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Hi Guys,
I’ve come across a problem whilst studying that I just can’t seem to get to the bottom of.
I was looking at it in relation to IAS 17 and it is in regards to calculating the interest rate implicit on a lease.
For Example:-
We take a lease out on a fixed asset at a FV of £2,000,000
We pay back in 5 instalments at £500,000Total Interest is £500,000 which is an interest rate of 25% over the course of the loan however how would I take the 25% and ascertain the annual interest rate implicit?
I think i’ve just had a mind numb and i’m sure there will be a straight forward answer.
Cheers,
I have already answered this! The present values of all the payments should equal the fair value of the asset. Look at the cumulative discount factors for a variety of rates. Multiply these various factors by the 500,000 until you find the rate which gives a close approximation to the fair value of the asset. That then is the implicit interest rate within the lease.
There is an example of this in the P2 course notes in the chapter on leasing
Ok?
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