This refers to expenditure essentially of a revenue nature which, instead of being charged off as and when it is incurred, is accumulated in an account appropriately headed to indicate its nature and the balance in the account is written off over a period of years during which its benefit is expected to accrue to the business. Examples of expenses are: prepaid expenses, discount allowed on subscription to debentures. As long as the expense is not written off, it continues to appear as an asset on the right hand side of the Balance Sheet. Such expenses are described as Deferred Revenue Expenditure so as to indicate clearly the fact that though the expense is essentially of a revenue nature, its writing off has been deferred for adequate reasons. For verification of such expenditure, it is necessary for the auditor to examine the evidence showing that the expense has actually been incurred as well as the proposed basis of its apportionment over a period of years. Wherever it is possible he must find out that the benefit of the expenditure which is being carried forward as an asset has not exhausted and, if so, the amount should be written off. If during the year any amount has been added thereto, the justification for the same should be examined.
Capitalisation of expenditure : Where a part of the expenditure, in respect of a period before the business had reached the revenue earning state, has been capitalized, the auditor should carefully examine that the amount so capitalized only represents expenditure which could be considered to have directly or indirectly contributed to bring into existence assets. It this connection, he should examine the resolution of the Board of Directors which the capitalisation has been authorised and the amount capitalized should be disclosed in the Balance Sheet. Students may note that with the issuance of AS-26 on Intangible Assets, the concept of miscellaneous expenditure would undergo a change. Para 55 of AS 26, “Intangible Assets” which deals with recognition of an expense requires than an expenditure on an intangible item should be recognised as an expense when it is incurred unless:
- it forms part of the cost of an intangible asset that meets the recognition criteria, viz., future economic benefit, cost measured reliability, etc.
- the item is acquired in an amalgamation in the nature of purchase and cannot be recognised as an intangible asset. In this case, this expenditure should form part of the amount attributed to goodwill (Capital Reserve) at the date of acquisition.
The examples as prescribed in AS 26 of expenditure that are recognised as expenses are as under:
- expenditure on start up activities, unless this expenditure is included in the cost of an item of fixed asset under AS 10.
- expenditure on training activities.
- expenditure on advertisement and promotional activities.
- expenditure on relocating or re-organising part or all of an enterprise.
It should be further noted that, discount or premium relating to borrowing and ancillary costs incurred in connection with the arrangement of borrowings, share issue expenses and discount allowed on the issue of shares can be treated as deferred revenue expenditure. Since, AS 26 does not apply to such item due to its specific nature.