Topic: Effects of Changes in Foreign Exchange Rates

On 1 January 2023, Fabin Ghana Airlines PLC (FGA) leased a new fuel-efficient aircraft from German Jets Builders PLC (GJB) for ten (10) years, with an option to extend the lease period for five (5) additional years. However, at lease inception, FGA determined that the renewal option was not economically beneficial and would not be exercised.

The lease formed part of FGA’s sustainability strategy to green its air operations. Lease payments were structured as follows:

• Fixed annual lease payments of €6 million, payable at each year-end starting 31 December 2023.
• An additional 5% annual payment, conditional on FGA’s aircraft noise footprints and nitrogen oxide emissions declining by at least 15% and 10%, respectively.
• At 31 December 2023, the Sustainability Committee determined that these environmental targets were met.

Additional lease details:

• Estimated residual value of €15 million at 31 December 2032 and €10 million at 31 December 2037.
• Residual Value Guarantee: FGA guaranteed that the relevant residual value will not drop below 30%.
• Initial Direct Costs: GH¢500,000 was incurred in setting up the lease.
• Discount Rate: 12%
• Exchange Rates:
  • 1 January 2023: €1 = GH¢10
  • 31 December 2023: €1 = GH¢12
  • Average rate: €1 = GH¢11

Discount Factors at 12%:

Required:

In line with IFRS 16: Leases and IAS 21: Effects of Changes in Foreign Exchange Rates, discuss how this lease should be accounted for in the financial statements of FGA for the year ended 31 December 2023.