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The guidance in ASC 842, Leases, was applicable for most public business entities starting in 2019. Private calendar year-end companies have until the beginning of 2022 to adopt the standard. Early adoption is permitted for both public and nonpublic entities. See LG 10.2 for information on the effective date of ASC 842.

4.7.1 Lessee accounting for foreign currency leases - after ASC 842

A lessee classifies a lease as either a finance or operating lease based on the criteria prescribed in ASC 842, Leases. One of those criteria requires reporting entities to determine the present value of the lease payments. When calculating the present value, a lessee should discount the foreign currency lease payments to present value and then remeasure that present value into the functional currency using the exchange rate at lease commencement. The discount rate should be the rate implicit in a lease. If that information is not readily available, a lessee should use an incremental borrowing rate for an assumed borrowing in the foreign currency. See LG 3 for information on lease classification.
A lessee is required to record a right-of-use asset and lease liability for all leases (other than, if elected, those that, at lease commencement, have a lease term of 12 months or less). When calculating the right-of-use asset and lease liability for a foreign currency denominated lease, the present value of future lease payments, payments made to the lessor at or before the commencement date, lease incentives, and initial direct costs should be measured in the functional currency using the exchange rate at the lease commencement date (or the date the cash flow is paid or received, if before lease commencement). See LG 4.2 for information on initial recognition and measurement of leases by a lessee.
The right-of-use asset is a nonmonetary asset and lease liability is a monetary liability. Over the lease term, a lessee must amortize the right-of-use asset and lease liability. For both operating and finance leases, the right-of-use asset should be remeasured into the functional currency using the exchange rate on the lease commencement date, while the lease liability should be remeasured based on the period end exchange rate. Although ASC 842 describes operating lease expense as a single cost, it is actually comprised of two elements: amortization of the right-of-use asset and the expense associated with the accretion of interest on the lease liability. The expense associated with the amortization of the right-of-use asset should be remeasured using the exchange rate on the lease commencement date while the accretion of interest on the lease liability should be remeasured using the average exchange rate during the period in which it is incurred. See FX 4.4.2 for information on measurement of monetary assets and liabilities and FX 4.10 for information on how to account for the remeasurement of the interest expense and amortization of the lease liability for a finance lease.

4.7.1A Lessee accounting for foreign currency leases - before ASC 842

The accounting treatment of a foreign currency denominated lease depends on whether the lease is a capital lease or an operating lease. ASC 840, Leases, prescribes criteria to be considered to make that determination. Lease classification is based on amounts determined using the functional currency of the reporting entity, not the currency the lease is denominated in. There are alternative methods of determining the present value of the minimum lease payments in accordance with ASC 840-10-25-1(d). One common approach is to discount the foreign currency minimum lease payments using an incremental borrowing rate for an assumed borrowing in the foreign currency. The resulting present value would be remeasured into the functional currency using the exchange rate at the lease inception date.
Capital lease assets and obligations are initially measured and recorded in an entity’s functional currency using the exchange rate on the lease inception date. The capital lease asset (owned property) is a nonmonetary asset; the capital lease obligation (debt) is a monetary liability. See FX 4.6 for information on the accounting for property, plant, and equipment purchased in a foreign currency, and FX 4.10 for information on the accounting for foreign currency denominated debt.
An operating lease does not result in an asset or liability being recorded on the balance sheet. Instead, operating lease expense is recognized as it is incurred using the average exchange rate during the period in which it is incurred (e.g., monthly lease expense should be recognized using the average monthly exchange rate).

4.7.2 Lessor accounting for foreign currency leases

There are three types of leases for lessors, sales-type, direct financing, and operating leases. The terms of the lease arrangement will determine how each lease should be classified. See LG 3 for information on lease classification.
Sales-type lease
In a sales-type lease, a lessor derecognizes the leased asset and records its net investment in the lease at lease commencement. When calculating the net investment in a foreign currency denominated lease, the lease payments and the unguaranteed residual asset should be measured in the functional currency using the exchange rate at the lease commencement date. See LG 4.3.1 for information on initial recognition and measurement of a sales-type lease by a lessor.
For sales-type leases, any selling profit or loss is recognized at the commencement date; interest income is recognized on the lease receivable and the unguaranteed residual asset is accreted over the lease term. These amounts should be measured in the functional currency using the average exchange rate during the period in which it is recognized (e.g., monthly lease expense should be recognized using the average monthly exchange rate). In addition, the net investment in a lease is a monetary asset that should be remeasured at the end of each reporting period using the exchange rate at that date. See FX 4.4.2 for information on the measurement of monetary assets and liabilities. See LG 4.5.1 for information on subsequent recognition of a sales-type lease.
Direct financing lease
In a direct financing lease, a lessor should derecognize the leased asset underlying the lease and record a net investment in the lease at lease commencement. The net investment in the lease should be measured in the same manner as a sales-type lease adjusted for selling profit and initial direct costs. When calculating the net investment in a foreign currency denominated lease, amounts should be measured in the functional currency using the exchange rate at the lease commencement date. See LG 4.3.1 for information on measuring the net investment in a sales-type lease.
For direct financing leases under ASC 842, any selling profit and initial direct costs should be deferred and included in the net investment in the lease. (Note that the definition of a direct finance lease under ASC 842 is different than what it was under ASC 840; a lease that resulted in a selling profit or loss did not meet the definition of a direct financing lease under ASC 840. Rather, a lease that otherwise met the definition of a direct financing lease would have been classified as either a sales-type lease or as an operating lease, in accordance with the lease classification guidance in ASC 840.) These amounts should be recognized over the lease term in a manner that will produce a constant periodic rate of return on the lease when combined with the interest income on the lease receivable and the residual asset. Amounts recorded in the income statement should be measured in the functional currency using the average exchange rate during the period in which it is recognized. Losses on sale should not be deferred; they should be recognized using the impairment guidance for inventory or property, plant, and equipment, as applicable. See LG 4.5.1 for information on subsequent recognition of a direct financing lease. See FX 4.6.1 for information on the impairment of property, plant, and equipment.
The net investment in a lease is a monetary asset that should be remeasured at the end of each reporting period using the exchange rate at that date.
Operating lease
A lessor should recognize rental revenue on a straight-line basis (or another systematic basis) using the average exchange rate during the period in which it is recognized. The lessor would record an unbilled rent receivable when the amount of rental revenue recognized on a straight-line basis exceeds rents currently billed in accordance with the lease. The unbilled rent receivable is a monetary asset that should be measured at the end of each reporting period using the exchange rate at that date. See FX 4.4.2 for information on the measurement of monetary assets. See LG 4.3.3 for information on a lessor's accounting for an operating lease.
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