Lease example with quarterly payments

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daisystar88
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Joined: 24 Oct 2021, 14:51

Lease example with quarterly payments

Post by daisystar88 »

Hi,

I have a specific question about one of the IFRS 16 posts on this forum: https://ifrscommunity.com/knowledge-bas ... of-leases/ The author of this post has kindly provided an Excel example that shows how to measure a lease with quarterly payments https://ifrscommunity.com/wp-content/up ... ments.xlsx

The example seems to be using the daily compounding interest method. I'm a bit concerned that the discount factor used in the example is still based on the annual interest of 5%. From recollection of my financial knowledge, it appears to me that the daily interest (ie. 5% / 365) would be more appropriate to use, for consistency with the daily compounding interest method.

I would appreciate it a lot if the author of that post can revisit this example and anyone please correct me if I'm wrong.

Cheers,

Daisy
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Marek Muc
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Re: Lease example with quarterly payments

Post by Marek Muc »

can you please copy-paste here the formula that you think uses daily compounding?
daisystar88
Posts: 4
Joined: 24 Oct 2021, 14:51

Re: Lease example with quarterly payments

Post by daisystar88 »

Hi Marek,

The first formula in the Excel document under the column "Discount factor" is this:

=1/(1+$E$16)^((C27-$A$15)/365)

$E$16 = 5% per annum
C27 = 4/1/2001
$A$15 = 1/1/2001

I was thinking whether the formula should have been = 1/(1+$E$16/365)^((C27-$A$15)/365)
daisystar88
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Joined: 24 Oct 2021, 14:51

Re: Lease example with quarterly payments

Post by daisystar88 »

[EDIT:link removed]

I also find the above link which provides a formula that's similar to my approach.
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Marek Muc
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Re: Lease example with quarterly payments

Post by Marek Muc »

daisystar88 wrote: 25 Oct 2021, 00:44 The first formula in the Excel document under the column "Discount factor" is this:

=1/(1+$E$16)^((C27-$A$15)/365)

$E$16 = 5% per annum
C27 = 4/1/2001
$A$15 = 1/1/2001
So this uses daily compounding in your opinion?
daisystar88
Posts: 4
Joined: 24 Oct 2021, 14:51

Re: Lease example with quarterly payments

Post by daisystar88 »

Hi Mark,

My perception is it's trying to use daily compounding. Please correct me if I was wrong. If it does use daily compounding, I think the interest rate used should also be a daily one (instead of an annual one)!

Cheers,

Daisy
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Marek Muc
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Re: Lease example with quarterly payments

Post by Marek Muc »

it uses annual compounding

see this comparison:
daily compound.JPG
picture credits:
https://www.educba.com/daily-compound-interest-formula/
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