Our Methodology & Regulatory Basis

Lease Rater provides a structured and documented method of estimating an obtainable borrowing rate for lease accounting under FRS 102. This page explains what FRS 102 requires, when an obtainable borrowing rate may be used, why estimation may be necessary, and how Lease Rater combines observable market information with an entity-specific credit assessment to produce a fully documented, audit-support estimate. It is written for FDs and finance teams who want reassurance that this is a legitimate, well-grounded approach, and for accountants and auditors who want to see the methodology is properly supported before recommending or accepting it.

Lease Rater does not replace management judgement or guarantee that a particular rate will be accepted by an auditor. It provides a consistent framework through which management can develop, understand and document its estimate.

What is the 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.

"Obtainable borrowing rate" (OBR) is not a Lease Rater marketing phrase. It is the precise terminology used in FRS 102 Section 20 as revised by the Financial Reporting Council's Periodic Review 2024, which takes effect for accounting periods beginning on or after 1 January 2026, with early application permitted. The definition focuses on two important comparability factors:

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

The rate should represent the borrowing rate that would be obtainable by the lessee, grounded in the entity's specific creditworthiness and the nature of the security offered.

When can an obtainable borrowing rate be used?

FRS 102 Section 20 establishes a hierarchy for the discount rate a lessee must apply to its lease liability. Where the interest rate implicit in the lease can be readily determined, the lessee must use it. Where it cannot, the lessee uses the lessee's incremental borrowing rate (IBR) or, under the revised standard, the obtainable borrowing rate (OBR). The IBR and OBR are available as alternatives at this stage of the hierarchy; neither is mandatory over the other, and Lease Rater does not suggest that using an IBR approach is inappropriate where management considers it more suitable.

In practice, for most operating and finance leases entered into by SMEs (property, vehicles, equipment) the implicit rate is either not stated in the lease contract or cannot be readily determined. In those cases, the lessee proceeds to the IBR/OBR stage. That is the situation Lease Rater is designed to address.

How is the obtainable borrowing rate different from an incremental borrowing rate?

The OBR and the IBR are similar in purpose but differ in their definitional anchor. The IBR, as used under IFRS 16, references the rate the lessee would pay to borrow funds necessary to obtain an asset of similar value to the right-of-use asset. That definition requires a view of the value of the leased asset.

The OBR, by contrast, is anchored to the payment stream rather than the asset value: the rate to borrow an amount similar to the undiscounted lease payments. This is a more practical basis for private UK entities that do not routinely obtain external valuations of leased assets and represents a deliberate simplification introduced by the FRC for the FRS 102 context.

Why estimation may be necessary

A question finance teams commonly raise is: should we just ask our bank for a rate? Professional guidance is clear on this point. Banks rarely provide formal rate letters for hypothetical lease financing facilities. It is not a service they offer routinely, and most relationship managers will not commit a rate for a facility that has not been applied for.

The profession fully recognises this. Guidance from ICAEW, ACCA, and practitioner bodies consistently acknowledges that a direct bank quote will not usually be available, and that estimation based on observable market data and a documented credit assessment is the expected and appropriate alternative. No mandated calculation model exists in FRS 102 itself; the standard sets out the definition and leaves the estimation methodology to management's judgement, applied consistently.

A finance team that presents an undocumented or retrospectively assembled rate is taking more audit risk, not less, than one that uses a systematic, market-anchored estimation methodology with clear documentation.

Lease Rater's methodology

Lease Rater estimates the OBR as the sum of two components:

a term-sensitive market reference rate, drawn from the Bank of England SONIA overnight index swap (OIS) zero-coupon spot yield curve and matched to the specific lease term; and
an entity-specific borrowing-risk adjustment, expressed in basis points, derived from a structured four-pillar credit assessment of the lessee.

This two-component structure (market base rate plus entity-specific spread) is the approach described consistently in published guidance from ICAEW, ACCA, KPMG, BDO, Grant Thornton, and EY for determining an OBR or its IFRS 16 equivalent. Lease Rater's contribution is to systematise and document that assessment in a reproducible, auditable way.

Term-sensitive market reference rate

Lease Rater uses the Bank of England SONIA OIS zero-coupon spot yield curve as its base rate source. SONIA represents the risk-free overnight rate for sterling; the OIS curve provides market-implied term rates across the yield curve. Government gilt rates are not used, because gilts carry sovereign credit risk rather than corporate credit risk and would systematically understate the rate a private company would actually pay.

The base rate is matched to the specific lease term by interpolating between adjacent published tenors on the SONIA curve. Where a lease term falls beyond the longest published tenor, the curve is extrapolated conservatively using the methodology described in the technical documentation. Curve data is refreshed regularly so that the rate reflects current market conditions at the time of the calculation.

Entity-specific borrowing-risk adjustment

The entity-specific adjustment is derived from a structured assessment across four pillars, each weighted by its contribution to overall borrowing risk. The four pillars and their weights are:

Financial health (45%): the dominant pillar, reflecting the primacy of financial condition in commercial lending decisions;
Security and structure (30%): collateral quality, payment terms, and credit maturity indicators;
Sector and size (15%): industry-level risk and company scale; and
Exposure (10%): concentration ratios measuring the size of the lease liability relative to the entity's financial capacity.

