Friends,
I am new on this forum, and I look forward to the intellectual exchanges and knowledge sharing.
I have a peculiar lease modification accounting challenge, and I will try to keep the explanation as short as possible. Basically, I am trying to figure out the accounting for lease term modification adjustment that results in positive ROU Asset value in transaction currency but negative ROU Asset in reporting currency.
We have a USD lease entered some years ago for an entity with NGN reporting currency. In addition to the contractual lease term (of say 10 years), management considers the leased facility as being strategically important and hence added an additional term (say 5 years) to the lease for determination of expected lease period. The exchange rate on initial contract date (say: NGN500/$1) was very low compared to the exchange rate on lease modification date (say NGN1,500/$). Per standard, the ROU Assets is carried at the historical rate, while the lease liability is revalued as the NGN devalues versus the USD.
Management's plan on the use of the facility changed, resulting in need for reduction of the lease term to the contractual end date (i.e. excluding the additional lease term). Consequently, a lease modification adjustment was required to account for the reduced lease term. The adjustment (i.e. a debit to lease liability and a credit to ROUA) in transaction currency (i.e. USD) results in positive ROUA and negative lease liability balances after the modification as expected. However, converting the required lease modification adjustment to the reporting currency (i.e. NGN) results in a value higher than the carrying value of the ROUA, hence making the ROUA in reporting currency negative. Of course it is incorrect to have a negative ROUA value. So how does one account for these modification/transactions in reporting currency?
I have seen a suggestion that the ROUA in reporting currency be reduced to zero, with excess balance posted to P&L. But this results in a mismatch of the ROUA in the transaction currency (which is a positive value) and the reporting currency (which is now zero). How will subsequent depreciation charge be accounted for in both currencies after the modification in this case? Also, if we are charging the excess that brings the ROUA to zero in reporting currency to P&L, should it be accounted for as normal expense or as FX?
I have attached some illustrative numbers to drive home my points above. Would sincerely appreciate your thoughts and insights into on fixing this unusual puzzle.
Thanks
I am new on this forum, and I look forward to the intellectual exchanges and knowledge sharing.
I have a peculiar lease modification accounting challenge, and I will try to keep the explanation as short as possible. Basically, I am trying to figure out the accounting for lease term modification adjustment that results in positive ROU Asset value in transaction currency but negative ROU Asset in reporting currency.
We have a USD lease entered some years ago for an entity with NGN reporting currency. In addition to the contractual lease term (of say 10 years), management considers the leased facility as being strategically important and hence added an additional term (say 5 years) to the lease for determination of expected lease period. The exchange rate on initial contract date (say: NGN500/$1) was very low compared to the exchange rate on lease modification date (say NGN1,500/$). Per standard, the ROU Assets is carried at the historical rate, while the lease liability is revalued as the NGN devalues versus the USD.
Management's plan on the use of the facility changed, resulting in need for reduction of the lease term to the contractual end date (i.e. excluding the additional lease term). Consequently, a lease modification adjustment was required to account for the reduced lease term. The adjustment (i.e. a debit to lease liability and a credit to ROUA) in transaction currency (i.e. USD) results in positive ROUA and negative lease liability balances after the modification as expected. However, converting the required lease modification adjustment to the reporting currency (i.e. NGN) results in a value higher than the carrying value of the ROUA, hence making the ROUA in reporting currency negative. Of course it is incorrect to have a negative ROUA value. So how does one account for these modification/transactions in reporting currency?
I have seen a suggestion that the ROUA in reporting currency be reduced to zero, with excess balance posted to P&L. But this results in a mismatch of the ROUA in the transaction currency (which is a positive value) and the reporting currency (which is now zero). How will subsequent depreciation charge be accounted for in both currencies after the modification in this case? Also, if we are charging the excess that brings the ROUA to zero in reporting currency to P&L, should it be accounted for as normal expense or as FX?
I have attached some illustrative numbers to drive home my points above. Would sincerely appreciate your thoughts and insights into on fixing this unusual puzzle.
Thanks