IFRS 9 - Guarantee Deposits

[Muzaffar]

Hello Community Members,

My Auditors just reported in their ML that the " Security Deposits" I have provided to my Lessor against the lease of premises fall under IFRS 9 and they need to book them at the amortized cost.

I am not sure how simple " security Deposits" which are re-payable by the lessor at the end of the lease agreement, fall under the definition of financial instrument and IFRS - 9 Please guide me in this matter.

[JakobLavrod]

Is the point not that you should see it as a liability, payable at the end? However, since the interest is 0 % (so lower then market rate), you would have to adjust it to what you could get similar deposits for (so the relevant market rate). At least my spontaneous thoughts, but love to hear any other views.

[Muzaffar]

NO, We have to receive it Back from the lessor, We have deposited it initially with the lessor as a security deposit which we will get back after the contract period.

[JakobLavrod]

Aha, but then you are just on the other end right? You have an asset with 0 % interest rate? So the same reasoning as above but from the asset side.

[JRSB]

It's a financial asset (right to receive cash) at day-1 fair value, ie present value of the cash you'll get at the end, and the difference between face value and fair value is addition to RoU asset at the start of the lease.

In plain English, the interest you are foregoing during the lease term is cost of the lease.

[JakobLavrod]

Thank you JRSB, super interesting way to view it

[JRSB]

I learnt it from Marek! https://ifrscommunity.com/knowledge-bas ... osits-paid

[Marek Muc]

[Greenfrog]

Is there any standard or literature supporting the view that the day 1 cost related to the discounting of the deposits can be considered as initial direct cost in accordance with IFRS 16? Thanks in advance!

[JRSB]

Is it not just on the principle that you are in effect 'giving' the lessor the present value of interest generated by that deposit and so that's a cost just like other initial costs.

[Greenfrog]

Good point. Thank you very much!