THE PROBLEM:
A publicly traded clinical stage biotech company needed to understand the correct implied discount rate for a lease agreement in accordance with ASC 842 rules.
THE SOLUTION:
ASC 842 has specific rules relating to leases, including guidance on lease classification (operating versus financial) and how to discount a lessee’s lease payments to arrive at an appropriate present value amount.
RNA conducted an analysis to find an incremental borrowing rate (“IBR”) that suited the company’s profile. In this case, the IBR will serve as the discount rate when performing a present value calculation. The present value of the lease agreement is needed in order to determine the fair value of the company’s liability under ASC 842.
To start, we analyzed comparable venture debt financings for companies in a similar stage of the development lifecycle to that of the company. These venture deals included ranges for lease term, principal amount, interest rate, warrant coverage, closing fees, and more.
RNA made adjustments to each comparable venture debt deal’s base interest rate for term, financing initiation timing (relative to the valuation date), and for deal specific warrant coverage and closing fees to estimate a normalized comparable interest rate on a standard term loan equal to the company’s lease term.
After careful consideration, RNA was able to select an appropriate IBR that matched the company’s risk profile and the term of the lease.
