Compounding effect and Incremental borrowing rate: Difference between pages

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The additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.
''Financial reporting - IFRS 16''.


Another example is the compounding effect of growth on growth.  
(IBR).


The lessee's Incremental Borrowing Rate is a key concept in financial reporting for leases under IFRS 16.


'''Example'''


Interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:
The incremental borrowing rate is the rate the lessee would pay to borrow:
*Over a term similar to the lease term
*With a similar security


= (1.06 x 1.06) - 1


= 12.36% for the two year period.
When the interest rate implicit in the lease cannot be determined, the IBR shall be used instead, to discount the related lease liabilities and assets for reporting under IFRS 16.




Without the additional interest on interest, the total interest would have been simply
Note that a lessees's incremental borrowing rate is likely to differ from their existing borrowing rate under other borrowing arrangements.


6% per annum x 2 years


= 12.00%.
==See also==
*[[DIA]]
*[[IFRS 16]]
*[[Incremental]]
*[[Internal rate of return]]
*[[Interest rate implicit in a lease]]
*[[Lease]]




So the compounding effect of interest on interest here
==Other links==
[https://www.treasurers.org/thetreasurer/definitive-guide-to-deriving-ifrs-16-discount-rates Definitive guide to deriving IFRS 16 discount rates: The Treasurer]


= 12.36% - 12.00%
[[Category:Accounting,_tax_and_regulation]]
 
[[Category:Compliance_and_audit]]
= 0.36% over the two year period (= 6% x 6%).
 
 
When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small.
 
When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects quickly become very much larger.
 
 
== See also ==
* [[Compound interest]]
* [[Compounding factor]]
* [[Continuously compounded rate of return]]
* [[Discount]]
 
[[Category:Manage_risks]]

Latest revision as of 14:35, 21 December 2020

Financial reporting - IFRS 16.

(IBR).

The lessee's Incremental Borrowing Rate is a key concept in financial reporting for leases under IFRS 16.


The incremental borrowing rate is the rate the lessee would pay to borrow:

  • Over a term similar to the lease term
  • With a similar security


When the interest rate implicit in the lease cannot be determined, the IBR shall be used instead, to discount the related lease liabilities and assets for reporting under IFRS 16.


Note that a lessees's incremental borrowing rate is likely to differ from their existing borrowing rate under other borrowing arrangements.


See also


Other links

Definitive guide to deriving IFRS 16 discount rates: The Treasurer

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