IFRS 16/AASB 16 leases often requires lessees to discount lease payments with an Incremental Borrowing Rate (IBR) in determining its lease liabilities. Depending on facts and circumstances, this requirement is typically on initial recognition of new lease contracts as well as after lease modifications, where the lessee cannot readily determine the interest rate implicit in the lease.
Applying the correct IBRs could have a significant positive impact on key financial ratios. While many organisations merely see an IBR calculation as a compliance item, with careful management and application of an IBR strategy, organisations can position themselves to benefit from the rapidly changing economic environment and optimise their balance sheet and profitability metrics.
The calculation and application of these rates continue to be a challenge for many organisations. IFRS 16/AASB 16 introduces three key considerations for balance sheet reporting – lease payments, lease term and discount rate. For some entities, the discount rate (IBR) is the area where most judgement is required. Careful consideration of an IBR strategy therefore presents an opportunity to better understand the impact of changing IBRs on the balance sheet.
In analysis we have performed with Deloitte on actual IBRs adopted by Australian entities over recent years, we noted that many Australian entities are not proactively updating their IBR when required to do so under the accounting standard, and in so doing are failing to better position their financial metrics and balance sheet outcomes to reflect current economic conditions.
A changing interest rate environment introduces risk to organisations that are not updating their IBR regularly or have an unclear or uncertain calculation process around IBR. With interest rates expected to rise in 2022, there is opportunity to understand the impact that a revised IBR strategy can have on the balance sheet.
Find out how and why you can get ahead by reading our insights here: https://www.quadrent.com.au/incremental-borrowing-rates-market-analysis-and-trends-report
If you’re looking for guidance on managing your IBR, the structure of your leases and whether your lease accounting systems are delivering the strongest commercial results possible for your organisation, click below to learn more about Quadrent’s lease analytics and IBR benchmarking portal.
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