A lease accounting discount rate is a measure of the lessee’s lease liabilities under the new lease standard ASC 842 and an important part of overall lease accounting compliance.
With the new lease accounting standards, lessees have to report all their operating and capital leases with contracts lasting longer than 12 months. Bringing these leases to the forefront requires an appropriate method for reporting leases. If the interest rate implicit in the lease is not available to the lessees, determining the present value of the lessee’s lease payments can be calculated using the incremental borrowing rate (IBR). Calculating an accurate IBR is critical for lease accounting compliance under ASC 842 issued by the Financial Accounting Standards Board (FASB) and International Financial Reporting Standard (IFRS) 16.
To better understand the IBR, know the standard definition as stated by the FASB:
“The rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.”
Similar to that is the definition posted by the IFRS, which offers slightly more detail:
“The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.”
Determining the IBR requires thorough documentation of your findings that can be tested and proven. Factors include:
- Commencement date of the lease
- Lease obligation rate
- Lease terms
- Subsidiary rate determined by the origin of the cash flow
- Currency rate and economic environment
- Lessee-specific credit risk
- Lessee’s assets as collateral
Determining the results of these findings can prove to be tedious, however, expert advice and cloud-based software tailored to your needs will provide peace of mind that you are following the right compliance procedure to accurately comply with the new lease accounting standards. See how CoStar Lease Accounting software is the smart choice.