4.10 Property, Plant, and Equipment
ASC 830-10-45-18 states that PP&E are
nonmonetary assets. Therefore, when an entity maintains its books and records in a
foreign currency, PP&E must be remeasured in the functional currency at the
historical exchange rate (i.e., the rate that was in effect when the PP&E was
purchased). Further, upon a triggering event, entities must perform a two-step test
under ASC 360-10 to determine whether PP&E is impaired:
-
Step 1 — Compare the carrying amount of the PP&E with the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group).
-
Step 2 — If the carrying value of the PP&E exceeds the undiscounted cash flows determined in step 1, compare the carrying value of the PP&E with its fair value. If the carrying value exceeds the fair value, an impairment loss is recognized for the difference.
As with the accounting for inventory discussed in Section 4.9, an entity must test PP&E for
impairment in its functional currency. Therefore, when an entity maintains its books
and records in a foreign currency, a devaluation of the foreign currency against the
functional currency could cause an entity to fail step 1 of the impairment test.
This is because PP&E constitute nonmonetary assets that must be remeasured at
the historical exchange rate, while the undiscounted cash flows are measured at the
exchange rate that is in effect when the impairment test is performed. As with
inventory, an impairment of PP&E in the functional currency may result even
though the entity is not required to report an impairment in the books and records
maintained in the foreign currency. The example below illustrates this concept.
Example 4-8
PP&E Impairment Test When Books and Records Are
Maintained in a Foreign Currency
Parent Co, a U.S. registrant whose
functional and reporting currency is the USD, has a
subsidiary, Sub Co, that operates in Mexico. Sub Co is a
distinct and separable operation whose functional currency
is the reporting currency (USD). Sub Co maintains its books
and records in MXN, the local currency.
Assume that Sub Co purchased a piece of
equipment for MXN 250,000 in 20X6, when the exchange rate
was MXN 1 = $0.10, and that the equipment is a single asset
group under ASC 360-10. In 20X9, because of a significant
decline in the operations of Sub Co, the equipment is tested
for impairment under ASC 360-10.
Assume that the following facts exist on
December 31, 20X9:
-
The carrying value of the equipment is $17,500 (MXN 175,000 measured at the historical exchange rate).
-
The sum of undiscounted cash flows expected to result from the use and eventual disposition of the equipment is MXN 200,000.
-
The exchange rate is MXN 1 = $0.05.
-
The fair value of the equipment is $5,000.
Sub Co determines that the carrying value of
the equipment ($17,500) exceeds the sum of the undiscounted
cash flows ($10,000) on a functional currency basis.
Therefore, Sub Co recognizes an impairment loss of $12,500
on December 31, 20X9 ($5,000 fair value less $17,500
carrying value).
As in Example 4-7, Sub Co
must recognize an impairment loss in its functional currency
even though no impairment would have been recognized if the
local currency were the functional currency. That is, the
sum of the undiscounted cash flows in the local currency is
MXN 200,000, which is greater than the equipment’s carrying
value of MXN 175,000.