Final answer:
The interest rate used for discounting the present value of lease payments under IFRS is the lessor's implicit rate if known, else the company's incremental borrowing rate. The choice of discount rate includes evaluation of opportunity costs and risk premiums associated with the investment.
Step-by-step explanation:
If a company is determining the present value of the minimum lease payments under a lease, the interest rate to be used as the discount rate according to IFRS is (a) The lessor's implicit interest rate if it is known; otherwise the company's incremental borrowing rate. When the lessor's implicit interest rate is not ascertainable or unknown, the company should then use its own incremental borrowing rate. The incremental borrowing rate is the rate the lessee would have to pay if, instead of leasing, it financed the purchase of an asset with a similar security at the lease commencement date.
In practice, choosing an interest rate for discounting requires consideration of the opportunity cost and a potential risk premium. For example, when placing a present discounted value on a bond, adjustments may be needed if market interest rates change affecting the bond's value. In valuing future payments, an investor might consider an interest rate that includes a reflection of the return on available financial investments and potentially a higher rate if an investment seems particularly risky.