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Editorial Board on Accounts and Audit
  • Security deposit

    by Chirag on Friday, November 01, 2019 at 07:31 PM

    Dear Sir, A company made security deposit of Rs 15 lacs in respect of lease. Lease period is 5 years. If Market interest rate is 10%, pls tell the accounting & Entries for first & last year ?? 2) If in above case (1), Interest on security deposit is 8% p.a., & Market rate is 10%, what will be accounting in such case ??

    Replied byEditorial Board Wednesday, November 13, 2019 at 03:56 PM

    According to Ind AS 116, Leases, at commencement of a lease, lessee shall recognise a right-of-use asset and a corresponding lease liability.

    The right-of-use asset is measured at the initial value of lease liability as increased by any lease payments before the lease commencement, initial direct costs and initial estimate of dismantling costs. The lease liability is measured at the present value of the relevant payment over the lease term.

    Further, a financial asset is measured applying the requirements of Ind AS 109, Financial Instruments at its fair value.

    So, if in your case the period of 5 years is non-cancellable period, then the company is required to determine the fair value of the security deposit, being present value of Rs. 15 lakhs using 10% as discounted rate, at the commencement of the lease. The difference between the security deposit paid and its fair value should be included in the initial measurement of cost of the right-of use asset. The discount needs to be unwound each period by recognizing finance income and accreting the security deposit.

    As per the facts of the case stated in your query, the company has the right to cancel the lease at any time. This does not change the requirement to fair value the security deposit. You may note that the period for which the deposit needs to be discounted needs to be consistent with the lease term determined for capitalizing the Right-of-use asset at the inception of the lease.

    However, in case the security deposit rate is compensated with interest at 8%, as mentioned by you the company shall determine the present value of security deposit using 10% discount rate.

 
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