How should the exchange difference arising from the lease liability within the scope of IFRS 16 be accounted for, when it is agreed in foreign currency?
The effects of changes in the lease should be recognized in profit or loss, in line with the provisions of IAS 21 for the translation of monetary items expressed in foreign currency.
The rationale for why these variations do not affect the right of use is explained in the document “IFRS 16 – Rationale for Conclusions”, in particular the following paragraphs.
Foreign currency exchange
FC196 IFRS 16 does not provide specific requirements on how a lessee should account for the effects of foreign currency exchange differences related to lease liabilities that are denominated in a foreign currency. Consistent with other financial liabilities, a lessee’s lease liability is a monetary item and therefore, if it is denominated in a foreign currency, it is required to be measured again using the closing exchange rates at the end of each reporting period by applying IAS 21 Effects of Changes in Foreign Exchange Rates.
FC197 Some stakeholders suggested that a lessee should recognize any foreign currency exchange difference as an adjustment to the carrying amount of the right-of-use asset. This approach would treat conversion adjustments as an update to the cost of the right-of-use asset, which is initially measured on the basis of the initial measurement of the lease liability. These stakeholders are of the view that lease payments denominated in a foreign currency are indeed another form of variable lease payment, and should be accounted for in a manner analogous to variable lease payments that depend on an index or rate. Those interested parties also asked whether the usefulness of the information would be obscured as a result of the volatility of the result of the period that may arise from recognizing the foreign currency exchange differences of the lessee’s lease liability in the profit or loss of the period.
FC198 The IASB decided that foreign currency exchange differences related to lease liabilities denominated in a foreign currency should be recognised in profit or loss for the period for the following reasons:
(a)This approach is consistent with the requirements for foreign currency differences arising from other financial liabilities (e.g., loans and prior finance lease liabilities accounted for under IAS 17).
(b) A lessee with a liability denominated in a foreign currency is exposed to foreign currency risk. Accordingly, the foreign currency gains or losses recognized in profit or loss for the period fairly represent the economic effect of the lessee’s currency exposure to foreign currency exchange risk.
(c) If a lessee engages derivatives to hedge its economic exposure to foreign currency risk, the recognition of foreign currency exchange differences related to lease liabilities as an adjustment to the cost of right-of-use assets would preclude a natural offsetting of economic exposure to profit or loss. This is because an entity would recognize any change in the foreign currency risk of derivatives in profit or loss, while recognizing the corresponding change in lease liabilities on the balance sheet—thereby introducing volatility as a result of reducing exposure to foreign currency risk. This asymmetry could distort the presented economic position of the tenant.
(d) In the opinion of the IASB, subsequent changes in the foreign currency exchange rate should have no effect on the cost of a non-monetary item. Therefore, it would be inappropriate to include these changes in the new right-of-use asset measurement.
FC199 Although this approach could lead to volatility in the result of the period due to the recognition of foreign currency exchange differences, an entity would disclose those changes separately as foreign currency exchange gains or losses. It would therefore be clear to users of the financial statements that the gain or loss arises only from movements in foreign currency rates. Since this approach is consistent with the requirements for foreign exchange differences in IAS 21, the IASB concluded that it was not necessary to include the specific requirements of IFRS 16.
Rules involved:
IFRS 16 – Leases
IAS 21 – Effects of Changes in Foreign Exchange Rates
“The responses on the application of IFRS are not interpretations of these standards, which must be applied as they are issued by the IASB and adopted by the BCRA regulations. They represent solutions to specific cases analyzed in accordance with the available information and the accounting framework established by the BCRA through the Chart of Accounts, Complementary Provisions and other related regulations.”