Security / Refundable deposits on building rent/lease agreements

Question

How to account for security deposits kept under lease agreements. The deposit is refunded at the end of the lease term without any interest (after 04 years). How do I account for this under IFRS?

Answer 1

IAS39 requires such a deposit to be recognized as a financial asset and classified as loans & receivables.

Initially the security deposit has to be recorded at fair value plus transaction cost. To find the fair value you will have to discount the deposit at a market interest rate. For instance if you deposit $10,000/= as the security deposit which is refunded after two years, then assuming current market interest rate for a such a deposit at bank is 10%, the fair value of the deposit at the time of placing the deposit would be $7,513/=. This will be recorded as follows:

Dr-Security Deposit                           =  7,513
Dr-Deferred Rent Expense (B/S)      =  2,487
(You may have the option of fully charge this amount to income statement in the first year itself)
Cr-Cash                                                 = 10,000
(Assumed that the transaction cost is immaterial/zero)

The subsequent measurement of loans & receivables should be at the amortized cost using the effective interest method which should ensure the amortised cost of a financial asset is the present value of future cash receipts discounted at the effective interest rate.

Therefore, over the period of the deposit, interest receivable will be added to the deposit account using the effective interest method. The interest income for a year equals the carrying amount of the loan (financial asset) at the beginning of a period multiplied by the effective interest rate for the period.

After the two years period your deposit account will get back to $10,000/= which will be set off against the refund of the deposit.

Just check out this example of accounting for security or refundable deposit.

Comments

how to calculate if the end period of security deposit is not defined? such security deposit for golf, electricity, gas or other. thank you in advance

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If the repayment is not defined you may calculate fair value considering the deposit in a  perpetuity

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What about if refundable deposit subject to the clause such as "at the end of lease period damages to the property or unsettled utility bill are deducted from the deposit amount". Can we recognized such deposit under IAS 39?

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what about treatment of prepaid exp(rent expenses) of Rs 2487/-?
whether it will be amortised in SLM method?

Answer 2

Initially recorded at fair value plus transaction cost. Subsequently measured at amortized cost, with interest accrued using the effective interest rate
method minus impairment.

Future cash inflows of the deposit need to be discounted at applicable market interest rate of a simile deposit in the market to arrive at the fair value.

As far as concern a short term deposit, the amounts deposited may be the fair value since the effect of discounting may be immaterial.

Reference: IAS 39

Answer 3

Security deposits are recognized as “financial asset” and classified as “loans and receivables” & treated accordingly as per IAS 39

Comments

Hi, can I know the double entries please?