Determining the IBR

Private companies face specific challenges when determining the Incremental Borrowing Rate (IBR) under ASC 842. To achieve the most accurate estimate, the approach should combine company-specific data, market indicators, and professional insights, tailored to reflect the unique financial profile of a private entity. Here’s the recommended approach:

Existing Borrowing Data

Review Secured Loan Agreements

If the company has recently entered into secured loans or credit facilities, these provide a strong starting point for estimating the IBR. Ensure that the terms (e.g., loan duration, payment structure, and collateral) are comparable to the lease in question.

Adjust the rate for differences in lease-specific attributes, such as term length or payment schedules.

Use Commercial Bank Rates

Engage with your bank or financial institution to understand borrowing rates for amounts and terms similar to the lease liability. This offers a market-based perspective on the company’s borrowing costs.

Perform Credit Risk Assessment

Estimate Credit Standing

For private companies without formal credit ratings, internally assess creditworthiness using financial metrics like debt-to-equity ratio, EBITDA, and cash flow coverage. This provides a basis for determining the company’s borrowing ability.

Benchmark Against Industry Peers

Identify borrowing costs reported by similar private companies in the same industry or geographic region. Adjust these rates to reflect the company's specific financial health.

Incorporate Market Data

Reference Government Bond Yields

Start with a risk-free rate, such as the yield on government bonds with a maturity similar to the lease term.

Adjust for Credit and Collateral Risk

Add a credit spread based on the company’s assessed risk profile and adjust for collateralization. This ensures the IBR reflects the company’s unique borrowing conditions.

Leverage Industry Loan Rates

Use data on secured loan rates for private companies, provided by industry reports or financial institutions, to fine-tune the borrowing rate.

Engage Experts for Validation

Consult Lenders or Financial Advisors

Collaborate with your bank or lender to validate assumptions. Financial institutions with insights into your company’s credit profile and collateral assets can provide tailored advice.

Work with Accounting Professionals

Engage external accountants or valuation experts familiar with ASC 842 to review and refine your IBR calculation. Their expertise ensures compliance with accounting standards while improving accuracy.

Adjust for Lease-Specific Factors

Term Length Sensitivity

Longer lease terms often carry higher borrowing rates. Ensure your IBR accounts for the time value of money and associated risks over the lease term.

Lease Payment Structure

Consider how payment timing affects borrowing costs. For example, a lease with front-loaded payments may warrant a different rate than one with level payments.

Document and Review Periodically

Transparency

Maintain detailed records of the data sources, assumptions, and methodologies used in determining the IBR. This documentation is essential for audits and compliance reviews.

Ongoing Review

Reassess the IBR periodically, especially when market conditions or the company’s financial profile changes. Consistent updates ensure continued alignment with ASC 842 requirements.

Get the Best ASC 842 Software Solution from iLeasePro

At iLeasePro, we’ve been helping companies understand and implement ASC 842 since it replaced ASC 840 in December of 2021. We know standard inside out, and we know how to implement software solutions that will help you be in compliance.

We’ve done this for both small and large businesses, and we’ve also helped these companies use ASC 842 as a business tool to operate more efficiently, get better reporting and use their leases as assets. When you call us we can set you up with a lease accounting software free demo so you can see how it all works.

To do this, call us at 888-351-4606, or you can email us at info@ileasepro.com We also have plenty of great information about lease accounting software on our website, which is ileasepro.com, and you can chat with a live representative there as well.