ASC 842-10 — Glossary
Discount Rate for the Lease
For a lessee, the discount rate for the lease is the rate implicit in the lease unless that rate cannot be readily determined. In that case, the lessee is required to use its incremental borrowing rate.
For a lessor, the discount rate for the lease is the rate implicit in the lease.
Incremental Borrowing Rate
The rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Initial Direct Costs
Incremental costs of a lease that would not have been incurred if the lease had not been obtained.
Rate Implicit in the Lease
The rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that a lessor expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized by the lessor and (2) any deferred initial direct costs of the lessor. However, if the rate determined in accordance with the preceding sentence is less than zero, a rate implicit in the lease of zero shall be used.
ASC 842-10-25-4 states, in part, that “a lessor shall assume that no initial direct costs will be deferred if, at the commencement date, the fair value of the underlying asset is different from its carrying amount.” Therefore, in a sales-type lease, initial direct costs will be recognized as an expense at lease commencement unless no selling profit or loss is recognized upon the derecognition of the leased asset.