INSTRUCTIONS TO CALCULATE INTEREST RATE IMPLICIT IN THE LEASE, USING SOLVER

• In the "Data" menu, select "Solver"

• In the "Set Objective" box, enter the reference for the cell that contains the total of the discounted amounts (E16 in
the table)
In the "To:" "Value Of" box, type the fair value (100,000)
In the "By Changing Variable Cells" box, enter the reference for the interest value as this is the value you want to
adjust. (C3 in the table).
Select "Solve"
The Interest rate implicit in the lease should have changed 10.36%. This is the interest rate implicit in the lease.
The present value of the minimum lease payments is the sum of the discounted cash flows excluding the discounted
unguaranteed residual value as this is not paid by the lessee. See the formula in cell E19.

© 2016 For information contact Deloitte Touche Tohmatsu Limited 1

Fair value of the asset 100,000 Note:
The interest r
Interest rate implicit in the lease 10.36%
calculated usi
First year discount variable 110.36% that the calcu
only - Learne
instruction of
Years Amounts Discount Discounted amounts the in depth u
variable the scope of t
consider facts
whether or no
Minimum lease payments 2016 25,000 1.1036 22,652 implicit in the
2017 25,000 1.2180 20,525 borrowing rat
value of lease
2018 25,000 1.3443 18,597
2019 25,000 1.4836 16,851
2020 25,000 1.6374 15,268
Unguaranteed residual amount 2020 10,000 1.6374 6,107

Total discounted amount 100,000

Present value of lease payments (sum of E8 to E12) 93,893

Percentage of fair value (93,893 / 100,000) 93.9%

© 2016 For information contact Deloitte Touche Tohmatsu Limited 2

C3: Note:
The interest rate implicit in the lease is calculated using the Solver tool. Please note that the calculation is
for illustration purpose only - Learners may refer to tab 1 for instruction of how to use the Solver tool but the
in depth use of the Solver tool is outside the scope of this e-learning. Learners should consider facts and
circumstances to determine whether or not to calculate the interest rate implicit in the lease or use the
incremental borrowing rate for calculating the present value of lease liability in practice.

© 2016 For information contact Deloitte Touche Tohmatsu Limited 3