Accounting Treatment of Refundable Security Deposit

As per Ind-As 32– Financial Instruments- Presentation – para 11 –

A financial asset is any asset that is:

(a) cash;

(b) an equity instrument of another entity;

(c) a contractual right:

(i) to receive cash or another financial asset from another entity; or

(ii) to exchange financial assets or financial liabilities with another entity under conditions that  are potentially favourable to the entity;

Ind-As 109 – Financial Instruments – para 5 .1.1

 “Except for trade receivables within the scope of paragraph 5.1.3, at initial recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability”.

One can read it through the relevant provisions as mentioned above and it is assumed, reader must be aware that deposits which are refundable in cash/ other financial assets will be treated as FINANCIAL ASSETS (if given) or FINANCIAL LIABILITY (if received).

Now,

Let’s have a practical discussion on these deposits and the treatment in the books of accounts as per their different nature/ purposes of such deposits

Whether present value of Security Deposit associated with the rent is to be done or not?

• Refundable SD Payable after 5 Years: 10,00,000/-
• Discount Rate: 12.00%
• PV of Deposit at the Beginning: 5,67,427/-
• Prepaid Lease Payments at the Beginning: 432,573/-

JOURNAL ENTRY:

Security Deposit a/c……………  DR      567,427

Prepaid Leases Expenses……..DR       432,573

To, Bank A/c …………………. 10, 00,000

Subsequently at every annual reporting year,

Interest Income shall be accrued at 12% p.a and Prepaid Expenses shall be amortised on SLM basis over the lease Term. 

• Security Deposit a/c…………….. DR 68,091 ……………. 567,427*12%)

To, Interest Income a/c  ……….68,091

• Lease Expense a/c ……………….. DR 86,515………….. (432,573/5 Years)

To, Prepaid Expenses …………. 86,515 

At the end of 5^th year, Security Deposit shall accrue 10 Lacs and prepaid expenses shall be fully amortised.

• Security Deposit a/c…………….. DR 107,143………………. (892,848*12%)

To, Interest Income a/c…………… 107,143

• Lease Expense a/c ……………….. DR 86,515…………………….. (432,573/5 Years)

To, Prepaid Expenses…………………..  86,515

• Bank a/c……………………………….. DR 10,00,000

To, Security Deposit……………….. 10, 00,000