As per the current accounting system in India, there is no specific treatment defined for any kind of security deposits which are being taken/ given in normal course of business by an entity and all such deposits that are refundable shown at their respective transaction values.
After the introduction of Ind-As/ IFRS, these type of deposits will be treated differently and a careful assessment is required to segregate their values and capture into accounting systems accordingly.
Below are some relevant extract of Ind-As/ IFRS which talks about the requirements to do such fair valuation and accordingly will talk about its practical requirements while applying Ind-As / IFRS-
Ind-As 32– Financial Instruments- Presentation – para 11 –
A financial asset is any asset that is:
(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; or…………………..
A financial liability is any liability that is:
(a) a contractual obligation :
i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or……………………………
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).
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 –
One can visualize that there would be significant process change for recording these deposits and their segregation will be required to have correct classification/ fair valuations.
Readers will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
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