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Forensic Accounting

What is Incremental borrowing rate stated in IAS 36 Impairment of asset?


As stated in Appendix A17 in IAS 36 - Impairment of Asset:
"As a starting point in making discount rate estimate, the entity might take into account the following rates:  
a. the entity’s weighted average cost of capital (WACC) determined using techniques such as the Capital Asset Pricing Model;
b. the entity’s incremental borrowing rate; and
c. other market borrowing rates.

So, what is above incremental borrowing rate? and When shoul we use this instead of WACC?

asked Oct 13, 2013 in IAS 36 - Impairment of Assets by anonymous

1 Answer

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Best answer
Incremental borrowing rate is the rate at which a company is able to borrow money to finance a similar asset with similar security / terms. Incremental borrowing rate can be different from the average borrowing rate of a company as Incremental borrowing rate will depend on the credit risk of the company at the time of lending.
A company's WACC may not be the most suitable discount rate where the company's capital structure is not similar to other market participants. In other words, when the risk of the cash flows of the asset/CGU is significantly different from the risk reflected in the company-wide WACC, you should opt Incremental borrowing rate over WACC.
answered Oct 13, 2013 by JohnK Level 1 Member (2,050 points)
Thank u very much.



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