How Does Your Incremental Borrowing Rate Stack Up With the Market?

As a number that’s voluntary for companies to disclose, there are only select organisations in select sectors that tend to report their incremental borrowing rate (IBR). Given the broad commercial impacts of a business’s IBR, it’s critical that your business ensures it has calculated a current and correct rate. In the absence of public reporting, how can you ensure your IBR calculation methodology and rate is accurate at all times? This article outlines some key considerations for balance sheet strength moving forward.

What’s the best way to calculate your business’s IBR?

When the IFRS 16 transitions took place, businesses needed to define an approach for calculating their IBR. This process should have occurred in collaboration with your external auditors to ensure your methodology was suitable now and into the future. While your company may have arrived at an approach that appears to be working and correct, balance sheet and profit and loss risks are growing as companies and regulators now have almost three years of lease accounting data to scrutinise. Now is an opportune time for companies to review their IBR calculation methodology and rates.

According to Deloitte, there are key factors a business should address as it’s defining an IBR calculation methodology. These factors include:

• Determining an appropriate discount rate for the present value calculation for a lease liability.
• Reviewing current debt financing arrangements and the impacts of future leases on the company’s balance sheet.
• Developing a detailed and repeatable process that includes accurate calculation of discount rates.
• Taking the time to gather and analyse all relevant data, such as asset type and lease term.
• Considering what position to calculate the IBR from on material lease liabilities and seeking expert advice to determine the most suitable approach.

By working through these factors with your external auditor for independent advice, as well as establishing strong systems and processes to gather accurate data (from your business and across your industry), you can ensure your business has a strong IBR calculation methodology.

Understanding the broader market is critical

Given the widespread commercial impacts of IBRs across companies, it’s important to take a broad view and understand the market. Therefore, you shouldn’t calculate your IBR in a vacuum, especially due to the mix of internal and external factors that go into a thorough calculation and modification methodology. By accessing more data sources, you can make sure your IBR is managed for the best outcome of your business. This proactively ensures your rates are accurate and mitigates the risk of needing to make adjustments that have an adverse impact on your balance sheet and borrowing rate. Furthermore, stakeholder perception around how your leasing assets and liabilities compare to the broader market is important as they can affect their perception of your credit worthiness.

Take the guesswork out of your IBR with Quadrent

When managed proactively with strong systems and processes in place, a company can effectively mitigate the financial risks associated with calculating its IBR as part of its broader leasing strategy.

Until now, companies haven’t had a reliable way to benchmark their IBRs against the market, which has driven ongoing ambiguity around the rate and perpetuated the related commercial risks.

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 here to learn more about Quadrent’s lease analytics and IBR benchmarking portal.