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IFRS 16 — Incremental borrowing rate

Date recorded:


The Committee received a submission about whether a lessee’s incremental borrowing rate must reflect the interest rate in a loan with both a similar maturity to the lease and a similar payment profile to the lease payments. The submitter points out that different interest rates are charged for amortising loans and bullet repayment loans with the same maturity and asks if the incremental borrowing rate must also reflect the payment pattern.

Staff analysis

The staff analyse that IFRS 16 does not explicitly require a lessee to determine its incremental borrowing rate to reflect the interest rate in a loan with a similar payment profile to the lease payments. Nonetheless, the staff observe that, in applying judgement in determining its incremental borrowing rate as defined in IFRS 16, a lessee might often refer as a starting point to a readily observable rate for a loan with a similar payment profile to that of the lease.  IFRS 16 states that the rate used shall take into account the terms and conditions of the lease. Hence, the staff think the definition of incremental borrowing rate provides an adequate basis for a lessee to determine the rates, while the submitter is asking for a degree of precision in applying the definition that goes beyond the definition itself. The staff acknowledge that judgement is required in estimating the incremental borrowing rate and decides not to include application guidance in IFRS 16 on this topic.

Staff recommendation

The staff recommended that a tentative agenda decision be published stating that the Committee concluded that the principles and requirements in IFRS 16 provide an adequate basis for a lessee to determine its incremental borrowing rate.


A few Committee members commented that the tentative agenda decision is too open and not specific in pinpointing the economics of the lease. Although IFRS 16 does not state explicitly that the interest rate should reflect the similar payment profile, these Committee members considered IFRS 16 is clear that the incremental borrowing rate is a lease specific rate which reflects how the contract is priced, and as such the payment profile should always be taken into consideration. A few of them did not agree with the tentative agenda decision and consider it should state that the incremental borrowing rate should reflect the payment profile.

The Chair responded that the staff did not want to take the tentative Agenda Decision too far. Some Committee members agreed with that view and considered the staff analysis and the tentative agenda decision align with the wording in IFRS 16. They were worried that if the tentative agenda decision has explained too much about practice, it will result in pushing too far on the implementation on the newly issued standard. It is now too early to give prescriptive guidance when the standard has been effective for only a few months. They suggested the Board could publish education materials which could provide sufficient guidance.

In terms of the wording, one Committee member suggested to modify the sentence and state clearly "the definition of incremental borrowing rate in IFRS 16 does not explicitly require………"

The Committee decided, by a majority of votes, not to add the matter to the standard-setting and to adopt the tentative agenda decision with the above-mentioned edition.

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