The four pillar scores are combined using a weighted sum to produce the overall spread. The exposure pillar uses a mean aggregation of its component ratios. The methodology is transparent and auditable; the specific basis-point calibrations and band thresholds used within each pillar are proprietary and are not disclosed on this page.

Financial health assessment

The financial health pillar assesses 14 industry-standard financial metrics, grouped by category:

Profitability: EBITDA margin; EBIT margin; Return on Equity (ROE).
Liquidity: current ratio; quick ratio; cash ratio.
Leverage: Total Debt / Tangible Net Worth (TD/TNW); Total Debt / EBITDA; Net Debt / EBITDA.
Coverage: Interest Coverage Ratio (ICR); Fixed Charge Coverage (FCC).
Cash flow: Free Cash Flow (FCF); FCF / Total Debt ratio.
Balance sheet strength: Cash buffer (Cash / Total Debt).

Each metric is assessed using a six-band risk classification aligned to UK SME lending standards, ranging from excellent to vulnerable. The financial health pillar score reflects the profile across all 14 metrics, weighted by their relative predictive power for credit risk.

Security and structure

The security and structure pillar reflects factors that a commercial lender would consider when pricing a facility beyond the borrower's financial condition alone. Lease Rater assesses:

security type (for example, fixed charge over a specific asset, floating charge, or unsecured);
residual or balloon payment as a percentage of total facility, reflecting repayment concentration risk;
payment profile (for example, monthly in advance, monthly in arrears, or quarterly in advance);
rent deposit in months, as an indicator of covenant strength and landlord-negotiated credit support; and
years trading and any available external credit rating, as credit maturity indicators.

Sector and size

The sector and size pillar applies overlays reflecting industry-level credit risk and company scale. Sector risk is assessed using a structured overlay derived from UK SME banking credit risk pricing across a broad range of industry classifications. Size is assessed by reference to the entity's revenue band, with smaller entities attracting a higher adjustment to reflect the greater credit volatility typically observed in micro and small businesses relative to larger ones.

Exposure

The exposure pillar measures the concentration of the lease obligation relative to the entity's financial capacity. Three ratios are assessed:

facility (undiscounted lease payments) relative to EBITDA;
facility relative to revenue; and
facility relative to tangible net worth (TNW).

These ratios reflect how material the lease obligation is in the context of the entity's earnings, scale, and balance sheet, consistent with how a commercial lender would assess concentration risk when pricing a new facility. The three exposure ratios are averaged to produce the pillar score.

How Lease Rater produces the final estimate

The final OBR estimate is the sum of the term-matched SONIA base rate and the weighted entity-specific spread derived from the four-pillar assessment. The output is expressed as a percentage rate, presented with a sensitivity range (low, mid, and high) to reflect the fact that this is an estimate, not a single objective number.

The PDF report produced by Lease Rater discloses all inputs, the calculated financial ratios, and each pillar's assessment conclusion, so that management and auditors can review and trace the estimate. The internal calibration of the scoring model (the specific basis-point values assigned to each band and the thresholds between bands) is proprietary and is not disclosed, consistent with standard practice for credit-scoring tools. The report provides sufficient transparency for audit review without exposing the commercial calibration logic.

Why the result includes a range

Lease Rater presents the OBR as a range rather than a single rate. This reflects the inherent uncertainty in any estimation of an entity-specific borrowing rate in the absence of an actual quoted facility. The range is derived from a sensitivity analysis applied to the entity-specific spread. It is not a confidence interval in the statistical sense; it is a recognition that reasonable professional judgement could produce a rate within that band, and that management should consider where within the range the most appropriate point estimate lies.

Presenting a single number without a range would imply a false precision that is not warranted for an estimated rate. FRS 102 does not require a range to be disclosed, but presenting one is consistent with best-practice documentation and supports management's explanation to auditors.

Management responsibility and professional judgement

Lease Rater is an accounting-support tool. It does not give legal, audit, tax, or investment advice, and it does not guarantee that the rate it produces will be accepted by any particular auditor. The responsibility for the discount rate used in the financial statements rests with management.

Management should review the rate produced by Lease Rater for reasonableness in the context of the entity's specific circumstances, consider whether the inputs reflect the entity's actual financial position, and apply judgement as to whether the estimated rate is appropriate for the lease being accounted for. Where management has access to other relevant evidence (for example, an actual facility recently obtained on broadly similar terms) that evidence should inform the final judgement.

Application across multiple leases

Where an entity has a portfolio of leases, FRS 102 permits the use of a portfolio approach to discount rates where the leases have reasonably similar characteristics and applying a single rate would not produce a materially different result from calculating individual rates. Lease Rater can be used to estimate individual rates for each lease or to support a documented portfolio rate where the conditions for portfolio treatment are met.

