Security deposits (given or taken): “Fair Value” – Ind-As/ IFRS

CA Anuj Agrawal

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:

(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; 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).

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 –

1. There are some deposits which are being kept with government authorities e.g. custom, excise etc which will essentially not be a financial assets because there is no underlying contractual right with the government agencies and hence those deposits will be shown at their par value (transaction price) only,
2. Deposits which are being given/ received from parties on account of return in future (refund period is certain) in cash will be discounted and will be shown at their present value at the time of its initial recognition,
3. Now, a question arises that, what RATE should be used to discount these deposits, then one can use normal deposits rate of bank (FD rate) for the period in case of financial assets (deposits given) and entity’s own borrowing rate (incremental rate) for discounting the financial liabilities (deposits received),
4. These present value calculated as mentioned in point 3 above will be treated as fair values of these securities deposits and it will be recognized as financial asset/ liabilities accordingly (as the requirement is to recognize at fair value initially), The DIFFERENCE between carrying amount of the deposits and fair value will be transferred as PREPAID EXPENSE in case of financial assets (deposits given) and DEFERRED INCOME in case of financial liability (deposits received) also refer guidance mentioned in para B5.1.2A of Ind-As 109,
5. Now, these fair valued deposit amounts will charged for finance expense/ income using discount rate which was used for discounting initially (or the new one if there is any change subsequently) and accordingly will be transferred/ charged to PL and at the same time prepaid exp/ deferred income will be released to PL using some systematic allocation (preferably straight lined also refer para B5.1.2A of Ind-As 109),
6. One has to be careful about the cases where refundable deposits are interest bearing (contains some amount of interest to be paid/ received) then there is NO need to do these workings (PV exercise) as its already having interest portion (time value of money),
7. There would be some deposits which are to be settled against some services/ materials/ items (not to be refundable in cash) then these would NOT be classified as financial instrument (there is no contractual right/ obligation to receive / deliver cash) and hence those deposits will be valued at their transaction value only,
8. These fair valued deposits will then be segregated between current and non- current portion based on the criteria of 12 months,
9. In case refundable deposits are for less than one year then there is NO need to go for discounting (considering materiality based on normal business practices),
10. Any deposits e.g electricity/ government deposits where refundable time period is NOT defined/ not available then there is no need for discounting as the period is not available,

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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