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What Is a Cost Deferral?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 June 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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A cost deferral is a process that involves the creation and tracking of a deferred charge. Charges of this type have to do with expenses that are incurred in the present but are realized in the accounting records during some upcoming period of time, when those charges are anticipated to generate some sort of benefit to the organization. By using a cost deferral approach, the organization is able to incrementally benefit from those delayed charges, either in terms of balancing the budget to better effect or even enjoying some type of tax breaks.

With a cost deferral arrangement, expenses that are incurred as the means of launching a project that will generate revenue later on can be spaced out over time. They are usually carried in accounting records as non-current assets until the period in which they are realized. The deferral will be structured, making it possible to realize a portion of the cost over successive periods after those projects have in fact begun to generate some sort of steady cash flow. At that point, the costs can be deducted from the total assets of the organization, with that cash flow balancing the costs with ease. In many cases, the organization can maximize the benefit by also claiming any allowable tax deductions associated with those costs.

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There are a number of different expenses that may be managed using a cost deferral approach. Costs associated with the execution of an advertising campaign may be managed with a financial deferral strategy, realizing the cost incrementally at the campaign triggers additional sales and more revenue for a business. New business entities that are in the start-up phase may also use the cost deferral approach to get through those first difficult months of operation until the operation begins to produce revenue. Even older businesses may use a cost deferral strategy to manage the expenses that are associated with some type of long-term debt, making it possible to realize that debt during periods in which doing so will benefit the business in some manner.

While there are exceptions, cost deferral usually has to do with some sort of expense that can be recognized over an extended period of time. The actual process of tracking the deferral process must be in compliance with generally accepted accounting principles. In addition, companies and other entities that choose to use this method should also make sure the expenses are tracked in a manner that is considered within any tax laws and regulations that may apply. Doing so means there is less potential for any of the expenses to be posted incorrectly in the accounting records, or for an opportunity to claim a deduction overlooked.

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