when GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) require that they be included in the cost of a long-term asset, and then charged to expense over a long period of time.

For example, you may have to include the cost of interest in the cost of a constructed asset, such as a building, and then charge the cost of the building to expense over many years in the form of depreciation. In this case, the cost of the interest is a deferred cost.