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№2(13)(2013)
In previous issue we discussed the concept and application of deferred expenses. Logically, if there are deferred expenses, there should be deferred income. We know perfectly well what the income is. The Regulations (Standard) of accounting 15 "Revenue"[1] defines the following criteria of income: "Income is determined at a time of increasing or decreasing asset liabilities, which causes an increase in shareholders' equity (excluding capital increase from contributions paid by company’s participants), provided that the revenue assessment can be measured reliably".
According to the International Financial Reporting Standards 18, "Income” (IAS 18), deferred revenue (deferred income) is income as a consequence of economic activity and events in current period, but recognized in "Income Statement" report of future periods.
Law of Ukraine "On Accounting and Reporting” № 996 from 16.07.1999 (as amended) has identified the following:
- income and expenses calculation and correspondence – to identify financial result of reporting period it is necessary to compare income of reporting period with costs that have been implemented for these revenues. Revenues and expenses are recorded in accounting records and financial statements as they are incurred regardless of date of arrival or pay cash.
We present basic terms which a company uses to form deferred incomes.
Deferred income - money received in reporting period, but according to financial statements relating to future reporting periods.
Advance payments are amounts of money that are paid according to contract in advance against future payments for goods (works, services), which must be received (performed, provided).
Rent is a fixed payment that lessee shall pay to lessor regardless the economic activities consequences.
Transport service - cargo transportation and range of supporting operations related to delivery of goods by road.
Objects of deferred income are such types of income:
- Income in the form of advance payments for leased property and equipment and other non-current assets (advanced rental payments);
- Income in form of advanced payments for cargo transportation, which is not performed yet;
- Advanced payments for newspapers, magazines, periodicals and reference books, gains from tickets sale for transport and theater-entertainment companies, monthly fee for the use of communication facilities, etc.;
- Other deferred revenue.
According to the Instruction "On application of the Chart of Accounts of assets, capital, liabilities and business operations of enterprises and organizations", approved by the Ministry of Finance of Ukraine from 30.11.1999, № 291 and registered with the Ministry of Justice on 21.12.1999, #893 / 4186 (as amended), accounting of deferred income is performed in the account 69 "Deferred income".
How to perform key business operations concerning deferred income? Let’s describe basic business transactions, which are generally considered as deferred incomes.
According to paragraph 6.3. of R(S)A № 15 "Revenue", advanced payment for products (goods and services) are not recognized as income. Thus, the amounts are recognized as deferred income since the amounts received in the reporting period will be incomes in subsequent periods as associated costs will be implemented.
1. Advance payment of lease
Deferred income is recognized as income in form of advance rental payments under leases, provided that advance sum is paid for more than one reporting period. Advance payment of lease is performed according to parties’ agreement (lessor and tenant).
Recognition of advance payments for rental as income in future periods is accrued in reporting period when they came.
Revenue from advance payment for rent is distributed and included in income of the reporting period in equal parts during period when payment is received. Reason for including these revenues amount in reporting period is a contract where monthly rental payment and payment terms are fixed.
Accounts that reflect leases, subject to advance rents recognized as deferred income
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|
account name |
Account features |
|
6810[2] |
Settlement of advances lease payment |
Amount of advances received under lease agreements are credited, assignment of such advance payments to deferred expense are debited on account 69 |
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69 |
Deferred income |
Credited to income recognized as deferred revenue are reflected on credit, they are closed in the group of accounts on debit 713 (depending to the OS type) |
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713 |
Equipment rental income |
Reflects current period income from lease transactions |
Also deferred income can be an amount of money paid for the last month's rent as a deposit, which is subsequently accounted for the payment of rent.
2. Advance payment for cargo traffic
Amount of prepayment is recognized as deferred income if cargo traffic is not performed yet under a contract of cargo carriage and will be performed in subsequent reporting periods. Prepayment is done as agreed. Revenue recognition for works, services yet not performed as deferred income is recognized in reporting period when it was done.
Prepayment for cargo transportation is included in income of reporting period when related services are performed under the Act of rendered services transfer.
Correspondence of accounts is similar to correspondence described in previous section.
Accounts that record transactions for transportation services with the advance lease payments recognized as deferred income
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account name |
Account features |
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681 |
Settlement of advances for transportation services |
amount of advances received on contracts for transportation of goods is credited, assignment of such advance payments as deferred expense are debited on account 69 |
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69 |
Deferred income |
income recognized as deferred income is credited, writing-off is debited on account 703 |
|
703 |
Income from transport services |
reflects income of current period for transport services rendered |
3. Advance payment for newspapers, magazines, periodicals and reference books, income from sale of tickets for transport and theater-entertainment companies, monthly fee for communication
As in the above cases, deferred income is recognized a sum of received advance payments for newspapers, magazines, periodicals and reference books, income from sale of tickets for transport and theater-entertainment companies, monthly fee for communication. Pre-payment is done according to agreement between parties. Income recognition for the above transactions is in accounting period when operation is to be performed (for example, sales of newspapers, periodicals, showing plays in theater, actual implementation of transport services).
In addition, in our opinion, an accountant or financial director can sometimes classify other operations as deferred income. For example, deferred income can be received income from tuition fees.
Thus, in Russia deferred income includes income that could potentially occur in future periods to cover shortfalls in prior periods. This implies that according to certain shortfall will be found or is found a guilty person who will compensate damage caused to enterprise. A legal regulation is fixed in Instructions[3] to use the Plan of accounts for financial and economic activities of organization, approved by the Order of the Ministry of the Russian Federation from 31.10.2000 № 94 as amended on 08.11.2010. In national accounting such operations are not regarded as deferred income – such calculation is reflected on the balance of subaccount 375 "Payments to compensate for losses incurred”.
[1] Regulation(standard) of accounting 15 "Revenue", approved by the Ministry of Finance from November 29, 1999 № 290., and registered with the Ministry of Justice on December 14, 1999, № 860/4153 (as amended)
[2] Sub-account 681 "Settlement of advances received" integrates accounting of advances for supply of property or work performance, and amount pre-paid by customers and clients of suppliers accounts for goods and works
[3] Movement of forthcoming payments of outstanding shortfalls identified in accounting period in previous years is accounted at subaccount 98-3 "Upcoming incomes outstanding for shortfalls identified in the past years". Amount of shortages of values identified in prior years (up to reporting year), recognized by guilty persons, or sums awarded to collect by court are credited at account 98 "Deferred income" in correspondence with account 94 "Shortages and losses from property damage". Simultaneously account 94 "Shortages and losses from property damage" is credited on these amounts in correspondence with account 73 "Settlements with personnel for other operations" (sub-account "Payments to compensate damages"). As debt of shortfalls is repaid, the account 73 "Settlements with personnel for other operations" is credited in correspondence with funds accounts with simultaneous reflection of amounts received under credit of account 91 "Other income and expenses" (profits of previous years identified during reporting year) and debited with account 98 "Deferred income"
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