The new leasing standards require companies to use either 1) the interest rate implicit in the lease, or 2) the incremental borrowing rate (IBR) to calculate the lease liability. Determining the interest rate will likely be difficult for many companies, and so it’s expected that the IBR will be more widely used. However, understanding how to calculate the IBR may also be difficult.
Key Considerations
The IBR is defined as the interest rate the lessee would have to pay to borrow the value of the asset over a similar term length and with similar security. To calculate the IBR:
- Determine the corporate borrowing rate and adjust if for security as well as any foreign currency adjustment.
- If the company does not have a corporate borrowing rate, use a borrowing rate for an index the company is part of, or something similar, and adjust it for the company.
Treasury will be instrumental in this process as they will likely already hold some of the data needed to calculate the IBR.
What the Experts Think
Links to Additional Resources
Understanding and Overcoming Incremental Borrowing Rate Challenges
There is significant confusion around how to calculate the IBR as the definition has changed somewhat under ASC 842. This article covers the basics of calculating the IBR as well as the boxes companies need to check before rolling out their IBR policy.
ASC 842: Calculating the incremental borrowing rate as a lessee
RSM's white paper “ASC 842: Calculating the incremental borrowing rate as a lessee” presents the requirements for developing the discount rate according to the new lease accounting guidance and focuses on how an organization can determine the incremental borrowing rate for lessees.
A guide to the incremental borrowing rate: Assessing the impact of IFRS 16 "Leases"
In this paper Deloitte offers a straightforward, three step approach to calculate the incremental borrowing rate, or IBR, which will be required under the modified retrospective approach of IFRS 16 to calculate the lease liability.
Leasing - Discount rate for the lease liability
In this video, PwC covers how the incremental borrowing rate has changed and how to determine what collateral can be used to calculate the IBR as well as the term that should be used.
