Incremental Borrowing Rate
Related terms
Category
ASC 842
The incremental borrowing rate (IBR) is the rate of interest a lessee would have to pay to borrow on a collateralized basis over a similar term and in a similar economic environment to the lease. It is used as the discount rate when the rate implicit in the lease is not readily determinable.
Why it matters
The IBR directly affects the size of the lease liability and ROU asset on the balance sheet. A higher IBR reduces the present value of future payments (smaller liability), while a lower IBR increases it. For companies with hundreds of leases, the IBR methodology must be defensible and consistently applied.
Determining the IBR requires judgment. It should reflect the lessee's credit standing, the lease term, the currency, the economic environment, and the nature of collateral. Many companies develop an IBR methodology that considers their existing borrowing rates, adjusted for term and security differences.
How Arvexi handles this
Arvexi allows you to set IBR rates at the portfolio, entity, or individual lease level. The platform applies the appropriate rate during present value calculations and automatically recalculates when rates are updated due to remeasurement events or lease modifications.