Where a portfolio rate is used, management should document the basis for concluding that the portfolio approach is appropriate, the characteristics shared by the leases in the portfolio, and the rate selected. Lease Rater's output report provides input to that documentation, but the portfolio conclusion itself requires management's judgement and should be reviewed with the entity's auditor where there is any uncertainty.

How Lease Rater supports audit evidence

When auditors review management's discount rate under the revised FRS 102, their assessment typically focuses on a specific set of questions:

Has management first assessed whether the implicit rate is determinable?
Is the rate applied entity-specific, rather than a group rate or a generic sector average applied without adjustment?
Is the rate term-matched to the actual lease?
Is there clear, contemporaneous evidence of how the rate was derived, documented at the time of the calculation?
Is the same methodology applied consistently across all leases in the same period?
Has sensitivity to the rate been considered?

The genuine audit red flags are a group-wide rate used for all entities without adjustment, a risk-free or gilt rate applied to a non-investment-grade entity, evidence that appears to have been assembled retrospectively, or a rate that appears arbitrary or suspiciously low without explanation.

Lease Rater's PDF report is built to produce a contemporaneous evidence trail: it records the SONIA curve date and term-matched base rate, the entity's financial inputs and calculated ratios, each pillar's assessment and score, the resulting spread in basis points, and the overall OBR with sensitivity range. All of this is captured at the time of the calculation, producing the kind of auditable, traceable documentation that addresses the standard audit checklist. For accountants reviewing these calculations, further context is available in the For Accountants page.

Consistency and reassessment

FRS 102 does not require the OBR to be recalculated at each subsequent reporting date once a lease is recognised; the rate set at initial recognition is generally locked in for the remainder of the lease term (subject to specific modification events). However, management should document its chosen methodology and apply it consistently to all leases recognised in the same period.

The rate should be revisited when a specific modification or reassessment event occurs (for example, a significant deterioration in financial condition that triggers a lease modification, or a reassessment of the lease term) that would affect the rate that would be obtainable at that date. In those circumstances, the revised rate applies from the date of modification or reassessment event, not retrospectively.

From discount rate to complete lease accounting

Lease Rater's full paid report includes not only the OBR estimate but also the complete accounting deliverables for the lease:

the opening present value of future lease payments discounted at the OBR;
a full month-by-month lease liability amortisation schedule showing interest, principal repayment, and closing balance;
a right-of-use asset depreciation schedule with opening and closing net book values each month;
annual balance sheet and P&L impact summaries ready for disclosure;
ready-to-adapt journal-entry templates for day one recognition, monthly lease payments, and monthly depreciation;
a draft FRS 102 Section 20 disclosure note; and
a CSV data export for integration with existing working papers or accounting software.

These deliverables reduce the accounting time required to implement the new lease accounting requirements and provide a consistent, reproducible output across all leases.

Why a structured tool matters for SMEs

The FRC's Periodic Review 2024 is one of the most significant changes to UK GAAP in a generation. The FRC's own news release (March 2024) noted that approximately 3.4 million entities currently report under FRS 102 or FRS 105, the vast majority of UK businesses. The lease accounting changes apply to any FRS 102 reporter with in-scope leases beyond the short-term and low-value exemptions.

For most SME finance teams, the realistic alternatives to a tool like Lease Rater are a costly bespoke consultancy study (typically several hundred to over a thousand pounds per lease, with multi-week turnarounds) or an undocumented internal estimate that carries significant audit risk. Neither is practical when a business may have multiple leases, a hard year-end deadline, and no specialist treasury team. Lease Rater delivers the same market-anchored, entity-specific methodology in under two minutes for a fraction of the cost, with full documentation.

What Lease Rater does and does not claim

For the avoidance of doubt, Lease Rater:

does not claim to provide an auditor-guaranteed rate, a rate that will be accepted by any specific auditor or firm, or a rate that is objectively correct in a sense that admits no professional disagreement;
does not claim that OBR is the only or the superior discount-rate choice under FRS 102: it is one of the available options at the IBR/OBR stage of the standard's hierarchy;
does not claim to give legal, tax, investment, or audit advice;
does not disclose the specific basis-point calibrations, band thresholds, or internal scoring weights used within the engine; these are proprietary;
does claim that its methodology follows the two-component structure (market reference rate plus entity-specific spread) described consistently in published guidance from the major professional and advisory bodies;
does claim that the financial metrics it assesses are the 14 industry-standard metrics used by the live scoring engine, grouped by profitability, liquidity, leverage, coverage, cash flow, and balance sheet strength;
does claim that its output provides a contemporaneous, auditable evidence trail that addresses the standard audit checklist for discount-rate documentation; and
does claim that the SONIA base rate is current at the time of the calculation and that it is term-matched to the specific lease.

Calculate your OBR now

Lease Rater applies the same market-anchored, credit-risk-based methodology that the profession recognises and expects, grounded in published guidance from ACCA, ICAEW, KPMG, BDO, Grant Thornton, and EY, and delivers it with full documentation in under two minutes. If you are preparing for a January 2026 transition or need an OBR for an existing lease, the calculator is ready when you are.

Calculate your obtainable borrowing rate