X Ltd. has taken a plant on lease from Y Ltd. for 5 years to use in its manufacturing process for which it has to pay annual rentals in arrears of…

On initial measurement, X Ltd. will measure the lease liability and ROU asset as under: Year Lease Payments (USD) Present Value factor @5% Present Value of Lease Payment Conversion rate (spot rate) INR value 1 10,000 0.952 9,520 68 6,47,360 2 10,000 0.907 9,070 68 6,16,760 3 10,000 0.864 8,640 68 5,87,520 4 10,000 0.823 8,230 68 5,59,640 5 10,000 0.784 7,840 68 5,33,120 Total 43,300 29,44,400 As per Ind AS 21 The Effects of Changes in Foreign Exchange Rates, monetary assets and liabilities are restated at each reporting date at the closing rate and the difference due to foreign exchange movement is recognised in profit and loss whereas non-monetary assets and liabilities carried measured in terms of historical cost in foreign currency are not restated. Accordingly, the ROU asset in the given case being a non-monetary asset measured in terms of historical cost in foreign currency will not be restated but the lease liability being a monetary liability will be restated at each reporting date with the resultant difference being taken to profit and loss. At the end of Year 1, the lease liability will be measured in terms of USD as under: Lease Liability: Year Initial Value (USD) (a) Lease Payment (b) Interest @ 5% (c) = (a x 5%) Closing Value (USD) (d = a + c - b) 1 43,300 10,000 2,165 35,465 Interest at the rate of 5% will be accounted for in profit and loss at average rate of 69 (i.e., USD 2,165 x 69) = 1,49,385. Particulars Dr. (₹) Cr. (₹) Interest Expense 1,49,385 To Lease liability 1,49,385 Lease payment would be accounted for at the reporting date exchange rate, i.e.70 at the end of year 1 Particulars Dr. (₹) Cr. (₹) Lease liability Dr. 7,00,000 To Cash 7,00,000 As per the guidance above under Ind AS 21, the lease liability will be restated using the reporting date exchange rate i.e.,70 at the end of Year 1. Accordingly, the lease liability will be measured at 24,82,550 (35,465 x 70) with the corresponding impact due to exchange rate movement of 88,765 (24,82,550 – (29,44,400 + 1,49,385 – 700,000) taken to profit and loss. At the end of year 1, the ROU asset will be measured as under: Year Opening Balance (₹) Depreciation (₹) Closing Balance (₹) 1 29,44,400 5,88,880 23,55,520