Deferred acquisition costs are any expenses associated with an acquisition effort that are not immediately realized but are recognized incrementally over a period of time. The term itself is most commonly employed within the insurance industry and has to do with the costs associated with securing a new client. Rather that recognizing those expenses all at once in a single period, those costs are spread out over the life of the insurance contract, using methods that are in line with generally accepted accounting principles.
One of the benefits of utilizing deferred acquisition costs as part of the accounting process is that a business can make use of revenue generated from the acquisition to offset costs over a longer period of time. By contrast, it would be necessary to absorb all the cost in one billing period, even if the acquisition had not yet begun to generate some sort of income to justify those expenses. This can create a somewhat unbalanced view of the actual financial stability of the business, while using the concept of deferred acquisition costs helps to provide a more equitable view over an extended period of time.
This method of using deferred acquisition costs in the insurance industry is very common. Any provider will incur expenses related to the pursuit and ultimate acquisition of a new client. By deferring those costs and incrementally recognizing them after the new client has begun to generate some revenue for the company, it is easier to track the progress made in offsetting those up front investments represented by those costs. This in turn helps in identifying when those costs are recouped by the revenue generated by that client, and when the company actually begins to make some profit from the effort.
While deferred acquisition costs are employed in the insurance industry, other types of business operations may also use this same general concept when it comes to the acquisition of various types of assets, especially assets that are capable of generating income. Here, it is important to follow all accounting criteria related to the calculation of taxes, as well as make sure the methods used to identify and track these deferred acquisition costs are within the scope of generally accepted accounting principles. When this is the case, this particular approach can not only aid in keeping the company’s accounting records balanced, but also serve as a way to know when net profit from the effort is realized.
