IAS 39 defines a Loans and receivable as “non-derivative financial assets with fixed or determinable payments that are not quoted in an active market”
Security Deposits without Fixed Maturity such as Deposit with Regulatory Authorities such as Taxation – Indirect, as well as Public Utility Services such as providers of Telephone, Mobile, Electricity, Gas, etc would be comprised in the category – Loans and Receivable – they are
- have fixed or determinable payments,
- are not quoted in active market, &
- generally have no fixed maturity.
If Security Deposits have a fixed maturity (defined refund period) then they would normally be classified as HTM (Held To Maturity) Investments subject to meeting condition of Management Intent and Ability.
Security Deposits paid to Public Utility Service providers or any private party are definitely ‘Contractual Rights / Obligations’. though I cannot commit myself on this point so far as Deposit with regulatory authorities are concerned.
In case of a Security Deposit – cash is generally refunded after termination of the contract, therefore, it is a contractual right to receive cash and therefore it is a Financial Asset
Therefore, Security Deposits paid to Public Utility Services should be definitely categorised as “Loans & Receivables“.
Initial Recognition of Financial Assets is at Fair Value of Consideration given or paid + Transaction Costs
Subsequent Measurement of Loans and receivable is at Amortised Cost using the Effective Interest Method.
Amortised Cost = Initial Recognition Amount – (Principal Repayments) ‘+/-‘ (Difference in Initial Recognition and Maturity Value) – Impairment Reduction.
Suppose, Security deposit is Rs. 5000/-, transaction costs is Rs. 50/- and maturity is also Rs. 5000/-
Fair Value at initial recognition is Rs. 5000/- + 50/- = 5050/-
then Amortised cost = 5050 – Nil – (5050-5000) or (50) – Nil
= 5050 – Nil – 50 – Nil
therefore, effectively Security Deposits for contractual obligations will stand in the Balance Sheet at the amount receivable on the termination of the contract and which will generally be equal to the amount paid.