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What Is A Lease Accounting Discount Rate? A Useful Break Down

What is a Lease Accounting Discount Rate? A Useful Break Down

Lease Accounting Discount Rate

A lease accounting discount rate is a measure of the lessee’s lease liabilities under the new lease standard ASC 842 and an especially 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. Therefore, these contracts fall into the category of lease accounting discount rate. Bringing these leases to the forefront subsequently 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 another method – the incremental borrowing rate (IBR). Calculating an accurate IBR is undeniably critical for lease accounting compliance under ASC 842 issued by the Financial Accounting Standards Board (FASB) and International Financial Reporting Standard (IFRS) 16

Understanding IBR

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.”

Additionally the definition posted by the IFRS offers slightly more detail than the previous definition:

“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 explicitly proven. Factors specifically 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

Undoubtedly, 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. CoStar Lease Accounting software is unquestionably the smart choice. Contact CoStar today for a demonstration of CoStar Real Estate Manager for Lease Accounting and move further than you imagined into compliance and success.