Treatment of security deposit on lease agreement

AS 3116 views 5 replies

rishabh

student

21 Points Joined May 2017

Dear Professional,

Can you please help me with this situation!

XYZ company has taken an office on lease from Sep 2019 till Sep 2024 with lessor ABC. A security deposit of INR 90 Lakhs was also paid (FAIR VALUE AT TIME OF RECORDING INR 20 Lakhs). The company has accounted lease based on IND AS 116 and a security deposit based on 109. Also, prepaid rent was transfer to ROU account and amortized appropriately.

But in Nov 2020, with appropriate notice (1 month) XYX decided to vacate the office due to the requirement of bigger office. The new office taken on the lease was in the same building with the same vendor as earlier. They entered into a new lease agreement for the new office.

Now in the case of security deposit XYX just had to pay INR 10 lakhs more as earlier deposit was continued for new space.

For the above scenarios, I have the following queries -

1. Do I need to reverse ROU and Lease liability as on the date of office vacation and the difference should be accounted in P and L account?

2. What about security deposit? How should I deal with the carrying value of security deposits pertaining to earlier lease?

Replies (5)

Prachi Bansal

3134 Points Joined December 2020

You should get the entire amount of security deposit unless any damage

yasaswi gomes

My grammar is 💯 good I

7296 Points Joined March 2019

1. Derecognise ROU ASSET with lease liability eg.,

By Pv of lease liability a/c

To ROU Asset a/c

account for depreciation until before the contract is terminated. Since leases are remeasured every year, rou and lease payments must be the same.

2. Since you did not include security deposit into rou value, put it into suspense account until new lease contract is complete. Then transfer it to the new contract.

yasaswi gomes

My grammar is 💯 good I

7296 Points Joined March 2019

Deposit is taken out from ROU value. Now the question is how to derecognise excess ROU value? I read the standard and it says r assessing the lease will be the key. In your scenario, since the lessor is the same guy, you can reassess the ROU value as

Pending payments + new floor lease payments discounted to PV. Again it differs by arrangement if you want to terminate or extend lease with expanding office space office. Once again please let me know the status of ROU now and lease payments outstanding balance and interest balance separately. Txs

yasaswi gomes

My grammar is 💯 good I

7296 Points Joined March 2019

Derecognition of rou asset

Dr depreciation

Dr lease laibility

Dr. Termination charges

Cr. ROU Asset

Dr/Cr Loss/Gain

coming to security deposit commencememt

Dr security deposit

Dr ROU Asset

Cr Bank

rou Asset is debited because the difference between the PV and FV is added to it. Finally

Dr bank

Cr security deposit

Cr. Rou Asset

Full amount should be refunded although it is termination or, like mentioned before, keep it into suspense until you debit that account with new sum paid.

You got everything correct by yourself.