FRS 102 Discount Rate (OBR): How to Determine the Right Rate for UK Lease Calculations

Introduction

The discount rate is the single most impactful variable in any lease liability calculation under FRS 102. A 1% change in the rate can shift the present value of lease payments by 5–10%, depending on the lease term. For a typical commercial property lease, that translates to tens of thousands of pounds.

Yet many UK entities treat the discount rate as an afterthought — selecting a round number that "feels about right" or defaulting to whatever rate their auditor used last year. This is a mistake. The rate you choose directly determines the lease liability on your balance sheet, the interest expense in your profit and loss account, and the gearing ratios that may trigger loan covenant breaches.

Under the revised FRS 102 Section 20, effective for accounting periods beginning on or after 1 January 2026, all leases must now be recognised on the balance sheet. The discount rate used to measure these liabilities — called the obtainable borrowing rate (OBR) — deserves careful attention and proper documentation.

This guide explains what the OBR is, how it differs from the IFRS 16 incremental borrowing rate, and provides practical approaches for UK businesses to determine an appropriate rate. Use our free FRS 102 lease liability calculator to model different rate scenarios and see the impact on your numbers.

What Is the Obtainable Borrowing Rate (OBR)

The obtainable borrowing rate is FRS 102's term for the discount rate used to measure lease liabilities. The standard defines it as:

The rate of interest that the entity would have to pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment.

In practice, this means: the rate at which the entity could borrow an amount similar to the total undiscounted lease payments, over a similar term, with similar security.

There are two important points to note about this definition.

The reference borrowing amount is the total undiscounted payments. If you have a 5-year lease with monthly payments of £10,000, the reference amount is £600,000 — the total cash outflow over the lease term. This is a deliberate simplification compared to IFRS 16's approach.

The rate is entity-specific, not market-generic. The OBR should reflect the entity's own credit standing and borrowing capacity. A well-capitalised company with strong banking relationships will have a lower OBR than a highly leveraged startup, even for an identical lease.

The OBR was introduced by the Financial Reporting Council (FRC) as part of the 2024 Periodic Review specifically because the IFRS 16 incremental borrowing rate (IBR) was considered unnecessarily complex for the FRS 102 reporting population — predominantly SMEs and mid-market entities without dedicated treasury functions.

OBR vs IFRS 16 IBR: Key Differences

For entities familiar with IFRS 16, or advisors working across both frameworks, understanding the differences between the OBR and the IBR is essential. While the two rates often produce similar results, the methodology differs in important ways.

The Circularity Problem

The most significant practical difference is the circularity issue. Under IFRS 16, the IBR is used to discount payments to arrive at the present value — but the IBR is itself defined as the rate to borrow an amount equal to the present value. You need the rate to calculate the amount, but you need the amount to determine the rate. In practice, this is resolved through iteration, but it adds complexity.

The FRS 102 OBR avoids this entirely by referencing the total undiscounted payments. You know the amount (sum of all lease payments) before you need to determine the rate. This is a meaningful simplification.

When the Rates Diverge

In most cases, the OBR and IBR for the same lease will be close, because the entity's credit standing and the economic environment are the same factors. However, the rates may diverge when:

• The total undiscounted payments differ significantly from the present value (long-term leases with high discount rates)
• The entity would face different lending terms for different borrowing amounts
• The collateral or security arrangements vary with loan size

For UK entities that report under both FRS 102 (for statutory accounts) and IFRS 16 (for group reporting), these differences should be understood and documented.

How to Determine the OBR: Four Practical Approaches

Determining the OBR requires judgment, but it is not the black-box exercise that some entities fear. There are four practical approaches, listed from most direct to most constructed.

1. Existing Borrowing Facilities

Best for: Entities with recent bank loans, revolving credit facilities, or overdraft agreements.

If the entity has borrowed recently on terms that are similar to the lease in question — similar amount, similar term, similar security — then the rate on that borrowing is a strong starting point for the OBR.

What to look for:

• Term loans with a remaining term similar to the lease term
• Revolving credit facilities where the margin reflects current market conditions
• Overdraft rates (though these are typically floating and short-term, so may need adjustment for longer lease terms)
• Asset finance agreements for equipment similar in value to the leased asset

Adjustments to consider:

• If the existing borrowing is secured on different collateral, adjust for the difference in security
• If the borrowing term differs materially, adjust for the term premium (longer terms generally carry higher rates)
• If the borrowing was arranged some time ago, consider whether the rate still reflects current conditions

2. Bank Quotes

Best for: Entities without existing borrowings of a similar nature, or where existing facilities have stale rates.

