What Is an Obtainable Borrowing Rate?

FRS 102 defines the lessee's obtainable borrowing rate as the rate of interest the lessee would have to pay to borrow, over a similar term, an amount similar to the total undiscounted lease payments included in the measurement of the lease liability.

The term is not marketing language. It is the wording introduced into Section 20 by the Financial Reporting Council's Periodic Review 2024, effective for accounting periods beginning on or after 1 January 2026, with early application permitted provided all the amendments are adopted together.

Two comparability factors sit inside that definition, and both matter when you come to evidence the rate:

• a borrowing term similar to the lease term; and
• a borrowing amount similar to the undiscounted lease payments included in the liability.

The rate is hypothetical. It is what the entity could borrow at, not what it does borrow at, so an entity with no debt at all still has an obtainable borrowing rate.

Section 20 sets out an order, and it is worth being precise about it because the point is widely misstated.

1. The interest rate implicit in the lease, where it can be readily determined. This is the rate that equates the present value of the lease payments and any unguaranteed residual value to the fair value of the underlying asset plus the lessor's initial direct costs.
2. If that rate cannot be readily determined, the lessee chooses, on a lease-by-lease basis, between its incremental borrowing rate and its obtainable borrowing rate (FRS 102 para 20.49).

The OBR is therefore not compulsory. It is one of two permitted options at the second step, and the choice is a matter of management judgement that can be made lease by lease. Any source telling you that SMEs "must use" an obtainable borrowing rate has overstated the position.

In practice the implicit rate is rarely available to a lessee. Determining it needs the lessor's initial direct costs and residual value assumptions, which are commercially sensitive and not usually disclosed. For most SME property, vehicle and equipment leases the question moves straight to the second step.

No, and this is worth checking before you spend time on rates at all. A lessee may elect not to recognise a right-of-use asset and lease liability for:

• short-term leases, meaning a lease with a term of 12 months or less at the commencement date and containing no purchase option; and
• leases of low-value assets, assessed on the absolute value of the underlying asset when new, independently of materiality to the entity.

Both are voluntary elections, both carry conditions, and where either is applied the fact and the related expense must be disclosed. Where an election applies there is no liability to discount and therefore no rate to determine. Applying the exemptions properly can materially reduce the population of leases you need rates for.

An obtainable borrowing rate is entity-specific. A single group rate applied to every subsidiary, or a headline rate taken from a lender's website, does not meet the definition, because neither reflects the borrower in question. A supportable rate takes account of:

• the entity's credit standing, evidenced by its financial position: leverage, interest cover, liquidity, profitability and the quality of its balance sheet;
• the term, matched to the lease term, since borrowing costs vary along the yield curve;
• the amount, referenced to the total undiscounted lease payments;
• how the borrowing is structured, including whether it is secured. Structure is not part of the OBR definition, which references only the term and the amount; but a lender pricing that borrowing would price its structure, so it affects the rate the lessee would in fact have to pay; and
• the economic environment at the measurement date, anchored to an observable market rate.

The practical consequence is that two companies signing identical leases on the same day should arrive at different rates. If your method cannot produce that result, it is not measuring what the standard asks for.

The intuitive approach is to ask your relationship manager. It usually disappoints, for reasons that have nothing to do with the relationship:

• banks do not ordinarily issue formal rate letters for facilities that have not been applied for and will not be drawn;
• an indicative rate given verbally arrives without the method, assumptions or credit analysis behind it, which is the part a reviewer asks to see; and
• a quote reflects that bank's appetite on that day, which is not the same as the rate obtainable in the market generally.

A bank indication remains a useful sense check. It is seldom sufficient on its own as audit evidence.

Section 20 leaves the discount rate to management's judgement, and judgement is reviewable. A file that stands up generally shows four things:

1. An observable anchor. A market reference rate at the measurement date, term-matched, that a reviewer can independently verify.
2. A stated method. How the credit spread was derived, which factors were considered, and how each was weighted.
3. The inputs used. The financial figures, the lease terms, the security position, and their source.
4. The judgements taken. Where a range was available, which point was selected and why.

No provider can promise that a particular rate will be accepted. What you can control is whether the basis for the judgement is written down, consistent between leases and periods, and capable of being followed by someone who was not in the room.

To work a rate out by hand, see how to calculate an obtainable borrowing rate. To decide between this and the incremental borrowing rate, see OBR vs IBR. For what changed in the standard, see the FRS 102 2026 guide.

Lease Rater builds an entity-specific obtainable borrowing rate from an observable base rate plus a credit spread, and documents every step of the derivation.

The base rate is taken from the SONIA term structure, matched to the lease term. The spread is assembled from four weighted pillars covering financial health, security and structure, sector and size, and exposure, assessed from the entity's own figures. The report discloses the inputs used, the calculated ratios, each pillar's assessment and its contribution to the spread in basis points, and the curve snapshot the base rate came from. The basis-point values within each band, and the thresholds between bands, are proprietary and are not disclosed.

The output is not only the rate. Each paid report carries the lease liability present value, the monthly amortisation and right-of-use depreciation schedules, balance sheet and profit and loss impact summaries, journal entry templates and a disclosure note template, with a CSV export for your working papers.

Run one calculation free, or read the full methodology before you rely on it.