How is the discount rate for lease liabilities determined under IFRS 16?

Core rule Under IFRS 16, the lease liability is discounted using the interest rate implicit in the lease (IRIL); only when that rate cannot be readily determined does the lessee use its incremental borrowing rate (IBR) — the rate it would pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of comparable value in a similar economic environment (IFRS 16.26). How it works - Priority: implicit rate first. The lessee must first attempt to determine the IRIL — the rate that equates the present value of lease payments and unguaranteed residual value to the fair value of the underlying asset plus any initial direct costs of the lessor (IFRS 16 Appendix A). In practice, lessees rarely have access to the lessor's residual value assumptions, so IRIL is seldom "readily determinable," and the IBR becomes the default rate. - IBR definition and key inputs. The IBR reflects: (1) what the lessee would pay — not a risk-free rate; (2) borrowing (secured debt), not equity returns; (3) a term matching the lease term as defined under IFRS 16.19; (4) an amount equal to the ROU asset value; and (5) the lessee's specific credit quality and econo

How should a lessee determine the IBR for a foreign-currency lease in a high-inflation jurisdiction under IFRS 16?

mic environment at the commencement date (IFRS 16.26). - Building the IBR in practice. A common constructive approach starts with an observable reference rate (e.g., mid-swap rate, government bond yield, or quoted bank lending rate for the relevant currency and tenor), then layers on a credit spread reflecting the lessee's secured borrowing cost, and adjusts for any currency, jurisdiction, or collateral differences. The IBR is determined at the lease commencement date and is not subsequently remeasured unless a lease modification or reassessment event occurs (IFRS 16.45). - Reassessment triggers. If a lease is modified (IFRS 16.44–45), the lease term is reassessed (IFRS 16.20), or variable payments are revised, the lessee remeasures the lease liability using a revised IBR at the reassessment date — not the original commencement-date rate. - Practical expedient for portfolio. IFRS 16.B1 permits the IBR to be applied on a portfolio basis for leases with reasonably similar characteristics (asset class, tenor, economic environment), reducing the burden of lease-by-lease rate derivation. - Disclosure. Lessees must disclose the weighted-average IBR applied to new leases reco

When a lease term is reassessed under IFRS 16.20, how is the revised IBR calculated and what is the journal entry for the remeasurement?

gnised during the period and the carrying amount of lease liabilities by maturity band (IFRS 16.58–59), enabling users to assess the rate sensitivity of reported liabilities. Practical example A lessee enters a 5-year office lease on 1 January 20X1. Annual payments of €100,000 are due in arrears. The IRIL cannot be readily determined. The lessee's treasury team derives an IBR of 4.5% for a 5-year EUR-denominated secured borrowing. Present value of lease payments = €100,000 × annuity factor (4.5%, 5 years) = €100,000 × 4.3900 = €439,000 (rounded). At commencement (1 Jan 20X1): | Account | Dr (€) | Cr (€) | |---|---|---| | Right-of-use asset | 439,000 | | | Lease liability | | 439,000 | End of Year 1 — interest unwinding and payment: | Account | Dr (€) | Cr (€) | |---|---|---| | Finance cost (P&L) | 19,755 | | | Lease liability | | 19,755 | | Lease liability | 100,000 | | | Cash | | 100,000 | Closing lease liability = €439,000 + €19,755 − €100,000 = €358,755. Common pitfalls - Using an unsecured or group-level rate. The IBR must reflect secured borrowing at the individual entity level. Applying a parent company's unsecured bond yield — a frequent shortcut — overstates th

Can a lessee use a risk-free rate as a practical expedient instead of the IBR, and if so, under what conditions does IFRS 16 permit this?

e discount rate, understates the lease liability, and invites auditor challenge. - Freezing the IBR on reassessment. When a lease term is extended or a modification is treated as a new lease, the liability must be remeasured at the current IBR, not the original rate. Failing to update is a common audit finding, particularly where rates have moved materially. - Ignoring currency and jurisdiction. The IBR must reflect the currency in which lease payments are denominated and the lessee's local economic environment. Using a USD IBR for a EUR-denominated lease, or a headquarter-country rate for a foreign subsidiary, produces a systematically misstated discount rate. Key paragraphs to know - IFRS 16.26 — Definition of IBR and the hierarchy (IRIL first, then IBR). - IFRS 16 Appendix A — Definition of the interest rate implicit in the lease and incremental borrowing rate. - IFRS 16.45(c) — Requirement to use a revised IBR when remeasuring the lease liability on reassessment of the lease term. - IFRS 16.B1 — Portfolio practical expedient permitting a single IBR across a group of leases. - IFRS 16.58–59 — Disclosure requirements including weighted-average IBR and maturity analys

IFRS 16 Discount Rate — IBR

IFRS 16 Discount — Core Rule

Under IFRS 16, the lease liability is discounted using the interest rate implicit in the lease (IRIL); only when that rate cannot be readily determined does the lessee use its incremental borrowing rate (IBR) — the rate it would pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of comparable value in a similar economic environment (IFRS 16.26).

How IFRS 16 Discount Works

Priority: implicit rate first. The lessee must first attempt to determine the IRIL — the rate that equates the present value of lease payments and unguaranteed residual value to the fair value of the underlying asset plus any initial direct costs of the lessor (IFRS 16 Appendix A). In practice, lessees rarely have access to the lessor's residual value assumptions, so IRIL is seldom "readily determinable," and the IBR becomes the default rate.

IBR definition and key inputs. The IBR reflects: (1) what the lessee would pay — not a risk-free rate; (2) borrowing (secured debt), not equity returns; (3) a term matching the lease term as defined under IFRS 16.19; (4) an amount equal to the ROU asset value; and (5) the lessee's specific credit quality and economic environment at the commencement date (IFRS 16.26).