Foreign Currency Conversion in Lease Accounting: What Moves and What Stays
Questions this article answers
- How do you account for a lease denominated in a foreign currency under ASC 842?
- Is a lease liability a monetary or nonmonetary item under ASC 830?
- Which exchange rate applies to the right-of-use asset?
- Where does the foreign currency gain or loss on a lease liability go?
- Does a change in exchange rates trigger a lease remeasurement under ASC 842?
Foreign currency conversion in lease accounting comes down to one distinction. The lease liability is a monetary item and the right-of-use (ROU) asset is a nonmonetary item; ASC 842-20-55-10 says so directly. So a US company with a lease payable in euros remeasures the liability into dollars at the rate on every balance sheet date.
The right-of-use asset stays at the exchange rate on the later of ASC 842's initial application or the lease's commencement date, unless a lease modification that is not a separate contract resets it. The gap between the two is a gain or loss in earnings.
This page covers where each rule comes from, what it does on the books, and a worked euro lease with every input stated. It assumes a US private company whose functional currency is the US dollar.
Which currency is the lease measured in first?
The lease is measured in the currency of the contract, then converted. Under ASC 842-20-30-1 the lease liability at commencement is the present value of the lease payments not yet paid, discounted at the rate for the lease. For a euro lease that means euro payments discounted to a euro present value. The dollar figure comes afterward, at the exchange rate on the commencement date.
The discount rate follows the currency. PwC's foreign currency guide puts it this way: "If that information is not readily available, a lessee uses an incremental borrowing rate for an assumed borrowing in the foreign currency." A euro lease is discounted at what the company would pay to borrow euros, not dollars. When you build a rate the way calculating the incremental borrowing rate for ASC 842 describes, the borrowing currency is one more input.
The right-of-use asset starts from the same number. ASC 842-20-30-5 sets its cost at commencement as the initial lease liability, plus payments made at or before commencement, minus lease incentives received, plus initial direct costs. Each piece converts at the commencement-date rate, or, for cash paid or received before commencement, at the rate on the date it was paid; PwC's foreign currency guide states that refinement.
For most leases everything dates from commencement, so the two sides agree in dollars on day one.
Why does the lease liability move with the exchange rate but the ROU asset does not?
Because ASC 830 sorts every foreign-currency balance into one of two buckets, and the two halves of a lease land in different ones. Monetary items are amounts fixed in units of currency, like a payable or a loan. Nonmonetary items are not, like equipment or inventory.
Deloitte's Foreign Currency Matters roadmap summarizes ASC 830-10-45-17 and 45-18 this way: monetary items carry at the current exchange rate, nonmonetary items at historical rates. The same roadmap draws the comparison to foreign-currency debt and to property, plant and equipment.
ASC 842-20-55-10 settles which bucket each lease balance falls into: "The right-of-use asset is a nonmonetary asset while the lease liability is a monetary liability." The liability is a stream of euro payments the company still owes, so it behaves like euro debt. The right-of-use asset is the right to occupy a building, not a claim to a fixed amount of currency, so it behaves like property.
The mechanics follow from that. ASC 830-20-35-2 requires recorded balances denominated in a foreign currency to be adjusted to the current exchange rate at each balance sheet date, and that applies to the liability.
The right-of-use asset keeps that historical rate until something resets it. Deloitte's Leases roadmap puts the historical rate at the later of the date ASC 842 was first applied or the lease commencement date. It holds that rate there provided the lease has not been modified.
On the books, two balances that were equal at commencement drift apart, even though nothing about the lease changed. That is expected, and the auditor will look for it. For the single-currency version of the same schedule, see ASC 842 lease accounting: a scenario explained.
Where does the foreign currency gain or loss go?
To net income, in the period the rate moves. ASC 830-20-35-1 treats the effect of a rate change on expected functional-currency cash flows as a foreign currency transaction gain or loss, generally included in net income. For a lease liability, that sits with the company's other transaction gains and losses.
For an ordinary third-party lease it is not lease cost and does not go through other comprehensive income. ASC 830 carries narrow exceptions to earnings recognition that do not apply to this fact pattern.
It also does not touch the ASC 842 schedule. Under ASC 842-20-35-4, a lessee remeasures the lease liability for the changes to lease payments described in ASC 842-10-35-4 through 35-5. Those events are a lease modification that is not a separate contract and the resolution of a contingency that makes variable payments fixed.
They also include changes in the lease term, the purchase-option assessment or amounts probable under a residual value guarantee. A rate movement changes none of the euro payments, so there is no new discount rate and no reset of the right-of-use asset.
