Major challenges of the lease accounting standards

Incremental Borrowing Rates

Calculating lease liabilities for the leasing standards requires companies to use the interest rate implicit in the lease. The implicit interest rate of a lease is rarely provided to the lessee and is not that easy to figure out, as certain lessor inputs are needed which are not generally known. The standard provides a practical expedient where the implicit interest rate is not determinable and that is the Incremental Borrowing Rate (IBR). Virtually all organizations use the IBR instead.

Defining the IBR

The IBR is the interest rate a lessee would have to pay to borrow the value of the asset over a similar term length on a collateralized basis.

To calculate the IBR:

  • Figure out the corporate borrowing rate taking into account the currency, economic environment and the term of the loan and make any necessary adjustments, such as for security and asset type.
  • If there isn’t a corporate borrowing rate for the organization, use a borrowing rate for an index or similar industry, and adjust it for the organization.

Work with the Treasury team to calculate the IBR, since they will have the existing rates easily available.

Download the ASC 842 Handbook

This is a brief introduction to ASC 842. For more detail on the technical accounting as well as how companies can successfully achieve and maintain compliance with the standard, download our full ASC 842 Handbook.

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