What is a deferred asset?

A deferred asset represents costs that have occurred, but because of certain circumstances the costs can be reported as expenses at a later time. One of these circumstances is the assurance from an electric utility's regulators that the costs being deferred will be recoverable through increases in future utility rates.

To illustrate, let's assume that an electric utility spent $300,000 for a project before it had to be abandoned. The state regulators ruled that the utility may recover the $300,000 from its customers in the form of higher rates over a 5-year period starting next year. Because of this assurance, the utility can record the $300,000 as a deferred asset. In each of the five subsequent years, the utility will credit the deferred asset account for $60,000 and will debit an expense for $60,000. Hence, the $60,000 of increased expenses will be matched with the $60,000 of increased revenues on five annual income statements.

Deferred assets are also referred to as deferred charges, deferred costs, or deferred debits. For the example we used above, utilities will use the term regulatory assets.

The balance in a deferred asset account will be reported on the balance sheet as a current asset and/or as a noncurrent asset depending on the facts involved.

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