Presentation of Security
Deposits
An
electricity distribution company collects security deposit at the time of issue
of electricity connection, which is refundable when the connection is
surrendered. The entity expects that most of the customers will not surrender
their connection. A question was raised to the Ind AS Transition Facilitation
Group (ITFG) whether such a security deposit shall be classified as a ‘current
liability’ or a ‘non-current liability’ in the books of the electricity
company?
The
ITFG at the first instance concluded that the security deposit should be
presented as current liability on the basis of Paragraph 69 of Ind AS 1,
Presentation of Financial Statement, which states as under:
“An
entity shall classify a liability as current when:
a) it
expects to settle the liability in its normal operating cycle;
b) it
holds the liability primarily for the purpose of trading;
c) the
liability is due to be settled within twelve months after the reporting period;
or
d) it
does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period”
The
ITFG opined “Although it is expected that most of the customers will not
surrender their connection and the deposit need not be refunded, but
surrendering of the connection is a condition that is not within the control of
the entity. Hence, the electricity company does not have a right to defer the
refund of deposit. The expectation of the company that it will not be settled
within 12 months is not relevant to classify the liability as a non-current
liability. Accordingly, the said security deposits should be classified as a
current liability in the books of the electricity company.”
However,
subsequently the ITFG withdrew the above guidance. Among other matters, the
ITFG stated that the concept of current and non-current classification already
existed under Indian GAAP and is not new to Ind AS. Hence, there is no need for
transition group guidance on the matter. Rather, the classification should be
based on Ind AS 1 and Ind AS compliant Schedule III principles. Some may argue
that by withdrawing the guidance, ITFG is permitting electricity companies to
present the security deposit as non-current. The supporters of this view
believe that in withdrawing the guidance, the ITFG must have focussed on the
substance of the arrangement, and the redemption pattern, which indicates that
the security deposit was non-current.
Author’s
View on some related matters
Pursuant
to the above change, electricity and similar companies, for example, a company
that provides gas connection or water supply, would classify security deposits
received from the customers as current or non-current liability based on
estimated redemption pattern. This view would generally apply in limited
circumstances such as in monopolistic or oligopolistic situations where choices
available to the consumer to change the service provider are highly limited.
This view should not apply by analogy in all cases. For example, in the case of
security deposit received by a consumer goods company from
retailers/distributors, the classification of security deposits would continue
to be current.
The
other question not addressed by the ITFG is whether the security deposits, once
presented as non-current needs to be discounted to its present value followed
by subsequent unwinding of the discount. One view is that discounting would be
required. On initial discounting, the security deposit would be stated at its
present value. The difference between the amount of security deposit received
and the present value will be treated as deferred income. The deferred income
will be credited to the P&L income, generally on a straight line basis to
reflect the true value of the goods or services provided to the customer. On
the other hand, the unwinding of the discounting will result in the security
deposit being reflected at its original value just before redemption. The
unwinding will be done on an effective interest rate method and the consequent
financial expense will be debited to P&L. The accounting will result in a
mis-match in the P&L as the deferred income is recognised on a straight
line basis whereas the financial expense is recognised on an effective interest
rate basis.
The
author’s view is that the new guidance (viz., non-current presentation of
deposit by electricity and similar companies) arising from withdrawal of old
ITFG view is relevant only for presentation in the balance sheet. Recognition
and measurement of security deposits, including those accepted by the
electricity and similar companies, would continue to be governed by Ind AS 109 Financial
Instruments principles. Consequently, the author believes that there is no
need to discount the security deposits.
WHETHER INDEPENDENT DIRECTORS ARE KEY MANAGEMENT
PERSONNEL?
Whether
independent directors should be considered as key management personnel (KMP)
under Ind AS 24 Related Party Disclosures?
Authors’
View
Ind
AS 24 defines the term ‘key management personnel’ as “the persons having
authority and responsibility for planning, directing and controlling the
activities of the entity directly or indirectly, including any director (whether
executive or otherwise) of that entity.”
Under
Indian GAAP, AS 18 Related Party Disclosures excludes non-executive
directors from the definition of KMP. However, under Ind AS, it is quite clear
that all directors whether Executive or Non-executive will generally be
considered as KMP. Furthermore, the Companies Act, 2013, prescribes very
onerous responsibilities for independent directors. These responsibilities
include taking executive responsibilities. This includes authority and
responsibility for planning, directing and controlling the activities of the
entity. Hence, independent directors are KMP under Ind AS 24.
ITFG may provide
appropriate guidance on this matter.
