Underwriting Commission is the commission paid by the company to the underwriter for underwriting company's Shares ? Why is the underwriting commission considered as Deferred Revenue Expenditure ?
Parth from India
Parth! Deferred revenue expenditures are big payments of expenses. All these expenses are revenue nature but due to huge amount, we get its benefits more than one year. Underwriting commission is in this category. We can not get all the benefit of this service within one year. That is the reason, we estimate written off value of underwriter commission and then we transfer same it in profit and loss account.
For example, we contracted a underwriter for selling Rs. 2 crores shares. He sold all and got Rs. 10 lakh underwriting commission. This is not simple commission. This is deferred revenue expenditure. We will not send all Rs. 10 lakh in profit and loss account. Suppose, we estimated that we will get this service's benefits in 5 year. So, we divide Rs. 10 lakh with 5 and Rs. 2 lakh will be written off every year and we will send Rs. 2 lakh in profit and loss account and balance will be shown as deferred revenue expenditure in asset side of balance sheet.