Security deposit for renewable lease
Security deposit for renewable lease
I have a client (audit) which has around 10 security deposits for its various offices. Now to measure the security deposits as per IFRS 9, it should be discounted using incremental borrowing rate and difference of Fair value and future value to be added in Right-of-use asset. Now my question is, when discounting, how many years should we consider as the life/refund period of the security deposit? E.g. 1 lease agreement is for 5 years but it will definitely be renewed after 5th year and continue to do so. Therefore, should we just discount the Security Deposit for those 5 years or what? It will not be refunded within a certain time.
Re: Security deposit for renewable lease
I would set the repayment date consistently with the lease term, how does this sound to you?
Re: Security deposit for renewable lease
That is the only option I can think of. But the reality is that the Security Deposit has no specific repayment date. It seems unreasonable to me to discount it for 5 years. My specific question would be does IFRS 13 specify how to deal with such case of unknown future date to measure fair value at present date?
Re: Security deposit for renewable lease
how big are the deposits. stick something to unadjusted errors...?
Re: Security deposit for renewable lease
the deposit is refundable after the leased office is vacated I presume, so you won't get better estimate than lease term
if 5 years seems unreasonable, then you may need to revisit the assessment of lease term
re. IFRS 13, it won't give you a specific answer
https://ifrscommunity.com/knowledge-bas ... techniques
PS. whose incremental borrowing rate do you plan to use for discounting? lessee is rather a lender here, not a borrower
@JRSB
I guess we could use the materiality argument for many of our discussions, but it would take away all the fun of solving accounting questions
if 5 years seems unreasonable, then you may need to revisit the assessment of lease term
re. IFRS 13, it won't give you a specific answer
https://ifrscommunity.com/knowledge-bas ... techniques
PS. whose incremental borrowing rate do you plan to use for discounting? lessee is rather a lender here, not a borrower
@JRSB
I guess we could use the materiality argument for many of our discussions, but it would take away all the fun of solving accounting questions
Re: Security deposit for renewable lease
Definitely. But as arnob appears to be an auditor just a warning not to upset his client if it's a tiny issue
Re: Security deposit for renewable lease
oh right, I overlooked it somehow
Re: Security deposit for renewable lease
Haha.. No I will not upset my client.. This is more for my own knowledge.
Re: Security deposit for renewable lease
I agree with Marek because you need to make the same assessment about the lease term dont you, ie exercising options and so on