Deferred Long-Term Asset Charges
Investing Lesson 3 - Analyzing a Balance Sheet
The next section of the balance sheet we are going to talk about is often categorized under a heading called "other assets". Other assets usually represent non-cash assets which are owed to the company for a period longer than one year. The most common of these other assets is an entry called Deferred Long-Term Asset Charges. Depending upon the type of business with which you are dealing, these may be large or small.
One way to get an idea of whether something might be considered normal is to compare a company's other assets as a percentage of the assets section of the balance sheet to the same metric calculated for competitors in the company's sector or industry. Even then, it might not be terribly useful due to the nature of both other assets and deferred long-term asset charges, which can arise because management was doing something intelligent or somehow involved in some sort of project that required an upfront outlay that may or may not happen again at some point in the future. It's one of those areas you simply have to ask yourself, "Does this seem reasonable?".
Understanding Deferred Long-Term Asset Charges from the Perspective of an Investor or Business Manager
Deferred long-term assets are expenses for which a company has already paid but not yet subtracted from the assets. They are very similar to Prepaid Expenses (where rent would be counted as an asset until it came due each month, then would be subtracted from the balance sheet).
In fact, Prepaid Expenses are a type of deferred charge. The difference? When companies prepay rent or some other expense, they have a legal right to collect the service. Deferred long-term asset charges have no legal rights attached to them.
For example, if a company prepaid rent on a storage building, and then spent $30,000 moving all of their equipment into it, they could set the $30,000 up on the balance sheet as a deferred charge.
This way, they wouldn't be forced to take a hit by reducing their earnings $30,000 the same month they paid for the relocation costs. They could then write this amount down over time depending upon the specifics of the circumstance of the move and other relevant variables under the accounting rules, matching up the recognition of the expense with the timing of when the expense occurred, in this case, on a monthly basis as the rent would have been due to the landlord.
Under Most Circumstances, Deferred Long-Term Asset Charges Aren't Particularly Important When Analyzing a Balance Sheet
Deferred long-term asset charges are intangible and, under most circumstances, should be given very little weight when analyzing a balance sheet. Though rare exceptions do exist, they aren't likely to contain anything groundbreaking or worthy of a particularly close look. They arise for a variety of reason, such as management negotiating a considerable discount in exchange for prepaying rent as a lump sum at the beginning of the year or buying a particularly large property and casualty insurance product that will protect some aspect of the company's assets should certain events occur in the future. Under U.S.-based GAAP rules, one exception that leads to deferred long-term asset charges is the capitalization of the costs of developing an advertising campaign, which stay on the books until the advertising or marketing program associated with the costs first airs or begins showing to the public, at which point it is written off as an expense, moved from the balance sheet to the income statement.