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Effective date and transition

Question 10-10

In transitioning to ASC 842, what exchange rate should be used to determine lease payments for
purposes of measuring a lessee’s operating lease liability and right-of-use asset for existing operating
leases?

PwC response
For leases that were classified as operating leases under ASC 840, a lessee should initially recognize a
right-of-use asset and a lease liability at the application date described in LG 10.3

We believe it is reasonable to use the foreign exchange rate at the application date (rather than the
commencement date) to determine lease payments for both the lease liability and the right-of-use
asset. This is because the transition guidance in the leases standard requires the right-of-use asset to
be initially equal to the lease liability adjusted for other items, which can only be accomplished by
using the foreign exchange rate at the application date.

In addition, ASC 830-20-30-1 states: “At the date a foreign currency transaction is recognized, each
asset, liability ... shall be measured initially in the functional currency of the recording entity by use of
the exchange rate in effect at that date.” Consequently, the lessee should use the foreign exchange rate
in effect at the date of initial recognition of the right-of-use asset and lease liability. For a calendar
year-end public business entity choosing to adjust comparative periods, this would be (a) January 1,
2017 for an operating lease that commenced prior to January 1, 2017 or (b) the commencement date of
the lease for a lease entered into during the comparative periods. For a calendar year-end public
business entity choosing to not adjust comparative periods, this would be January 1, 2019.

Question 10-11

For a reporting entity that chooses to adjust comparative periods in transition, how should foreign
currency gains or losses for a lessee’s operating leases during the look-back period be accounted for
after the initial application date?

PwC response
The transition guidance in ASC 842-10-65-1(d) of the leases standard states that a reporting entity
shall adjust equity and, if it elects to adjust comparative periods, the other prior period comparative
amounts, as if the new leases guidance always applied.

For reporting entities that choose to adjust comparative periods, based on the general transition
guidance in ASC 842-10-65-1(d), subsequent to the application date the comparative income
statements presented (i.e., 2017 and 2018 for a calendar year-end public company) should be adjusted
to reflect the effect of foreign currency exchange rate movements on lease-related monetary assets and
liabilities. These foreign exchange transaction gains or losses should be recognized in income during
the comparative periods.

10.4.1.5 Subsequent recognition and measurement

After initial recognition, a lessee should measure the lease liability and the right-of-use asset in
accordance with the subsequent measurement guidance in the leases standard as described in LG
4.4.2.

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