A rental deposit is usually required to be paid when a company rents a premise from the landlord. These rental deposits are either refundable at the end of the lease period or will be used to offset against the last few months rental payments. Rental deposits are usually not material to the financial statements. However, for companies in the property or retail industry, the rental deposits received or paid may be significant.
The rental deposit is a financial instrument (i.e. a financial asset to the lessee and a financial liability to the lessor) and should be accounted for under FRS 39. The rental deposit should be recognised at fair value on initial recognition, and the difference between the fair value and the amount paid is carried on the balance sheet as a deferred lease expense/income and recognised as lease expense/income on a straight line basis over the lease term. Interest income/expense is recognised over the lease term as the carrying value of the rental deposit is accreted to the nominal value.