IBERSOL | Annual Report 2021

ANNUAL REPORT 2021 thority to use those same deferred tax assets. At the end of each year, a review of the deferred taxes recorded is made, as well as of the unrecognized taxes, which are reduced whenever their future use is no longer probable or recorded, provided that, and to the extent that, it becomes probable the generation of taxable profits in the future/ reversal of taxable temporary differences that allow their recovery. c) Lease term and financing rate increases The Group makes estimates on lease terms and the incremental financing rate. The Group determines the lease term as the non-cancellable period of the lease, taking into account the periods covered by an option to extend the contract if it is reasonable for the Group to exercise it, or any periods covered by an option to ter- minate the contract, if it is reasonably certain that the Group will not exercise it. In determining the lease term, the Group therefore makes a judgment on the relevant factors that create an economic incentive to exercise the renewal or termination (in cases where such options belong to the lessee and the lessor, the Group exercises judgment about the economic incentives for lessor and lessee). See more details in note 2.19. In most leases, the Group is not able to readily determine the interest rate implicit in the contracts, so it considers its incremental financing rate to measure lease liabili- ties. The incremental financing rate is the interest rate that the Group would have to pay to obtain loans of similar terms and guarantees, to acquire an asset identical to the leased asset in a similar economic environment. In this way, the incremental financing rate reflects what the Group would have to pay, which requires an esti- mate when there are no observable rates available (such as in subsidiaries that do not carry out financing operations) or when they need to be adjusted to reflect the terms and conditions of the lease (for example when the contracts are not in the Group’s functional currency). The Group estimates the incremental funding rate us- ing observable information (such as market interest rates) when available, and it is necessary to make some specific estimates based on consultations with funding institutions such as Banks and Investment Funds. The average incremental financing rate used by the Group to discount lease liabilities was 5.12% in Portugal and 5.44% in Spain (5.04% and 5.25%, respectively, in Portugal and Spain as at 31st December 2020. 367