Our Methodology & Regulatory Basis

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. It is not a Lease Rater phrase: it is the terminology of Section 20 as revised by the Financial Reporting Council's Periodic Review 2024.

This page is about how Lease Rater estimates that rate, and why the estimate stands up to review. The standard itself is covered elsewhere and is not repeated here:

• What an obtainable borrowing rate is, where it sits in the discount rate hierarchy, and what the rate has to reflect.
• OBR or IBR: how the two definitions differ, and how to make and document the choice. Neither is mandatory over the other, and nothing here suggests an IBR approach is inappropriate where management considers it more suitable.
• How to calculate one, step by step, with a worked example.

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 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.

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.

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 pillar weights above are published, as is each pillar's contribution in basis points on every report, and the worked examples page shows what credit quality and security are each worth across the credit spectrum. The calibration inside the financial pillar, meaning the fourteen metrics, their six bands and the thresholds between them, is proprietary and is not disclosed.

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.

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, meaning a fixed charge over a specific asset, a debenture carrying fixed and floating charges, or a genuinely unsecured position;
• 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.

The security input answers a specific question, and it is not the one most people expect. FRS 102 defines the obtainable borrowing rate as the rate to borrow, over a similar term, an amount similar to the total undiscounted lease payments. Unlike the incremental borrowing rate under IFRS 16, that definition makes no reference to security. So the question is not what security the lease carries; it is what security the entity's bank would require to lend it that sum. For most trading SMEs a bank facility of that size carries a debenture, so that is the usual answer, including where the leased asset is property over which the entity could give no charge at all.

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 using Lease Rater's credit size band, which is derived from the entity's turnover using fixed cut-offs (£632k, £10.2m and £36m). The band is independent of the Companies Act size categories, with smaller entities attracting a higher adjustment to reflect the greater credit volatility typically observed in micro and small businesses relative to larger ones.

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.

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 total spread is then held within the model's sanity range: a minimum of 300 bps (3.0%) for debenture or unsecured borrowing, or 150 bps (1.5%) for a fixed charge over a specific asset, and a maximum of 1,600 bps. The minimum differs by security because the market does: lending against a floating charge, or with no security at all, does not price at a 1.5% margin to a UK SME however strong the borrower. Where a limit applies, the rate shown is that limit rather than the sum of the four pillars, and the report says so on its face.

Strong financial metrics never reduce the rate: no financial reading, however good, takes anything off the spread. The best readings add least and the weakest add most. Other features of the transaction can reduce it — a rent deposit, payment in advance, a long trading record, an external rating, company size, and a lower-risk sector — because each of those is a genuine reduction in what a lender stands to lose, or in how likely a loss is.

Company size is priced on a sliding scale by turnover rather than in steps, so companies near a band boundary are priced close to their neighbours in the next band. The band names on the report describe where a company sits; they do not themselves set the price.

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.

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.

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.

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.

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.

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.

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.

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 a market-anchored, entity-specific methodology in minutes rather than weeks, for a fraction of the cost, with full documentation.

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 band thresholds or per-metric basis-point calibrations inside the financial pillar; these are proprietary. The pillar weights, each pillar's contribution in basis points, and the effect of security type on the rate are published;
• 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.

Lease Rater applies a market-anchored, credit-risk-based methodology of the kind described in published guidance from ACCA, ICAEW, KPMG, BDO, Grant Thornton and EY, and delivers it with full documentation in minutes rather than weeks. Whether you are working through a transition balance sheet or need a rate for a lease signed this year, the calculator is ready when you are.

Calculate your obtainable borrowing rate

The following primary sources informed the content of this page. They are listed here so this page can itself serve as a citable reference for anyone evaluating Lease Rater's methodology.

• ACCA, "Lease accounting under FRS 102," ACCA Technical Factsheet, October 2024
• ICAEW, "Periodic Review 2024: Leases," ICAEW viewpoint, August 2024
• ICAEW, "FRS 102 Leases: A Deeper Dive," ICAEW webinar, September 2025
• ICPA, "FRS 102 Lease Changes: Your 2026 UK Accountant's Guide," ICPA practitioner guidance
• FRC, "Amendments to FRS 102: Periodic Review 2024," FRC News Release, March 2024
• KPMG, "Changes to UK GAAP: Amendments to lease accounting," KPMG UK technical commentary
• BDO, FRS 102 transition-provisions commentary, BDO UK technical resources
• Grant Thornton NI, FRS 102 report, Grant Thornton Northern Ireland technical resources
• EY, UK FRS 102 technical resources, EY UK
• ICAEW, TAS Helpsheets and Factsheets on FRS 102 lease accounting, 2025 to 2026