Deferred Expenses: What to Include and How to Write Them Off

Accounts for deferred expenses under NAS 21

The current portion of deferred expenses is recorded in the 3100 group "Deferred expenses — current portion" (para. 155 of the NAS 21 instructions). These are costs incurred in the reporting period but relating to subsequent reporting periods.

• 3110 "Prepaid operating lease payments" — rent paid in the current period but relating to the next one (para. 158);
• 3120 "Prepaid services" — services paid in advance, including subscriptions (para. 159);
• 3190 "Other deferred expenses" — other prepaid costs not recorded in 3110 and 3120 (para. 160).

What may be treated as deferred expenses

Paragraph 156 of the instructions gives examples of costs that may be recorded in these accounts:

• prepayment of the full amount of an annual subscription to periodicals;
• prepayment of annual property insurance;
• operating lease installments for future periods and other costs that may be charged to expenses in the future.

Current and long-term portions

The chart of accounts splits deferred costs into current and long-term portions. For the long-term portion, the long-term assets section provides account 0990 "Other long-term deferred expenses"; for the current deferred portion — the 3200 group "Deferred expenses — current portion" with account 3290 "Other deferred expenses".

In practice, costs relating to a period more than twelve months after the reporting date are shown in the long-term portion, and the amount approaching write-off is moved to the current portion. The split criterion should be set in the accounting policy.

How to write them off

Costs recorded in the 3100 accounts are written off to the debit of expense accounts. The write-off to current expenses is made over the established period or in proportion to the volume or quantity of output (para. 157 of the instructions). The company chooses the method and sets it in its accounting policy.

Analytical records for the 3100 accounts are kept by account, cost item and object (line). This shows how much of each prepayment remains to be written off under each contract.

• Dr 3190 — Cr 1010–1090, 2810: materials and products issued for work recorded as deferred expenses;
• Dr 3120 — Cr 5110: subscription for the next year paid;
• Dr 3190 — Cr 6010, 7010: amounts owed to suppliers and contractors for items or work relating to deferred expenses;
• Dr expense account — Cr 3110–3190: the share of deferred expenses transferred when the next reporting period arrives.

Example: rent paid for a year

In December a company paid its office landlord the rent for the next calendar year. At the time of payment the cost does not yet belong to the current period: the amount is recorded in account 3110 "Prepaid operating lease payments". From January, one twelfth is written off to period expenses each month: Dr expense account — Cr 3110. If part of the prepayment relates to a period beyond one year, that part is held in long-term deferred expenses and moved to the current portion as it approaches.

Tax treatment

Tax records are kept on the accrual basis (Art. 78 of the Tax Code of the Republic of Uzbekistan). Deductible costs are justified, documented costs incurred during the reporting (tax) period (Art. 305). So a prepayment does not by itself become an expense — the expense is recognized as the period to which it relates arrives.

Where recognition under accounting rules differs from the Tax Code, the Tax Code procedure applies for tax purposes (Art. 305). Costs that accounting includes in the initial cost of long-term assets or the cost of inventory are expensed through depreciation and cost of sales. Repair costs of depreciable assets are governed separately (Art. 309) — they should not be moved into deferred expenses automatically.

Stocktake and reporting

The balance on accounts 3100 and 0990 is a balance sheet asset, so it is checked in the annual stocktake just like receivables. For each contract you need to show how much was paid, how much has been written off and for which period an amount remains. If a lease or insurance contract is terminated early, the remaining balance is not carried forward: either the counterparty refunds it, in which case it becomes a receivable, or, if there is no refund, it is expensed in the period of termination.

Common mistakes

• the entire annual payment for rent or insurance is expensed in the month of payment;
• costs that are actually capital investments or the cost of a fixed asset accumulate in 3190;
• no analytics by contract — the balance at the reporting date cannot be supported;
• current and long-term portions are not separated in the balance sheet;
• the write-off method is not set in the accounting policy and changes from period to period.