When the incremental borrowing rate stops being incremental
How stale group rates creep into HKFRS 16 liabilities — and what auditors look for when challenging them.
Many Hong Kong groups set a handful of incremental borrowing rates by currency and tenor, then reuse them for years. That habit is understandable when treasury already publishes funding curves — and it becomes a finding when those curves no longer resemble what the entity would pay to borrow for a similar secured asset.
What we test in a lease accounting audit
We ask for the memo that links each rate to observable inputs: recent loan agreements, broker quotes, or a documented spread over a reference curve. If the memo is older than the leases originated in the period, we expect a refresh analysis — even when the conclusion is “no change.”
Common weak spots
- Using a parent’s unsecured bond yield for a subsidiary that only borrows secured against property
- Applying a five-year rate to a fifteen-year ground lease without explaining the long tenor adjustment
- Leaving COVID-era elevated spreads in place after funding costs have fallen
A practical year-end habit
Quarterly, have treasury initial a one-page confirmation that published rates remain appropriate. Auditors prefer a short contemporary note over a polished policy that was last touched at transition.