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Deferred Payment Definition
In a deferred payment situation, one is allowed to start making the required payments after a fixed period of time agreed to by both the creditor and the borrower.
A Little More on What is a Deferred Payment
A Deferred Payment is made in the future at some point. Deferred payment is used in different situations.
The retail market often opts for deferred payment arrangements. Here, a retailer buys products with a promise to pay on the predetermined future date. For example, X procures a few products from Y on June 1. Both X and Y agree that Y will begin making payments after 60 days of the shipment of the product.
Some lease agreements might have the provision of deferred payment. In such scenarios the tenants do not need to pay any rent for the initial 3-4 months. Then, they pay more rent than the market rate when the balance is due.
The terms of a deferred payment arrangement are always mutually agreed upon by the two parties involved in the transaction.
In accounting, the firm must keep track of deferred payments as “accounts payable” or “accounts receivable”.
References for Deferred Payments
Academic Research on Deferred Payment
- · Sharing risks of deferred payment, Shavell, S. (1976). Journal of Political Economy, 84(1), 161-168. This paper analyzes the different forms of uncertainty that come into play when two actors engage in a system of deferred payments. Different types of payment plans are considered, with a focus on finding an optimal plan between a borrower and lender that operate in different home currencies.
- · Student loans and their alternatives: improving the performance of deferred payment programs, Albrecht, D., & Ziderman, A. (1992). Higher Education, 23(4), 357-374. This research aims to find ways to help improve the system by which students borrow money to finance their schooling. Policy goals, loan terms, subsidies, and repayment systems are considered when finding a way to more efficiently and effectively help students achieve a higher education while lowering the overall default rate for these loans.
- · Open Transaction Treatment for Deferred Payment Sales After the Installment Sales Act of 1980, Goldberg, D. S. (1980). Open Transaction Tax Law., 34, 605. This paper examines a variety of different ways that a seller may benefit from a deferred payment after the sale of an asset. These approaches are analyzed from various perspectives, including tax law, accounting practices, legal concerns, and regulatory issues.
- · Earnings management: New evidence based on deferred tax expense, Phillips, J., Pincus, M., & Rego, S. O. (2003). The Accounting Review, 78(2), 491-521. The practice of deferred tax expenses is analyzed in comparison to other forms of reporting for the sale of assets. Using generally accepted accounting principles, this article shows a method for recording those sales that assist in clarity, accuracy, and more precise forecasting while also helping the firm maximize their financial situation.
- · Valuing the deferred tax liability, Sansing, R. (1998). Journal of Accounting Research, 36(2), 357-363. This paper demonstrates the burden caused by the valuation of the deferred tax liability. By using a mathematical formula, the author illustrates how the accounting for these deferred taxes gradually loses accuracy over time.
- · The valuation of the deferred tax liability: Evidence from the stock market, Givoly, D., & Hayn, C. (1992). Accounting Review, 394-410. This paper demonstrates some of the proposals to reform the system of deferred tax liability accounting. By analyzing the Tax Reform Act of 1986, different approaches toward this liability are addressed. The applied research toward this deferral is analyzed, and recommendations are made.
- · Optimal asset location and allocation with taxable and tax‐deferred investing, Dammon, R. M., Spatt, C. S., & Zhang, H. H. (2004). The Journal of Finance, 59(3), 999-1037. This research helps make portfolio recommendations in regards to the location of tax-deferred assets. By taking into account age and tax-deferred wealth, different investment vehicles and accounting practices are analyzed.
- · Valuation of the firm in the presence of temporary book-tax differences: The role of deferred tax assets and liabilities, Guenther, D. A., & Sansing, R. C. (2000). The Accounting Review, 75(1), 1-12. This paper analyzes the different approaches to determining a firm’s value when deferred tax assets and liabilities are used. By modeling different accounting method, the authors compare the variation in valuation that deferred assets and liabilities can create.
- · The association between deferred tax assets and liabilities and future tax payments, Laux, R. C. (2013). The Accounting Review, 88(4), 1357-1383. This study uses empirical analysis to see if deferred taxes offer any information about what can be expected regarding future tax payments. By applying generally accepted accounting principles, the author illustrates that deferred tax balances do not necessarily put off future tax payments.
- · Deferred tax positions and incentives for corporate behavior around corporate tax changes, Poterba, J., Rao, N., & Seidman, J. (2007). (No. w12923). National Bureau of Economic Research. This study shows how deferred tax positions influence firms’ behavior during times of changing national tax policy. By using data from a sample of firms between 1993 and 2004, the authors illustrate the various incentives that will affect the choices of firms in this position. The results are important for understanding the political and financial implications of tax reform.
- · Incentive and tax effects of executive compensation plans, Smith Jr, C. W., & Watts, R. L. (1982). Australian Journal of Management, 7(2), 139-157. This research examines the intersection between tax benefits and incentives when creating executive compensation plans. By comparing two different plans, the authors illustrate the relationship between the two variables over time and how the effect the popularity of various types of compensation plans.