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Yield curves illustrate the expected evolution of interest rates based on maturity, reflecting the return demanded by the market participiants for different terms. Yield curves serve as a comparative measure for assessing financial instruments and  market expectations concerning interest rates, inflation, and economic growth.

Under IFRS 16, incremental borrowing rates are required to depict leases in lessee’s financial statements. Future lease payments must be discounted, using the interest rate implicit in the lease. However, the lessee is typically unaware of this rate, as disclosing it could reveal the lessor's margin. If the implicit interest rate is unavailable, the lessee must instead determine its incremental borrowing rate — i.e., the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.. The interest rate used directly affects the amount of lease liabilities recognized on the balance sheet, as well as the corresponding right of use asset. Thereby, it impacts key financial metrics, particularly EBIT, which serves as a central performance and management indicator for many businesses.

Yield curves and incremental borrowing rates are estimated using established financial methodologies. These estimates are typically based on capital market data, including risk-free interest rates (e.g., swap rates) and credit risk premiums.

For yield curves, continuous curves are modeled from observable market interest rates across various maturities, using techniques such as regression analysis, splines, or bootstrapping. These curves serve as a foundation for deriving interest rates that reflect both term and creditworthiness-specific factors.

Incremental borrowing rates, in accordance with IFRS 16, are derived from the yield curve, incorporating company-specific factors such as credit rating, currency, maturity, and collateralization. The objective is to derive the rate of interest at which the company could borrow comparable financing in the market.

Capital costs are a critical measure for assess the profitability and risk of investments in relation to alternative investment opportunities. They play an essential role in optimizing a company's capital structure and serve as a key benchmark in investment decision-making processes. Additionally, capital costs remain significant in subsequent stages, such as when depicting an executed business combination in a purchase price allocation or conducting impairment tests. Therefore, the accurate calculation of capital costs is essential for various aspects of business management.

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