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Alvarez & Marsal Debuts Lease-Accounting Tool

April 08, 2019, 06:00 AM
Filed Under: Company Announcements

Alvarez & Marsal (A&M) announced the launch of LeaseSCRE, a web-based tool that uses machine learning to estimate an incremental borrowing rate (IBR) curve. LeaseSCRE provides companies with a streamlined and efficient mechanism to estimate the discount rates necessary to meet new lease accounting requirements under the Financial Accounting Standards Board's Accounting Standards Codification 842: Leases (ASC 842).

Under the new lease accounting standard, companies must record on their balance sheet the present value of future lease payments for finance leases and operating leases longer than 12 months. The lease payments must be discounted at a collateralized IBR upon lease commencement, 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." However, many companies do not know their IBR if they did not borrow on a collateralized basis or carry debt with terms similar to their lease arrangements. Moreover, developing an IBR methodology and calculating the IBR requires significant internal time and resources.

LeaseSCRE is a secure and efficient alternative. LeaseSCRE costs a fraction of third-party advisory services for IBR methodology and modeling, and with machine learning, it is a more accurate tool for estimating credit ratings to derive the related IBR, the company said.

Chandu Chilakapati, a Managing Director of A&M's Valuation practice, said, "Companies have deployed significant resources to classify and organize their lease portfolios. 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 uses market traded credit default swaps to derive an estimated rating-specific borrowing rate that is then adjusted with a collateral spread. The resulting rating-specific collateralized IBR curve enables companies to adjust for company or lease specific items and value all their leases.

It is priced at $5,000 per valuation date for an unlimited number of leases.

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