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Logic behind IRR being Interest Rate
Accountancy
Hi sir, hope you're well Why do we take IRR as the discount rate? Since the lessor is essentially the financer here, wouldn't they prefer to generally keep a higher interest rate? Why do we deem IRR as the lessor's interest rate? Thanks Video Details ------------- P1 - Accounting Standards - CA Inter (New) AS 19 #9. Accounting for Finance Lease in the Books of Lessee (Illustration 1): Part 4
Answers (1)
When you borrow money from bank, the bank earns interest by charging a specific interest rate say 10%. That 10% becomes the cost for the borrower and borrower accounts for 10% as interest expense. In leases which are in the nature of financing, the finance cost to lessee is nothing but what is earned by the lessor. If the lessee knows that rate, it will be considered for accounting. But in many cases, it might be difficult for lessee to determine this and hence incremental borrowing rate is considered.
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