Demystifying the Incremental Borrowing Rate

In February 2016, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“ASU”) 2016-02, which provided the finalized standards related to lease accounting under Accounting Standards Codification Topic 842, Leases (“ASC 842”). Subsequent Accounting Standards Updates have been issued in order to provide additional clarity on specific issues pertaining to lease reporting, which are beyond the scope of this article. ASC 842 pertains to both lessors and lessees, but valuation requirements resulting from the recently implemented standard mostly impacts lessees. Therefore, this article will be focused primarily on valuation issues which are relevant to lessees.