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 after ASC 842 becomes effective.
Determining the discount borrowing rate
Sometimes the discount borrowing rate is specifically listed in the lease agreement, although usually it is not. You can also calculate the rate implicit in the lease. 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. However, this requires data points that lessors sometimes hesitate to make available to lessees. If you don’t have all the data points required for calculating the implicit rate, use your incremental borrowing rate (IBR). The best practice is to start by asking your treasury department to help identify an incremental borrowing rate, and most companies use different rates for different terms of leases. Some companies have engaged an outside valuation expert to assist in determining appropriate rates.
Choosing the right lease accounting software to handle discount borrowing rates There are myriad 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 is essential. Contact CoStar today to learn more.