Incremental Borrowing Rate

Definition

The interest rate a lessee would pay to borrow funds on a collateralized basis over a similar term and in a similar economic environment, used to discount future lease payments when the rate implicit in the lease is not readily determinable. Under ASC 842, private companies may elect to use a risk-free rate as a practical expedient in place of the incremental borrowing rate. Selecting an appropriate and well-documented incremental borrowing rate is a critical judgment that affects the carrying value of both the lease liability and right-of-use asset.