Companies should not underestimate the time it will take to determine appropriate incremental borrowing rates. lessee-specific features or factors should be reasonably considered in the assessment of the rates.
The incremental borrowing rate is defined under HKFRS 9 as 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.
Based on its own facts and circumstances, a company should usually consider applying the following adjustments to its general borrowing rate as needed:
Align the duration of the loan to the length of the lease;
Reflect the loan with a collateral similar to the nature and quality of the leased asset;
Reflect the loan amount similar to the value to the right-of-use asset; and
Align the currency of the loan with the currency of the lease payments.
Alternatively, property yields (or rental yields) of the leased assets can be used as a starting point to derive incremental borrowing rates.
In both cases, a systematic process to derive applicable company specific adjustment factors should be in place to determine incremental borrowing rates.
Many listed companies may be lack of necessary third-party data and a systematic process to determine incremental borrowing rates.
Valtech Valuation has been helping our clients for smooth application and compliance of treatment according to the requirements of HKFRS 16.