Determining incremental borrowing rate under IFRS 16
Readers will remember that lessees shall use their incremental borrowing rate to measure a lease liability when the interest rate implicit in the lease cannot be readily determined (IFRS 16.26).
Keywords: Mazars, Thailand, IFRS, IFRS IC, IFRS 16, IFRIC, Borrowing Rate
18 November 2019
The incremental borrowing rate is defined (in Appendix A of IFRS 16) as “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”.
The IFRS Interpretations Committee received a request about the definition of a lessee’s incremental borrowing rate in IFRS 16. It was asked to clarify some details as to how the incremental borrowing rate should be determined: specifically, whether this rate is required to reflect the interest rate in a loan with both a similar maturity to the lease and a similar payment profile to the lease.
The Committee has just published its agenda decision on this request, in the September 2019 issue of IFRIC Update. The decision can be summarised as follows:
- the definition of a lessee’s incremental borrowing rate in IFRS 16 does not explicitly require the lessee to determine its incremental borrowing to reflect the interest rate in a loan with a similar payment profile to the lease payments;
- however, it would be consistent with the Board’s objective, as set out in the Basis for Conclusions (IFRS 16 BC162), to refer as a starting point to a readily observable rate for a loan with a similar payment profile to that of the lease;
- the principles and requirements of IFRS 16 provide an adequate basis for determining the incremental borrowing rate.
Although it is evident that the Committee favours the use of an interest rate for a loan with a similar maturity and payment profile to the lease, it has refrained from imposing this as a requirement. It is thus up to the lessee to decide whether or not it wishes to reflect the payment profile in its incremental borrowing rate.