What’s the correct rate?
IFRS 16 Leases requires lessees to bring most leases onto the balance sheet. The new assets and liabilities are initially measured at the present value of the lease payments. But discounted at what rate?
This question will be at the heart of many transition projects, particularly for lessees. The discount rate affects the amount of the lessee’s lease liabilities – and a host of key financial ratios.
Our publication Leases: Discount rates (PDF 1.5 MB) will help you to determine the appropriate discount rate and to assess how this will affect your financial statements.
The new standard brings forward definitions of discount rates from the current leases standard. But applying these old definitions in the new world of on-balance sheet lease accounting will be tough, especially for lessees. They now need to determine discount rates for most leases previously classified as operating leases.
Systems and process changes may be required to capture and assess the data necessary to comply with the new discount rate requirements. New calculations and review processes will be needed to determine the discount rate and the judgements and assumptions applied will need to be documented.
Ongoing monitoring will be required as estimates may be revised – e.g. if the lease is modified.
The nature and extent of discount rate information required in 2019 will depend on the transition approach chosen – e.g. under a retrospective approach, lessees are required to determine historical discount rates.
Our Leases: Discount rates (PDF 1.5 KB) publication analyses the key considerations when determining the correct discount rate for leases. It includes KPMG’s insight and examples illustrating practical application of the new requirements.
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