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Accounting For Security Deposit Forfeiture

Patricia Shepherd's Profile

Accounting For Security Deposit ForfeitureI have a quick question I'm hoping someone can assist me with.  We had paid a security deposit to our landlord many years ago.  This was booked on the balance sheet under other assets.  We have asked to be released from our lease, the space was just too large, and as a result have forfeited the security deposit.  Is the Journal Entry to Dr facility expenses and Cr security deposit?   Or should I instead Dr Other Expenses under the operating income line affecting just the NOI and not the operating income.
Thanks so much,
P

Answers

Keith Taylor
Title: CFO
Company: Lyris, Inc.
(CFO, Lyris, Inc.) |

So, here are a few comments:

GAAP Comment: Assuming its material, then you may be able to follow the guidance in SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, or ASC 420-10, “Exit or Disposal Cost Obligations”. Essentially, consider your lease abandonment as a one-time, non-recurring expense and so should be Other income and expense (Non-Op Expense.)

FP&A: Treating it as Non-Op Income means year-over-year analysis is easier, and also keeps from distorting EBITDA for unusual or "extraordinary" items.

ECONOMIC: Don't roll over and accept defeat, foregoing the deposit. Ask an attorney to re-read your lease and see if there is any way to reclaim some of the deposit, or impute interest as if the landlord had deposited the Security Deposit in a CD account. For your next lease, think about doing one of the following: Negotiate terms for the Security Deposit to require the Landlord to accrue an imputed interest so that when you can reclaim the deposit, at least it will have earned interest. Offer to put the Deposit in a CD with the L/L as the named beneficiary until maturity (when you can cash it in and recover it.) Negotiate an annual reclamation amount(either in refund or application against the monthly rent), so that at the end of a certain time period (say 3 to 5 years) you will have recovered the deposit. Just some suggestions.

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