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Under the ASC 842 lease accounting standard, leases are categorized into two types: operating leases and finance leases. Operating leases are those where the terms do not mimic the purchase of an asset, while finance leases have characteristics that are similar to purchasing an underlying asset.

When calculating the present value, a lessee should discount the foreign currency lease payments to present value and then remeasure that present value into the functional currency using the exchange rate at lease commencement. The discount rate should be the rate implicit in a lease.

The initial and subsequent accounting by lessees for operating leases and finance leases, including specific issues such as evaluating ROU assets for impairment, applying ASC 842 to leases denominated in a foreign currency and recognizing leases acquired in business combinations and asset acquisitions.

ASC 842, or Topic 842, is the new lease accounting standard issued by the FASB and governs how entities record the financial impact of their lease agreements. Among other changes, it requires all public and private entities reporting under US GAAP to record the vast majority of their leases to the balance sheet.

Public companies have already adopted ASC 842. Calendar year-end privately held companies are required to adopt ASC 842 effective January 1, 2022. Privately held companies with fiscal year-ends are required to adopt ASC 842 in the fiscal year beginning after December 15, 2021.

ASC 842 requires organizations with lease assets to recognize nearly all leases as assets and liabilities, whether classified as operating leases or financing leases, subject to certain exemptions.

A functional currency is the main currency that a company conducts its business. As companies transact in many currencies but report their financial statements in one currency, the foreign currencies have to be translated into the functional currency.

Lease contracts might be denominated in a currency which is different from the functional currency of the lessee (for example, contracts might be denominated in USD and the functional currency is EUR).

When a country experiences a recession, its interest rates are likely to fall, decreasing its chances to acquire foreign capital. As a result, its currency weakens in comparison to that of other countries, therefore lowering the exchange rate.

A lease will be recorded on the balance sheet as a right-of-use (ROU) asset and lease liability. The lease liability is the payment obligation over the term of the lease contract, while the ROU asset represents the control of the asset under the lease contract.