Property, plant and equipment are nonmonetary assets. Property, plant and equipment purchased in a foreign currency should be initially measured and recorded in an entity’s functional currency using the exchange rate on the date it is acquired. It should not be subsequently remeasured for changes in exchange rates during the period it is held.
Example FX 4-3 illustrates the depreciation of equipment purchased in a foreign currency.
EXAMPLE FX 4-3
Depreciation of fixed assets purchased in a foreign currency
USA Corp is a US registrant with a US dollar (USD) functional currency.
Britannia PLC is a foreign entity of USA Corp located in the United Kingdom. Britannia PLC maintains its books and records in the local currency, British pound sterling (GBP), but management has determined its functional currency is the euro (EUR).
Britannia PLC purchased fixed assets for GBP 500,000 on January 1, 20X1 when the exchange rate was EUR 1.3 = GBP 1.
The fixed assets have a useful life of five years.
How should Britannia PLC compute annual depreciation expense in the currency of its books and records, British pound sterling, and its functional currency, the euro?
Analysis
Britannia PLC would first measure and record the fixed assets using the exchange rate in effect at the date of purchase.
GBP 500,000 × [1.3 EUR / 1 GBP] = EUR 650,000.
Britannia PLC would then calculate annual depreciation using the exchange rate in effect on the date of purchase. The following table shows the calculation of annual depreciation expense.
Purchase price |
GBP 500,000 |
EUR 650,000 |
Useful life |
5 years |
5 years |
Annual depreciation |
GBP 100,000 |
EUR 130,000 |
View table
Changes in exchange rates subsequent to the acquisition of the fixed assets do not impact depreciation or the carrying amount of the fixed assets in the functional currency financial statements. For more information on remeasurement of local currency financial statements into a reporting entity’s functional currency, refer to
FX 5.4.