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Change incremental borrowing rate in asset lease

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Posted on by STP

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The customer will use "Asset leasing" module in D365FO.

There is a lease asset. The customer is a leasee.

They said they will get the interest rate (Incremental borrowing rate) from a bank every year.

The incremental borrowing rate of 1st year = 5%

The incremental borrowing rate of 2nd year = 5.5%

The incremental borrowing rate of 3rd year = 4%

The incremental borrowing rate of 4th year = 4.5%

The incremental borrowing rate of 5th year = 4.8%

Q1. The initial recognition, liability, interest expense, depreciation are posted in the 1st year. How do we update the rate from 5% to 5.5% and post the related entries in 2nd year?

Q2. I generated the depreciation schedule, and find the depreciation schedule is generated by month. How do we set it by year?

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Hi STP,

To answer your first question, according to the accounting standards, a change in the incremental borrowing rate alone does not constitute a lease modification. The user should measure their liability at the incremental borrowing rate active as of the commencement date of the lease and maintain that rate unless there is another event that constitutes a qualifying lease modification.

According to IFRS 16 paragraph 40, the only modification events that would trigger the user to update the rate used to measure the lease liability are 1) a change in the lease term or 2) a change in the assessment of an option to purchase the underlying asset.

According to IFRS 16 paragraph 41, there are other modifications where the user would adjust the lease but maintain the same incremental borrowing rate used to initially discount the lease payments. Such modifications are 1) there is a change in the amounts expected to be payable under a residual value guarantee or 2) there is a change in future lease payments resulting from a change in an index used to determine the payments.

To answer your second question, the asset depreciation schedule will always be generated on a monthly basis. However, if you could use the 'Summarize' parameter on the lease batch creation form to generate the depreciation expense entry for the entire year into 1 annual journal entry:

In the screenshot above, all of the depreciation expense journal entries for the year 2020 will be consolidated into 1 journal entry for each lease posting on the date specified in the 'Summarize journal date' field. So although the schedule shows the depreciation expense monthly, your client is still able to post the depreciation expense annually.

Thanks,

Brian

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