The ASC 842 remeasurement triggers checklist lists the events that do reopen the schedule; a currency move is not on it. So keep the two remeasurements separate in the ledger. The ASC 842 schedule runs in euros and never sees a rate. The ASC 830 remeasurement runs on top of it, in dollars, once per balance sheet date.
Worked example: a euro office lease on a US company's books
The inputs are chosen so every figure can be recomputed; amounts are rounded to the cent at each step. A US private company with a US dollar functional currency leases a Dublin office. The lease is an operating lease.
| Input | Value |
|---|---|
| Lease term | 3 years, commencing January 1 |
| Lease payments | EUR 100,000 per year, paid on December 31 of each year |
| Discount rate (euro incremental borrowing rate) | 6.0% per year |
| Initial direct costs, prepayments, incentives | None |
| Exchange rate at commencement (January 1, Year 1) | 1 EUR = 1.10 USD |
| Average exchange rate, Year 1 | 1 EUR = 1.12 USD |
| Exchange rate at first balance sheet date (December 31, Year 1) | 1 EUR = 1.15 USD |
The euro schedule comes first. The present value of three payments of EUR 100,000 at 6.0% is EUR 94,339.62 + EUR 88,999.64 + EUR 83,961.93 = EUR 267,301.19. Year 1 accretion is EUR 267,301.19 x 6.0% = EUR 16,038.07. After the December 31 payment the liability is EUR 267,301.19 + EUR 16,038.07 - EUR 100,000.00 = EUR 183,339.26, the present value of the two remaining payments.
The right-of-use asset follows the operating lease pattern. Single lease cost is straight-line at EUR 100,000 per year; EUR 16,038.07 of that is accretion, so the right-of-use asset is reduced by EUR 83,961.93 to EUR 183,339.26. In euros, asset and liability still match. Now convert each balance at the rate ASC 830 assigns to it.
| Balance | Euro amount | Rate applied | US dollar amount |
|---|---|---|---|
| Lease liability, January 1, Year 1 | EUR 267,301.19 | 1.10 (commencement) | USD 294,031.31 |
| Right-of-use asset, January 1, Year 1 | EUR 267,301.19 | 1.10 (commencement) | USD 294,031.31 |
| Lease liability, December 31, Year 1 | EUR 183,339.26 | 1.15 (closing) | USD 210,840.15 |
| Right-of-use asset, December 31, Year 1 | EUR 183,339.26 | 1.10 (commencement) | USD 201,673.19 |
| Difference at December 31, Year 1 | EUR 0.00 | USD 9,166.96 |
The USD 9,166.96 gap is EUR 183,339.26 x (1.15 - 1.10). It exists only because the dollar weakened against the euro during the year. Had the rate fallen to 1.05 instead, the liability would be USD 192,506.22 and the company would show a gain.
What the Year 1 entries look like in dollars
The liability's dollar roll-forward starts at USD 294,031.31. Accretion of EUR 16,038.07 at the 1.12 average rate adds USD 17,962.64, and the EUR 100,000 payment on December 31, at 1.15, removes USD 115,000.00. That leaves USD 196,993.95 before remeasurement, against USD 210,840.15 at the closing rate. The shortfall of USD 13,846.20 is the Year 1 foreign currency transaction loss.
- Commencement: debit right-of-use asset USD 294,031.31; credit lease liability USD 294,031.31.
- Year 1 lease cost: debit operating lease cost USD 110,320.76; credit lease liability USD 17,962.64 (accretion at 1.12); credit right-of-use asset USD 92,358.12 (EUR 83,961.93 at 1.10).
- December 31 payment: debit lease liability USD 115,000.00; credit cash USD 115,000.00.
- December 31 remeasurement: debit foreign currency transaction loss USD 13,846.20; credit lease liability USD 13,846.20.
Check the liability: USD 294,031.31 + USD 17,962.64 - USD 115,000.00 + USD 13,846.20 = USD 210,840.15. Check the loss another way. The opening balance contributes EUR 267,301.19 x (1.15 - 1.10) = USD 13,365.06, and the accretion contributes EUR 16,038.07 x (1.15 - 1.12) = USD 481.14. The payment was made at the closing rate, so it adds nothing; the total is USD 13,846.20.
Which exchange rate applies to the operating lease cost?
An operating lease has a single straight-line lease cost, but that cost has two parts carrying different rates. One part is accretion of the lease liability, a monetary item. The other is the reduction of the right-of-use asset, a nonmonetary item. ASC 842 does not say how to convert the single cost, so this rests on firm guidance rather than a Codification requirement.
