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Rate Implicit In The Lease:
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The rate implicit in the lease is the discount rate that causes the aggregate present value of the lease payments and unguaranteed residual value to equal the sum of the fair value of the underlying asset and any initial direct costs of the lessor.
The calculator uses the IRR (Internal Rate of Return) principle:
Where:
Explanation: The implicit rate is solved iteratively to find the discount rate that equates the present value of lease payments to the lease liability.
Details: Calculating the implicit rate is crucial for lease accounting under IFRS 16 and ASC 842, as it determines the interest expense and lease liability amortization over the lease term.
Tips: Enter the lease liability (present value), periodic lease payment amount, and number of payment periods. All values must be positive numbers.
Q1: What is the difference between implicit rate and incremental borrowing rate?
A: Implicit rate is specific to the lease and known to the lessor, while incremental borrowing rate is the rate the lessee would pay to borrow similar funds.
Q2: When is the implicit rate not readily determinable?
A: When the lessee cannot reliably determine the implicit rate, they must use their incremental borrowing rate.
Q3: How does residual value affect the implicit rate?
A: Higher residual values typically result in lower implicit rates, as less of the asset's value needs to be recovered through lease payments.
Q4: Can the implicit rate change during the lease term?
A: Generally, the implicit rate remains constant unless there is a lease modification that changes the fundamental terms.
Q5: What are typical implicit rate ranges?
A: Implicit rates vary by asset type, credit quality, and market conditions, but typically range from 3% to 12% for commercial leases.