Implicit Rate: the interest rate the lessor is charging the lessee. It is referred to as the implicit rate because it is not usually specified, or explicit, in the lease agreement. The rate implicit in a lease is the rate that at any given date causes the aggregate present value of:
- The lease payments and
- The amount the lessor expects to derive from the underlying asset at the end of the lease term to equal the sum of both:
- The fair value of the underlying asset minus any related investment tax credits retained and expected to be realized by lessor and
- Any deferred initial direct costs of the lessor.
This formula is a representation of the definition of the implicit rate:
For more help, check out LeaseQuery's free implicit rate calculator.