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Calculating Separate Incremental Borrowing Rates for Different Classes of Leased Assets

To comply with Governmental Accounting Standards Board (GASB) Statement No. 87 “Leases” (GASB-87), you will likely need to determine the incremental borrowing rate (IBR) of at least one of your leases. Read our full guide to incremental borrowing here.

At DebtBook, we’ve had many ask the following questions when discussing the IBR:

Do I need to calculate separate incremental borrowing rates for each different class of leased assets?

Because banks theoretically adjust their loan pricing based on the quality and character of the underlying security for the loan (which is typically the asset being financed), GASB-87 contemplates the possibility of calculating a separate incremental borrowing rate for each individual lease based on the nature of the underlying leased asset.

Many governmental entities and nonprofits, however, often bundle various assets together and finance them on an unsecured basis in a single transaction using their most efficient, lowest cost financing option. For local governments, for example, that may be a general obligation bond backed by their full faith and credit. For nonprofit universities or schools, that may be a general revenue bond payable from all available revenues.

When that bundled financing approach is possible, we believe calculating a single incremental borrowing rate across all asset classes using the entity’s lowest cost of funds is a reasonable approach and an acceptable basis for performing your GASB-related calculations.

This is the approach we have taken in DebtBook’s Incremental Borrowing Rate Template, which is available for our clients’ use. While DebtBook has vetted this approach and our template’s calculations with our internal accountants, external accounting consultants, and several commercial lenders, each client will need to consult with their own accountants and advisors when establishing its incremental borrowing rate (or rates) in accordance with GASB standards.

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