IFRS 16 Leases—Incremental borrowing rate (Agenda Paper 8)

Date recorded:


In its June 2019 meeting, the Committee discussed 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 Committee published a tentative agenda decision.

Some of the respondents disagreed with the Committee's conclusion. They stated that the requirements in IFRS 16 provide a sufficient basis for the Committee to conclude that a lessee's incremental borrowing rate must reflect the payment profile of the lease.

Staff analysis

The respondents considered IFRS 16:BC162, which states that the lessee's incremental borrowing rate takes into account the terms and conditions of the lease, and so the payment profile should be reflected. They also state that the pricing of the contract is affected by the payment profile and the terms 'similar term' and 'similar economic environment' in the definition of lessee's incremental borrowing rate include the consideration of payment profile.

The staff continue to hold the view that IFRS 16 itself 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. The staff also think that IFRS 16:BC162 does not introduce additional requirements to reflect all terms and conditions of a lease (specifically the payment profile) when determining the incremental borrowing rate. By interpreting the terms 'similar term' and 'similar economic environment', the definition does not require a lessee to reflect the payment profile of the lease in determining that rate.

Staff recommendation

The staff recommend finalising the agenda decision subject to certain editorial changes.


There were different views among Committee members regarding this topic. Some Committee members suggested including in the agenda decision that determining the incremental borrowing rate is not an exact science and involves estimates. A Committee member pointed out that he heard statements from some entities that they would not consider the payment profile in determining the incremental borrowing rate after reading the agenda decision. He was concerned about this as IFRS 16 is principle-based and the 'payment profile' has to be considered in determining incremental borrowing rate even if it is not specifically stated in the Standard.

Some Committee members agreed with the suggestion of one of the respondents to the tentative agenda decision to add the following to the agenda decision: 'However, the Committee observed that, in applying judgement in determining its incremental borrowing rate as defined in IFRS 16, it would be consistent with the Board's objective when developing the definition of incremental borrowing rate for a lessee to refer as a starting point to a readily observable rate for a loan with a similar payment profile to that of the lease' (emphasis added). This was a meaningful improvement to the agenda decision to better explain the application of the paragraphs based on the Board's objective. It would also reiterate that it is not an accounting policy choice. As there are many factors affecting the determination of the incremental borrowing rate and IFRS 16 is a new Standard, most Committee members did not favour standard-setting at this stage. A Committee member pointed out that if many constituents read the agenda decision as an accounting policy choice, he would suggest a narrow and focused amendment to IFRS 16 to add the 'timing of lease payment' in the definition of the incremental borrowing rate.

The Committee decided, by a majority of votes, to finalise the agenda decision, including the agreed addition discussed in the meeting.


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