AASB 16 Lease accounting  – which discount rate?

CaseWareAccounting Standards, Carmen Ridley, CaseWare News, Financial Reporting

What is an appropriate discount rate for the calculation of lease liabilities?

AASB 16 requires that most leases are brought on the balance sheet from 1 January 2019. I have been asked many times about the appropriate discount rate for the calculation of lease liabilities.

Ideally, all leases would contain an implicit interest rate and then the answer is obvious since AASB 16 tells us to use this rate where possible.

What about where the lease does not contain an implicit interest rate?

We may not be able to determine the implicit rate since it requires knowledge of the lessor’s costs in relation to the lease and unless the lessor is a related party then this information is not likely to be readily provided.

If we do not have the rate implicit in the lease, then AASB 16 requires a lessee to use its incremental borrowing rate, i.e. “ the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right of use asset in a similar economic environment.”

Perhaps the Indicator Lending Rates could apply?

If an entity has an existing relationship with a financial institution and current lending, then they may be able to obtain their incremental borrowing rate. However, if an entity does not have any existing borrowings, then a place to start could be the Indicator Lending Rates which are published on the RBA website (https://www.rba.gov.au/statistics/tables/xls/f05hist.xls?v=2018-08-21-11-13-36).   Entities would have to determine an appropriate margin to be added to the Indicator Lending Rate to take account the risk of the entity as well as the nature of the asset being leased and provide justification for the rate used.

If you have any questions on the new lease accounting regime, please contact Carmen Ridley on cridley@afrs.com.au