Determine the IBR for IFRS 16 and ASC 842 lease accounting compliance.
Yield on government bonds with a similar term to the lease.
Spread derived from the company's credit rating or recent unsecured borrowing.
Adjustment for the secured nature of the lease (usually negative).
Premium for asset liquidity or specific lease terms.
Base Reference Rate:
Total Spreads & Adjustments:
Estimated Incremental Borrowing Rate:
function calculateIBR() {
// Get input values using var
var riskFreeInput = document.getElementById('riskFreeRate');
var spreadInput = document.getElementById('creditSpread');
var securityInput = document.getElementById('securityAdjustment');
var assetInput = document.getElementById('assetSpecificAdjustment');
// Parse floats, default to 0 if empty
var riskFree = parseFloat(riskFreeInput.value);
var spread = parseFloat(spreadInput.value);
var security = parseFloat(securityInput.value);
var asset = parseFloat(assetInput.value);
// Validation: Check if inputs are numbers (allow 0, but handle NaN)
if (isNaN(riskFree)) riskFree = 0;
if (isNaN(spread)) spread = 0;
if (isNaN(security)) security = 0;
if (isNaN(asset)) asset = 0;
// Core Calculation Logic: Summation approach (Build-Up Method)
var totalAdjustments = spread + security + asset;
var finalIBR = riskFree + totalAdjustments;
// Avoid negative interest rates display unless intentional (though theoretically possible)
// We will display strictly what is calculated.
// Update UI
var resultContainer = document.getElementById('ibr-result-container');
var resBase = document.getElementById('res-base');
var resAdj = document.getElementById('res-adj');
var resFinal = document.getElementById('res-final');
resBase.innerHTML = riskFree.toFixed(2) + '%';
// Format adjustments with + sign if positive
var adjSign = totalAdjustments >= 0 ? '+' : ";
resAdj.innerHTML = adjSign + totalAdjustments.toFixed(2) + '%';
resFinal.innerHTML = finalIBR.toFixed(2) + '%';
// Show results
resultContainer.style.display = 'block';
}
What is the Incremental Borrowing Rate (IBR)?
The Incremental Borrowing Rate (IBR) is a critical financial metric defined under accounting standards such as IFRS 16 and ASC 842. It represents the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.
When the implicit interest rate in a lease cannot be readily determined, the IBR must be used to measure the present value of future lease payments. This calculation directly affects the size of the lease liability and the right-of-use (ROU) asset recorded on the balance sheet.
The Build-Up Approach Calculation
Since the IBR is a theoretical rate constructed for accounting purposes, it is often calculated using a "bottom-up" or "build-up" approach. This method starts with a risk-free baseline and adds various risk premiums relevant to the specific company and asset.
This is the baseline yield for a risk-free investment, typically a government bond (e.g., US Treasury, UK Gilt, or German Bund) matching the currency and the term of the lease. For a 5-year lease, one would use the 5-year government bond yield.
2. Credit Spread
This component accounts for the lessee's credit risk. It reflects the premium a lender would charge the company over the risk-free rate for unsecured borrowing. This is often based on the company's credit rating or observed yields on its existing debt.
3. Collateral / Security Adjustment
Because leases are inherently collateralized by the underlying asset (the lessor can repossess the asset if payments stop), the borrowing rate should theoretically be lower than an unsecured loan. This adjustment is typically a negative percentage (e.g., -0.50%) to reflect the reduced risk to the lender.
4. Specific Asset & Environment Adjustments
Final adjustments may be made for the specific nature of the asset (e.g., how liquid it is) or the economic environment if the reference rate does not perfectly align with the lease jurisdiction.
Example Calculation
Consider a company entering a 10-year lease for a warehouse. The components for the IBR calculation might look like this:
10-Year Government Bond Yield: 3.50%
Company Credit Spread (BB Rating): +4.00%
Security Adjustment (Collateralized): -0.50%
Asset Specific Adjustment: +0.10%
Total IBR: 3.50% + 4.00% – 0.50% + 0.10% = 7.10%
This 7.10% rate would then be used to discount the future lease payments to determine the initial lease liability.