The lease discount rate converts dated lease payments into present value. A lessee uses the rate implicit in the lease when that rate is readily determinable. Otherwise, it uses its incremental borrowing rate, subject to an available and documented policy election.
Match the rate to the obligation
The incremental borrowing rate represents a collateralized borrowing with an amount, term, and economic environment similar to the lease. Evidence should name the legal entity, currency, commencement date, term, collateral assumption, source, and approver. Convert the annual rate to the payment interval using a stated convention.
For example, an 8 percent annual rate cannot be placed into a monthly schedule as 8 percent per month. The preparer must state the periodic conversion. A parent company's unsecured revolving-credit rate also may not represent a subsidiary's collateralized five-year borrowing rate. An eligible private company can elect a risk-free rate by class of underlying asset, but the election does not override a readily determinable implicit rate.
This concept applies a supported rate; it does not create missing market evidence. Read the lessee measurement rule in ASC 842-20-30-2 and the rate-election guidance in ASC 842-20-30-3.
Put the concept to work
Apply this concept
- Apply a documented implicit, incremental-borrowing, or permitted risk-free rate to a payment stream whose compounding and payment periods are aligned, while retaining rate selection as a separate judgment.
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- Present value — Apply
To apply this concept: Required. Lease measurement discounts dated cash flows using a period-consistent rate.
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