How to Calculate IBR for ASC 842 Compliance

The Incremental Borrowing Rate (IBR) is a critical component of ASC 842 lease accounting compliance. This guide provides a step-by-step approach to calculating the IBR for a lease, including the data values required and considerations for accurate calculations.

Step 1: Gather Required Data

To calculate the IBR, you need the following data values:

• Lease Term: Start date and end date of the lease.
• Payment Schedule: Frequency (monthly, quarterly, annually) and amount of lease payments.
• Lease Type: Whether the lease is collateralized or non-collateralized.
• Lessee’s Credit Rating: Public companies can use published credit ratings; private companies may use proxy ratings or benchmarks.
• Market Interest Rates: Current market rates for similar borrowing terms (e.g., U.S. Treasury yields).
• Collateral Adjustment: The impact of collateralization on borrowing rates.
• Risk-Free Rate: A baseline rate for borrowing, such as a U.S. Treasury yield.

Step 2: Understand the Lease Terms

Identify the lease-specific details, including:

• The duration of the lease.
• The payment amounts and their frequency.
• Whether the lease involves collateral.

This data is foundational to determining the appropriate adjustments and calculation steps.

Step 3: Assess the Lessee’s Creditworthiness

Evaluate the lessee’s credit risk to determine an appropriate risk premium. Public companies can reference credit ratings from agencies such as:

• Moody’s Ratings
• S&P Global Ratings

Private companies can use industry benchmarks or proxy ratings to estimate their credit risk.

Step 4: Identify Market Interest Rates

Research the current market rates for borrowing terms similar to the lease. Start with risk-free rates, such as the U.S. Treasury Yield Curve, and adjust for the lease’s credit risk and terms.

Step 5: Adjust for Collateral and Lease-Specific Factors

Adjust the borrowing rate based on:

• Collateral: Reduce the rate if the lease is collateralized to reflect the lower risk to the lender.
• Lease Term: Adjust for the length of the lease, as longer terms typically involve higher rates.
• Payment Frequency: Frequent payments may reduce the effective borrowing rate.

Step 6: Perform the Calculation

Combine all inputs to calculate the IBR:

IBR = Base Market Rate + Credit Risk Premium + Collateral Adjustment

Example Calculation:

• Base Market Rate (e.g., U.S. Treasury yield): 3.5%
• Credit Risk Premium: 2.0%
• Collateral Adjustment: -0.5%
• Resulting IBR = 3.5% + 2.0% - 0.5% = 5.0%

Step 7: Document and Validate

Maintain thorough documentation of:

• The methodology and assumptions used.
• All data sources and calculations.

Validate the results to ensure compliance with ASC 842 guidelines.

Step 8: Leverage Technology

Consider using tools like iLeasePro to simplify the IBR calculation process. Such tools integrate market data, automate calculations, and provide audit-ready documentation.

By following this step-by-step guide, you can calculate an accurate Incremental Borrowing Rate (IBR) for your lease. Proper calculations ensure compliance with ASC 842 and accurate financial reporting. For a streamlined process, explore lease accounting solutions like iLeasePro.