Interest rate implicit in the lease
AASB 16 extract
For leases commencing on or after on the AASB 16 Leases (AASB 16) transition date, i.e. 1 July 2019, entities must adopt the interest rate implicit in the lease (IRI) to discount lease payments, where it is readily available.
IRI, as defined at Appendix A of AASB 16, is the rate of interest that causes the present value of (a) the lease payments and (b) the unguaranteed residual value to equal the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor, as show in the following diagram.
To determine the IRI, the lessee must know the lessor’s initial direct costs in establishing the lease and the unguaranteed residual value of the leased asset at the end of the lease. This information is often not available to the lessee.
Lessees should identify whether this information is included in the lease contract. If it is not, then lessees should apply their IBR in measuring the lease liability.
Note 12: Interest rate implicit in the lease
Incremental borrowing rate
A lessee’s IBR, as defined at Appendix A of AASB 16, is the rate of interest that a lessee would have to pay to borrow over a similar term, with a similar security, the funds necessary to obtain an asset of a similar value to the ROU asset in a similar economic environment.
Non-borrowing Commonwealth entities should use the Australian Government’s IBR, based on zero coupon bond parameters. These parameters are issued quarterly by Finance as the table of Leases - zero coupon discount rate. Entities should apply the quarterly parameters that precede the lease commencement date (e.g. for leases commencing 1 October to 31 December 2019, use the 30 September 2019 quarter IBR parameters).
The Simple Lease Calculation tool (available to Commonwealth officials from CBMS GovTEAMS):
- calculates monthly lease balances
- includes an Excel ‘Goalseek’ function to calculate the IBR for each lease, based on the relevant quarterly zero coupon bond parameters.
Commonwealth corporate entities who can borrow to fund their activities should identify their own IBR.
Note 13: Incremental borrowing rate
Non-borrowing Commonwealth entities must use the table of Leases - zero coupon discount rate to calculate their IBR. Commonwealth corporate entities who can borrow to fund their activities must identify their own IBR.
Changes in discount rate
Under paragraph 40 of AASB 16, lessees should only re-measure lease liabilities using a revised discount rate where there is a change in the estimated lease term or a re-assessment of an option to purchase the underlying asset.
Under paragraph 42 of AASB 16, lessees should re-measure lease liabilities using an unchanged discount rate where lease payments have changed due to:
- a change in the estimated residual value guarantee amount payable, or
- an index or a market review.
Worksheet D in Example lease journals illustrates accounting for a re-assessment of the lease term.
Note 14: Changes in discount rate
Lease liability interest expense
In accordance with provisions at section 15 of the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (FRR), Finance has elected not to capitalise lease interest expense under AASB 123 Borrowing Costs (AASB 123).
Under AASB 123:
- borrowing costs may include AASB 16 lease liability interest expenses (see Appendix D of AASB 16: Amendments to AASB 123, paragraph 6(d))
- not-for-profit public sector entities may elect to recognise borrowing costs as an expense when incurred (see AASB 123, paragraph Aus8.1).