PwC and Deloitte describe the same split. PwC's foreign currency guide states that right-of-use asset amortization is "remeasured using the exchange rate on the lease commencement date." Interest accretion on the liability is "remeasured using the average exchange rate during the period in which it is incurred." Deloitte's Leases roadmap describes bifurcating the single lease cost the same way: average rate on accretion, historical rate on the asset reduction.
That is why the example shows USD 92,358.12 plus USD 17,962.64. The euro cost is level every year; the dollar cost is not, because the accretion piece follows each year's average rate. The entries match those in ASC 842 journal entries explained with examples; only the rate column is new.
What happens to the exchange rate when the lease is modified?
A modification that is not a separate contract reopens the ASC 842 schedule, and that raises a question ASC 830 does not answer. The liability is remeasured in euros at a new discount rate and converted at the modification-date rate. But the right-of-use asset is adjusted by the same euro amount, and the historical rate no longer covers the whole balance.
Deloitte's Leases roadmap sets out two acceptable views. Under one, the entire right-of-use asset converts at the modification-date rate, which is likely to produce a foreign exchange gain or loss. Under the other, the pre-modification asset keeps its historical rate and only the increase takes the new rate, so no gain or loss arises. Deloitte ties the second view to paragraph BC175 of ASU 2016-02.
Deloitte extends the same question to remeasurement events. Under the first view, a change in the lease term or the purchase-option assessment resets the rate the way a modification does. A change in a residual value guarantee or the resolution of a contingency does not.
Whichever view the company takes, it is an accounting policy election. Deloitte, reporting formal discussions with the SEC staff, says entities should apply the elected approach consistently to all leases and disclose it if material. The modification mechanics themselves are in ASC 842 lease modification and remeasurement examples.
What does the auditor ask for on a foreign-currency lease?
Three things are worth having ready. First, the euro schedule on its own, so the ASC 842 arithmetic ties out without a rate in the way. Second, the rate source for each date used: commencement, each balance sheet date, the period average and each payment date. Third, a roll-forward of the dollar liability that isolates the transaction gain or loss, like the check above.
The common defect is a lease system that stores the liability only in dollars. Then the ASC 830 remeasurement cannot be separated from the ASC 842 accretion, and the gain or loss becomes a plug. Keep the contract currency as the schedule currency and make the conversion its own step. The basics in lease accounting explained: key concepts assume one currency; this is the layer on top.
Frequently asked questions
Is a lease liability a monetary or nonmonetary item?
A lease liability is a monetary liability and a right-of-use asset is a nonmonetary asset. ASC 842-20-55-10 states this directly. The liability is remeasured at the exchange rate on each balance sheet date. The right-of-use asset stays at the exchange rate used when it was first recognized, unless a lease modification that is not a separate contract resets it.
Where does the foreign currency gain or loss on a lease liability go?
It is generally included in net income as a foreign currency transaction gain or loss, under ASC 830-20-35-1. For an ordinary third-party lease it is not part of lease cost, it does not adjust the right-of-use asset, and it does not go through other comprehensive income. ASC 830 carries narrow exceptions to earnings recognition that do not apply here.
Does a change in the exchange rate trigger a lease remeasurement under ASC 842?
No. The remeasurement events in ASC 842-10-35-4 are a lease modification that is not a separate contract and the resolution of a contingency that makes variable payments fixed. They also include changes in the lease term, the purchase-option assessment or amounts probable under a residual value guarantee. An exchange rate movement changes none of the foreign-currency payments, so the ASC 842 schedule is untouched. Only the dollar amount of the liability changes, through ASC 830.
Sources and further reading
- ASC 842-20-30-1 (initial lease liability); ASC 842-20-30-5 (right-of-use asset at commencement); ASC 842-20-35-4 with ASC 842-10-35-4 through 35-5 (remeasurement of the lease liability); ASC 842-20-55-10 (nonmonetary asset, monetary liability).
- ASC 830-10-45-17 and 45-18 (current rates for monetary items, historical rates for nonmonetary items); ASC 830-20-35-1 (transaction gains and losses in net income); ASC 830-20-35-2 (foreign-currency balances adjusted to the current rate at each balance sheet date).
- PwC, Foreign currency guide, 4.7 Foreign currency-denominated leases — the quotations above.
- PwC, Foreign currency guide, 4.4 Subsequent measurement of foreign currency transactions.
- Deloitte, Roadmap: Leases, 8.8 Other lessee-related matters — the ASC 842-20-55-10 quotation and the two views after a modification.
- Deloitte, Roadmap: Foreign Currency Matters, 4.11 Leases.
- Deloitte, Roadmap: Foreign Currency Matters, 4.3 Subsequent measurement of foreign currency transactions — the ASC 830-20 text.
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