Stay Informed
iLeasePro Newsletter

Expert Knowledge to Your Inbox - SignUp Now!

ASC 842: Choosing the Right Incremental Borrowing Rate

image_pen

The problem of determining the rate implicit in a lease also presented a concern that most preparers used the incremental borrowing rate (IBR) as the discount rate. However, that wasn’t the only concern that came to light during FASB’s roundtable in September 2020. Apart from the rate implicit, members also discussed the IBR; i.e., how those that have adopted ASC 842 determine the IBR. It was recognized that a lot of time and effort goes into estimating the borrowing rate. The Problem For Non-Public Business Entity (Non-PBE) lessees, a risk-free rate is determined which uses a period set in the lease terms (paragraph 842-20-30-3). This risk-free rate was another cause for concern at the roundtable. The use of this risk-free rate under the current economic climate meant low rates and therefore high artificial lease liabilities, thus being potentially misleading for users. When the costs incurred to determine the IBR, and the prospect of using a risk-free rate were combined, a question arose whether non-public business entities as well as public should be allowed to use some other rate or not. Alternatives Proposed Based on the argument, FASB proposed two alternatives to the members, preparers, and users in the roundtable handout.   Based on the argument, FASB proposed two alternatives to the members, preparers, and users in the roundtable handout. 


  1. No change. The rate and method used right now to determine and use IBR for PBE and non-PBEs should remain the same.
  1. Both PBE and non-PBE lessees must use a market-specific rate instead of IBR.

When the two alternatives were discussed, following were the respective arguments for and against the prospects.


  1. Non-PBE would encounter issues when trying to determine IBR that falls on the definition presented in ASC 842 for IBR. The problem they would face would primarily be that they don’t have enough resources or departments that can determine a lease credit risk. However, if nothing is done, it is important to remember that the cost of determining IBR will only go down on a go-forward basis.
  1. The second alternative suggested that a rate be recommended like in ASC 944 (Insurance) and ASC 715 (Compensation). The use of this rate would significantly simplify the whole process, not to mention result in more uniform and comparable books. The problem here is that the rate may be very different from risk-free rates that non-PBEs use.


The Decision Most participants agreed that the first alternative is much better, i.e., current requirements for IBR should remain the same for public companies. Preparers agreed that creating a new process for IBR would cost even more, though they agreed that post-implementation costs would be lesser. Since users mostly use Disclosures to compare and evaluate companies, IBR didn’t really make much of a difference there. However, this was all limited to PBEs. When it came to non-PBEs, most members were in favor of making adjustments to the standard. The change in ASC 842, if any, would be targeted toward allowing non-PBEs to choose whether they use the risk-free rate on:


  • An asset-class basis
  • Or for the whole entity.

It was acknowledged there was a certain arbitration involved by allowing non-PBEs to use risk-free rates. To that end, members mostly were in favor of letting the FASB determine a specific rate for non-PBEs and implementing it via ASC 842.




Related: iLeasePro Free Trial, iLeaseXpress, iLeaseXpress Unlimited, ASC 842 Financial Reporting, ASC 842 Balance Sheet Reporting, ASC 842 Income Statement Reporting, ASC 842 Cash Flow Reporting, ASC 842 Statement of Shareholder Equity, ASC 842 Disclosure Notes, ASC 842 Management Discussion, ASC 842 Comprehensive Income, ASC 842 Glossary of Terms, ASC 842 Journal Entries, ASC 842 Software, When Is the ASC 842 Compliance Date, FASB Lease Accounting Software, Understanding the New FASB ASC 842 Lease Accounting Standard, How Does a Lease Balance Sheet Change After the New Standard?, Tracking Lease Details After ASC 842, Deferred Rent Explained Under the ASC 842, Guide to Lease Classification, Overview of Relevant Borrowing Rate, ASC 842 Footnote Disclosure, Lease Accounting, What Does Lease Accounting Software Do?, Key Features of A Lease Accounting Software, How to Never Miss Important Lease Dates, Scaling Your Lease Accounting Software to Your Business Needs, How to Select the Right Lease Solution, How to Set Up Lease Accounting Software, What is the Best Lease Accounting Software?, Overview of the Types of Leases, Equipment Lease Software, How the Right Lease Management Software Makes Equipment Leases Easier, Lease Tracking Software, How The Right Software Can Help You Manage Lease Data, Five Benefits of a SaaS Lease Management Solution, A Centralized Lease Portfolio Making Asset Management Easier, Lease Analysis 101, Lease Analysis: The Financial Metrics, Lease Abstraction, The Importance of Lease Abstraction for Lessees, The Lease Data an Abstract Should Include, What Software Do I Need for Lease Abstracting?, Navigating The ASC 842 Accounting Audit, Ultimate Lease Accounting Audit Checklist, Essential Guide To Engaging Auditors, Leveraging AI for Enhanced Year-End Audits Transitioning to the ASC 842 Standard Lease Document Management ASC 842 Short-Term Leases Practical Expedients Lease Modifications & Remeasurements Lease Variable Payments Embedded Leases Monitoring Critical Lease Dates Transportation - Navigate the ASC 842 The Impact of the ASC 842 on Regulatory Policies in Lease Management & Lease Accounting Integrating Lease Accounting into Your Month-End Closing Process The Modified Retrospective Approach in ASC 842 Determining the Incremental Borrowing Rate