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Demystifying Discount Borrowing Rates Under IFRS 16 ASC 842

Demystifying discount borrowing rates under IFRS 16 ASC 842

Discount borrowing rates are not always straightforward, and how discount borrowing rates are handled differs under current GAAP and the new lease accounting standard. Here is important information about how to account for discount borrowing rates before and after ASC 842 becomes effective.

Discount borrowing rates under current GAAP

Before an organization becomes compliant with ASC 842 requirements, GAAP prevents assets from being recording the books at a value greater than the fair value.  In cases where the present value is greater than the fair value, the interest rate is increased, which reduces liability.

Discount borrowing rates under new lease accounting standard

Once compliant with ASC 842, the approach to discount borrowing rates changes, as the process outlined above is no longer allowed. The present value of the asset should be recorded – even if it’s higher than the fair value – and then it is immediately impaired. This approach can immediately have a negative impact on the books if the present value is higher than fair value, however the approach achieves the higher level of transparency needed for informed decision-making, which is the goal of the new lease accounting standard. 

Determining the discount borrowing rate

Sometimes the discount borrowing rate is specifically implicit in the lease agreement, although not always. If you need to calculate the discount borrowing rate do a present value calculation based on the payment amounts and the fair value of the asset at the beginning and end of the lease to find the rate. If you don’t know the fair market value of the asset, use your incremental borrowing rate (IBR). If you don’t know your IBR, work with your treasury department to describe the lease and they may be able to provide the appropriate IBR. 

Choosing the right lease accounting software to handle discount borrowing rates There is a myriad of details and calculations associated with real estate and equipment leases, and a comprehensive lease management software solution designed to efficiently and effectively control the data associated with all leased assets. Contact CoStar today to learn more.

Matt Waters, CPA

Lease Accounting Subject Matter Expert with over 15 years of Management Experience in Accounting and Finance