Incremental Borrowing Rate (IBR)
Determining the Incremental Borrowing Rate (IBR) under IFRS 16 Leases
Lessee Accounting
IFRS 16 has become effective to annual reporting periods beginning on or after 1 January 2019. It provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases.
The immediate impact is that lessee appears to be more asset-rich, but also more heavily indebted. Subsequently, total lease expense is front-loaded even when rental payments are fixed amounts.
The determination of an appropriate discount rate will have a significant impact on both initial measurements of the lease liability and the financial and leverage ratios of the lessee.
The lessee should discount the lease payments using either
- The interest rate implicit in the lease, if readily available, or
- The lessee’s incremental borrowing rate if the interest rate implicit in the lease cannot be determined.
Interest rate implicit in the lease is specific for the lessor, not for the lessee. Thus, it is more likely to use the incremental borrowing rate (IBR).
As defined in IFRS 16, IBR is the rate of interest the lessee would have to pay:
- to borrow fund necessary to obtain an asset;
- with similar security;
- over similar term; and
- in a similar economic environment
What we can help you
IBR is determined on a case by case basis, i.e. every lease should have its unique IBR.
In general, there are 2 basic steps:
Starting with a reference rate.
A reference rate could be a rate on a similar borrowing or an actual offer from a bank
Making relevant adjustments.
As the reference rate usually does not match exactly to the lease term, security or economic environment, adjustments should be made. For instance, when your starting point is the rate for unsecured loan from the bank, then you need to make adjustments to the rate for the collateral, i.e. your underlying asset.
Thus, to determine the IBR rate, you should gather the following information:
- the lessee company-specific borrowing rate;
- the term of lease arrangement;
- the amount and currency in which the borrowing is taking place;
- the “security” granted to the lessor and the nature, the quality of the underlying assets; and
- the economic environment and the jurisdiction