Request an indicative rate from the entity's bank for a hypothetical loan matching the lease parameters:

• Amount: Total undiscounted lease payments (e.g., £600,000 for a 5-year lease at £10,000/month)
• Term: Same as the lease term
• Security: Similar to the lease arrangement (the right-of-use asset would be the security in a lease context)

Banks are generally willing to provide indicative rates without a formal loan application. This gives a direct, entity-specific data point.

3. Bank of England Base Rate + Credit Spread

Best for: Entities that need a systematic, documented methodology — particularly useful for portfolio approaches.

This is the most common constructed approach for UK entities. The OBR is built as:

OBR = Bank of England base rate + credit spread

Bank of England base rate: Published on the BoE website. As of early 2026, the base rate is 4.50%.

Credit spread: Added to reflect the entity's size, creditworthiness, and the specific characteristics of the borrowing. Typical ranges for UK SMEs:

These spreads are indicative. The actual spread should reflect the entity's specific circumstances, and the basis for the chosen spread should be documented.

4. Industry Benchmarks and Publications

Best for: Cross-checking rates derived from other methods, or as a secondary data point.

Several sources publish discount rate guidance relevant to UK lease accounting:

• Big 4 accounting firms periodically publish market discount rate analyses (KPMG, PwC, Deloitte, and EY all produce relevant publications)
• RICS (Royal Institution of Chartered Surveyors) provides guidance on discount rates in the property context
• Bank of England Financial Stability Reports contain data on lending spreads and credit conditions
• Industry bodies (e.g., British Property Federation) may provide sector-specific benchmarking

These should not be used as the sole basis for the OBR — the rate must be entity-specific — but they provide a useful reasonableness check.

Portfolio Approach

FRS 102 explicitly permits a portfolio approach to determining the OBR. Instead of calculating a separate rate for each lease, entities can apply a single rate to a portfolio of leases with similar characteristics.

What constitutes a "similar" portfolio:

• Leases with similar remaining terms (e.g., all leases with 3–5 years remaining)
• Leases with similar security or underlying asset type (e.g., all commercial property leases)
• Leases entered into within a similar time period (reflecting similar economic conditions)

The portfolio approach significantly reduces the compliance burden for entities with large lease portfolios. A company with 50 property leases might reasonably use 2–3 portfolio rates (grouped by term and economic environment at inception) rather than 50 individual rates.

Sensitivity Analysis: Why the Rate Matters So Much

To illustrate the impact of the discount rate, consider a standard commercial lease:

• Monthly payment: £10,000
• Lease term: 5 years (60 months)
• Total undiscounted payments: £600,000

The following table shows how different discount rates affect the initial lease liability — the present value of those payments:

Key observations:

• A 2% increase (from 3% to 5%) reduces the liability by approximately £26,400
• A 2% increase (from 5% to 7%) reduces the liability by approximately £23,600
• The difference in total interest expense between a 3% and 7% rate is nearly £50,000 — on a single lease
• For an entity with 20 similar leases, a 2% rate difference could shift total reported liabilities by approximately £500,000

The sensitivity grows with longer lease terms. For a 10-year lease at £10,000/month, a 2% rate difference shifts the liability by approximately £80,000.

This is why auditors scrutinise discount rate assumptions so closely, and why entities should not treat the OBR as a rounding exercise. Use our free FRS 102 lease liability calculator to run sensitivity analysis on your own lease terms and see the exact impact.

Common Mistakes

1. Using a Risk-Free Rate Without a Credit Spread

The Bank of England base rate or a government bond yield is a risk-free (or near risk-free) rate. It reflects the time value of money but not the entity's credit risk. The OBR must include a credit spread that reflects the entity's own borrowing capacity. Using a risk-free rate alone will overstate the lease liability.

2. Using Rates from Loans with Different Security or Term

A 2-year overdraft facility rate is not an appropriate proxy for a 10-year property lease OBR. Similarly, a rate secured against inventory or receivables does not reflect the borrowing cost for a property-backed loan. The security, term, and amount must all be similar for the comparison to be valid.

3. Not Updating Rates for New or Modified Leases

The OBR is determined at the commencement date of each lease (or at the transition date for existing leases). When a lease is modified — for example, when a rent review triggers a change in payments, or when an extension option is exercised — the liability must be remeasured using a current OBR as of the modification date. Continuing to use the original rate after a modification overstates or understates the liability.

4. Using the Same Rate for All Leases Regardless of Term

A 3-year lease and a 10-year lease should not typically use the same discount rate. Longer terms carry higher risk and generally higher borrowing costs (the term premium). The portfolio approach permits grouping leases with similar terms, but grouping a 3-year and a 10-year lease together is not appropriate.

