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Hello Kim
Can you please explain how lesses’ incremental borrowing rate is different from the discount rate that is implicit in a lease?
Second, do both the above have different impacts when it comes to auditing (e.g different audit procedures)?Thanks & Regards
The rate implicit in a lease is calculated from the lessor’s perspective – it is essentially a measure of the minimum return that the lessor expects to earn on the lease. If stated in the lease contract this is what should be used and the auditor will be able to agree it to the contract.
If not stated in the contract, the lessee will not know what it is – so incremental cost of borrowing will be used instead. Essentially, this is the rate at which the lessee would expect to have to borrow funds for a similar term with similar security on the right-of-use asset. This is a company-specific rate (i.e. specific to the lessee) which will reflect the company’s credit-worthiness (the higher the credit rating, the lower the rate). The auditor would check management’s calculation of incremental borrowing rate for each lease and the reasonableness of assumptions.
I think this is as much as you need to be aware of for AAA.
Thank you so much, Kim. It absolutely enough explained for me to well understand.
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