Incremental borrowing rate (IBR)
The rate the lessee would have to pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.
Definition
The incremental borrowing rate (IBR) is the rate the lessee would pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. It is used when the implicit rate in the lease cannot be readily determined, which is almost always the case for lessees. IFRS 16 names the IBR as the fallback; amended FRS 102 lets the lessee choose, lease by lease, between the IBR and the obtainable borrowing rate, whose definition does not specify the asset, security or economic-environment qualifiers that appear in the IBR definition.
Why it matters
The IBR is the most commonly used discount rate in practice. It requires documented professional judgement taking into account the lessee's credit quality, the lease term, the currency, and the nature of the asset. Auditors regularly challenge IBR determinations.
In AuditLease
AuditLease stores the IBR for each lease and the create form asks the user to document the basis for the rate. The statutory accounts note counts the leases with a rate rationale and shows one representative rationale. The borrowing rate suggestion panel can suggest a starting point from a benchmark rate plus your entity credit spread.
Related terms
Official sources
Put this into practice with AuditLease
AuditLease handles IFRS 16 and FRS 102 lease calculations, statutory note generation, journal entries, and audit evidence, so your team spends less time on spreadsheets and more time on judgements.
This definition is for general information only and is not accounting or legal advice. Definitions are based on IFRS 16, FRS 102, and associated guidance published by the IFRS Foundation and the Financial Reporting Council. Users should refer to the applicable accounting standards and their professional advisers for judgement-specific matters.