Discounting of Security Deposit

                   Discounting of Security Deposit



There are two types of deposits available

1. Interest free deposits
2. Deposits having interest.

As per Ind AS 109, Interest free security deposits are discounted to bring it to the present value..The whole Ind AS speaks about Fair value.


Evaluation:

A company receives a security deposit as per the terms of agreement and repays the same when the agreement is ended/terminated i.e. after 5 years. For the period of 5 years the company has the company and as per the time value of money the amount repaid after 5 years is not the same amount which is received now.

It involves time factor. In order to bring it to the fair value, security deposit is discounted using the Incremental borrowing rate.

The difference between the discounted amount and the amount received will be accounted as income received in advance. Such amount will be transferred to p&l (income) over the term of agreement, Simultaneously interest expense is recognized on such discounted value which will equal to the amount to be paid at the end of 5 years.


Example: Received rental deposit amounts to Rs. 1,00,000/-. the agreement period is 5 years. Suppose the interest rate used to discount the amount is 10%.

a. Discounting of 1,00,000 @ 10% for 5 years. The PVF is 0.621
    = 1,00,000*0.621
    = 62,100

b. The difference between 1,00,000 and 62,100 will be transferred to p&l over the term of agreement.
    = 37900/5
   =7,580 per year

c.Interest expense will be recognized on discounted amount 
    1st year :  62,100*10%= 6210
    2nd year : 68310 *10% = 6831 ......5th year 90920*10% = 1,00,000 (Approx).


References:  Ind AS 32/109 and IFTG Bulletin 15



  

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