IBR vs Implicit Rate vs Effective Rate - Product Advisory

June 2016

LeaseAccelerator is providing the following Product Feature Advisory to all clients.

The LeaseAccelerator Accounting sub-system is designed to apply ASC840, IAS17, ASC842 and IFRS16 Accounting standards.  As such, the following business rule is inherent in the application for all standards:

• Based on FASB/IAS definition of the Rate Implicit in the Lease⁽¹⁾, LeaseAccelerator assumes that Lessees will apply the Default IBR set up through your configuration as the discount rate.  This assumption is made based on our conclusion that the Lessee would have to be explicitly provided the information below from the Lessor in order to calculate the rate implicit in the lease.  We deem this unlikely. 

  • ASC840 and IAS17: Lessor profit and any investment tax credit retained by the lessor and expected to be realized by him

  • ASC842 and IFRS16: any related investment tax credit retained and expected to be realized by the lessor and any deferred initial direct costs of the lessor.

• Clients however, have flexibility to set a different discount rate for each individual Deal through either the Bulk Import or the UI.  (The discount rate is referred to as the IBR within LeaseAccelerator)

  • Clients may use this flexibility to input the Rate Implicit in the Lease (if known) in order to comply with the accounting standards. 

    • ASC840 requires the lessee to use the lesser of the Rate Implicit in the lease (if known) or the IBR. 

    • IAS17, ASC842, IFRS16 require the use of the Rate Implicit in the lease, if known.

  • ASC840 and IAS17 exception: The Total Lease Liability and ROU Asset Value at commencement cannot exceed the FMV (or OEC in LeaseAccelerator) of the equipment.  

    • Therefore, if the PV of the Liability using the IBR is greater than the OEC, then an effective rate is to be used.  The effective rate is calculated as the rate where the PV of the total Lease Liability (including any Purchase Option Liability and/or Guaranteed Residual Liability) equals the OEC.

      • Clients can determine this within LeaseAccelerator by reviewing the Total Lease Liability at Commencement using the IBR versus the OEC, by generating an Accounting Workbook report for the lease schedule in question

      • If the Total Lease Liability is greater than the OEC, clients are advised to manually calculate the effective rate, re-classify and re-book the lease in order to comply with ASC840 or IAS17

    • In a Future Release, LeaseAccelerator will automatically test the PV using the IBR vs the OEC and apply the Effective Rate as needed.

Note (1):

ASC840 Definition: Interest Rate Implicit in the Lease

The discount rate that causes the aggregate present value at the beginning of the lease term of the minimum lease payments (as described in paragraph 840-10-25-4), excluding that portion of the payments representing executory costs to be paid by the lessor, together with any profit thereon and the unguaranteed residual value, accruing to the benefit of the lessor to be equal to the fair value of the leased property to the lessor at lease inception, minus any investment tax credit retained by the lessor and expected to be realized by him.  If the lessor is not entitled to any excess of the amount realized on disposition of the property over a guaranteed amount, no unguaranteed residual value would accrue to its benefit.

ASC842 Definition: Rate Implicit in the Lease

The rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that a lessor expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized by the lessor and (2) any deferred initial direct costs of the lessor.