5. Failing to Document the Methodology

Even if the chosen rate is reasonable, an inability to explain how it was determined is an audit finding waiting to happen. The methodology must be documented and available for review. See the documentation requirements section below.

6. Anchoring to the Previous Year's Rate

Economic conditions change. Interest rates, credit spreads, and lending conditions evolve over time. The OBR for a lease commencing in 2026 should reflect 2026 conditions, not those from 2024 when a similar lease was last commenced. While stability is acceptable when conditions have not changed materially, entities should evidence that they have considered current conditions.

Documentation Requirements

FRS 102 expects entities to document their rate determination methodology. Auditors will want to see evidence that the OBR is reasonable, entity-specific, and consistently applied.

What to Document

1. Methodology description. Which approach was used to determine the OBR (existing facilities, bank quotes, base rate + spread, benchmarks), and why that approach is appropriate for the entity.

2. Data sources. The specific data points used — e.g., the Bank of England base rate at a particular date, the credit spread from a particular source or facility, indicative bank quotes received.

3. Assumptions. Any significant assumptions made — e.g., why a particular credit spread was chosen, why certain leases were grouped into a portfolio, how the entity assessed its own creditworthiness.

4. Rate used and effective date. The final OBR applied, and the date at which it was determined. This is particularly important for entities applying the portfolio approach, where a single rate is applied to multiple leases.

5. Approval and review process. Who approved the rate determination, and when it is subject to review. Best practice is to review the OBR annually, even if no new leases are commenced, to ensure it remains appropriate.

Documentation Template

A practical approach is to maintain a discount rate memorandum that covers:

• Date of determination
• Leases or portfolio to which the rate applies
• Method used (with step-by-step derivation)
• Data sources (with dates and references)
• Comparison to prior period rate and explanation of any change
• Preparer and reviewer sign-off

This document sits alongside the lease register and is available for audit review. The effort required is modest — a single page per portfolio is typically sufficient — but its absence can trigger disproportionate audit queries.

Practical Tips

1. Use the calculator for sensitivity analysis. Before finalising your OBR, run the numbers at several rates using our free FRS 102 lease liability calculator. Seeing the impact on your actual lease terms — not just abstract percentages — makes the importance of the rate tangible and helps justify the chosen rate to auditors and management.

2. Document your methodology from the start. Do not wait until audit season to reconstruct how you determined the OBR. Document it when you set the rate, and keep the supporting data. A 30-minute exercise at the time saves hours of retrospective work.

3. Consider the portfolio approach early. If you have more than a handful of leases, grouping them into portfolios by term and characteristics significantly reduces the number of rates you need to determine and justify. FRS 102 explicitly permits this — take advantage of it.

4. Review rates annually. Even if no new leases have commenced, the OBR should be reviewed at least annually to confirm it remains appropriate. If the Bank of England base rate has moved significantly, or the entity's credit standing has changed, the rate may need updating for any new or modified leases.

5. Engage your bank. Requesting an indicative rate for a hypothetical loan matching your lease parameters is free, takes a few days, and gives you a concrete, entity-specific data point. This is the most direct evidence of the OBR.

6. Cross-check with IFRS 16 methodology. If the entity or its group also reports under IFRS 16, compare the OBR with the IBR used for group reporting. Significant divergence should be understood and documented — it may be explainable (different methodology, different reference amount) but should not be ignored.

7. Consider the impact on covenants. Before finalising the OBR, model the resulting lease liabilities and check the impact on loan covenants. A higher OBR reduces the lease liability (and therefore gearing) but increases the total interest expense. The covenant impact may influence whether a rate within the reasonable range is optimised upward or downward — though the rate must remain genuinely obtainable.

Conclusion

The obtainable borrowing rate is not just a technical input — it is the lever that moves lease liabilities by tens of thousands of pounds. FRS 102 deliberately made the OBR simpler than the IFRS 16 IBR, but simpler does not mean unimportant. The rate must be entity-specific, well-documented, and reviewed regularly.

For most UK entities, the practical approach is straightforward: start with the Bank of England base rate, add a credit spread that reflects your entity's creditworthiness, and cross-check against any existing borrowing facilities or bank quotes. Document the methodology, apply it consistently, and review it annually.

The portfolio approach — explicitly permitted by FRS 102 — is a powerful simplification for entities with multiple leases, and should be considered from the outset.

For a deeper understanding of the broader FRS 102 lease accounting changes, how to calculate lease liability step by step, or to model different discount rate scenarios, use our free FRS 102 lease liability calculator — no signup required.

Need help determining the right discount rate for your lease portfolio? Try LeaseIQ free — upload your lease documents and get automated FRS 102 calculations, including sensitivity analysis across multiple discount rate scenarios.