Alvarez & Marsal debuts LeaseSCRE tool for lease accounting
By Michael Cohn
Alvarez & Marsal, a global professional services firm, has introduced LeaseSCRE, a web-based tool that employs machine learning technology to estimate an incremental borrowing rate curve to help companies adjust to the new lease accounting standard.
LeaseSCRE offers a way to estimate the discount rates necessary to meet the new lease accounting requirements under the Financial Accounting Standards Board’s Accounting Standards Codification 842: Leases (ASC 842).
Under the new leases standard, companies need to record on their balance sheet the present value of future lease payments for finance leases and operating leases longer than a year. The lease payments are supposed to be discounted at a collateralized incremental borrowing rate, or IBR, upon the commencement of the lease, as well as subsequent financial statement reporting dates, and certain remeasurement events.
The new lease accounting standard defines the IBR as “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.” But A&M pointed out that many companies don’t know their IBR if they didn’t borrow on a collateralized basis or carry debt with terms similar to their lease arrangements. On top of that, developing an IBR methodology and calculating the IBR requires significant internal time and resources.
Instead, LeaseSCRE automates the process, helping estimate credit ratings to derive the related IBR.
“Companies have deployed significant resources to classify and organize their lease portfolios,” said Chandu Chilakapati, a managing director of A&M’s Valuation practice, in a statement. “Despite all the resources spent on the accounting, companies still require the incremental borrowing rate to determine the present value of lease liabilities. The solution is LeaseSCRE. It generates an estimated credit rating using a machine learning based model that processes basic company and sector financial data and returns a rating-based IBR curve.”
LeaseSCRE relies on market-traded credit default swaps to get an estimated rating-specific borrowing rate that’s then adjusted with a collateral spread. It comes up with a rating-specific collateralized IBR curve to allow businesses to adjust for company- or lease-specific items and value all their leases.