Question
Should an asset of a 'rent deposit' held in the current assets of a company's balance sheet be treated as encumbered or unencumbered? If it is to be included as encumbered should the fair value of the encumbrance be the amount of the entire contract that the rental deposit secures?
Background on the question
The deposit is for the sum of £156,000.
Answer
The rental deposit should be treated as encumbered. The fair value of the encumbrance should be the amount of the entire contract that the rental deposit secures. The reason is that it is subject to an arrangement to secure rental property and cannot be easily withdrawn and used for future encumbrance.