Written by Terje Glesaaen
Determine the discount rate for the lease
For IFRS 16, calculating the discount rate and determining the interest rate to be used when discounting leases to determine the lease liability is one of the most important assessments that a lessee must make. Calculation of the discount rate will affect both the size of the debt and the financing costs that can be attributed to the debt.
What should be used to calculate the discount rate according to IFRS 16?
According to IFRS 16 leasing agreement, the implicit interest rate is used to discount the liability if it can be easily determined. If this is not the case, the tenant’s marginal lending rate should be used. The implicit interest rate is determined according to the methodology below.
In most all leasing contracts, the implicit interest rate cannot be easily set, and the marginal lending rate must therefore be estimated. The discount rate is determined on the date the lease was first reported. The interest is then unchanged if there are no special circumstances that cause the interest to change, for example the changed rental period.
What is meant?
The tenant’s marginal loan interest rate refers to the interest rate as:
- The tenant would have paid for financing through loans in the same period and with similar security.
- The interest rate must reflect financing on similar terms with similar security, the company’s credit rating (at subsidiary level) and the economic environment in which the company operates.
What information is needed for calculating the discount rate?
- The length of the rental period
- Type of asset leased
- Details of the economic environment in which the lessee operates
- Tenant’s creditworthiness
- Estimation of the market yield at the inception of the lease for the financing of an asset corresponding to the leased asset
The ShareControl IFRS 16 system guides you through what you should decide on and what data is needed, so that the IFRS 16 calculation is correct and that you can trust the calculation.
The ShareControl IFRS 16 solution also provides a good way to collect, organize and follow up all leasing agreements.
Above all, the solution gives you an overview that gives you full control, as opposed to having no control over outdated or incorrect data. The solution provides management of all the company’s leasing agreements, which provides predictability and even more security. For example, with associated notifications about when and how they must act in accordance with the agreements. The solution extracts important data from the contracts and performs calculations in accordance with IFRS 16.
Another important aspect is that ShareControl IFRS 16 has been developed by auditors and facilitates the audit trail that provides security and easy auditing. Almost everyone who complies with IFRS 16 today has some kind of solution, but many lack a whole from agreement to memorandum. Above all, many have a solution created in Excel. This is certainly not reliable over time. One should find a solution that gives the company full control and is easy to use.