Recording leases in foreign currency

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HI experts,

I don't understand the reason behind asset leasing transactions (initial recognition and any subsequent recognition like interest recognition, depreciation, adjustment, index rate revaluation etc) using a foreign currency exchange rate present in lease book, irrespective of the timing of the transaction. Does the solution assume lease contract to also act like a forward rate contract/agreement (FRA), just like how we have in a project contract. As far my knowledge and experience is concerned, be it either initial or subsequent recognition, all are recorded at the exchange rate prevailing on the date of transaction unless lessor enters into a FRA with bank or any third party (only for payments). Anyhow interest recognition or depreciation are again subjected to exchange rate prevailing on the date of transaction irrespective of any FRA entered into.

Kindly clarify.

Thanks,

Pranav

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Hi Pranav,

There is an exchange rate on leases in order to depreciate the right-of-use asset if the lease is denominated in a foreign currency. Right-of-use assets are nonmonetary assets and therefore, should be measured at the historic rate - in other words the exchange rate as of the initial recognition. Similar to the fixed asset module, the depreciation amounts are shown in accounting and reporting currencies using the exchange rate as of the initial recognition to ensure the asset depreciates fully in all currencies.

If you were to use the effective rate to calculate right-of-use asset depreciation, it is very likely that the asset would only fully depreciate in the transactional currency and would have a remaining balance at the end of the lease term in accounting/reporting currency because the rate varies every month.

In contract, the lease liability is a monetary asset and interest and payments are translated using the effective rate as of the time of posting. The liability accounts should be picked up during the foreign currency revaluation process to revalue to the accounting/reporting amounts at period end, therefore ensuring the liability balance to amortize to 0 at the end of the lease term. The asset should not be revalued using the spot rate, and therefore, must be depreciated using the historic rate on the lease record.

Thanks!

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