.svg)
Irrespective of lease classification, a lease liability represents a monetary liability and an ROU asset represents a nonmonetary asset. Therefore, a lease liability and ROU asset denominated in a foreign currency that are remeasured into an entity’s functional currency would be accounted for in the following manner:
- Lease Liability: Remeasured by using the current-period exchange rate, with changes recognized in net income in a manner consistent with other foreign-currency-denominated liabilities
- ROU Asset: Remeasured by using the historical exchange rate as of the commencement date, provided that the lease has not been modified.
Operating Lease Considerations:
As discussed in How to Subsequently Measure Operating Leases, operating lease costs consists of two components:
- Interest Expense: The expense associated with the accretion of the lease liability. For operating expenses, this is not presented on the income statement but is used to calculate the ROU asset reduction for the period.
- ROU Asset Reduction: Difference between straight-line expense and interest expense
Lessee’s would recognize the single lease cost, in its functional currency, associated with an operating lease denominated in a foreign currency by:
- Interest Expense: Since the lease liability is a monetary liability, when remeasuring the time-value-of-money component of the lease cost related to the lease liability accretion, it would be appropriate for the lessee to use the average exchange rate for the period.
- ROU Asset Reduction: When measuring the component of the lease cost representing the change in the ROU asset in each period, it would be appropriate for the lessee to use the historical exchange rate that was used when the ROU asset was initially recognized. That is, the ROU asset functional currency amount would be determined by using the foreign currency rate that was in effect as of the date on which the ROU asset was initially recognized (i.e., the latter of the date of initial application of ASC 842 or the lease commencement date). Therefore, in each period, the component of the lease cost representing the change in the ROU asset balance is no longer considered a foreign-currency- denominated amount; therefore, in each subsequent period, this amount would be calculated by using the exchange rate employed to initially determine the ROU asset and would not change unless an impairment is recognized or the ROU asset is updated as a result of a liability remeasurement event (e.g., a lease modification).
Accounting Guidance Referenced:
- ASC 842-20-55-10
- ASC 830-20-35
- Deloitte A Roadmap to Applying the New Leasing Standard (2020) 8.8.2