Impact of Monetary Devaluation and Exchange Rate Fluctuations on the Valuation of Depreciation Expense of Long-Term Assets: An IAS Integrated Analysis

Abstract

The devaluation of money and the volatility of exchange rates create an underlying, yet under-examined, tension in the accounting treatment of depreciation for long-term assets. Depreciation expense is conventionally based on the historical cost of an asset in its functional currency, as required by International Accounting Standards (IAS) 16 and IAS 21; this paper argues that this convention systematically weakens the capacity of accumulated depreciation funds to finance asset replacement (Diversification.com, n.d.-a). Drawing on a synthesis of IAS 16 (Property, Plant and Equipment), IAS 21 (The Effects of Changes in Foreign Exchange Rates), IAS 29 (Financial Reporting in Hyperinflationary Economies), and the Capital Asset Pricing Model (CAPM), the paper develops a conceptual framework that incorporates exchange rate risk into depreciation valuation. The analysis is placed in the context of actual data from Pakistan, Nigeria, and Egypt, showing that the gap between historical-cost depreciation and replacement-cost valuation widened significantly as these currencies depreciated. The study proposes a two-track adjustment mechanism that reprices depreciation expense through a combination of the IAS 16 revaluation model and an exchange rate-adjusted CAPM discount rate, aligning accounting practice with the core purpose of depreciation: providing funds adequate to replace an asset at the end of its useful life. The article contributes to the literature by bridging the gap between current financial reporting standards and macroeconomic realities, offering insights that are policy-relevant for regulators, corporate treasurers, and investors operating in currency-volatile environments.