What is the incremental borrowing rate?

The rate of interest a lessee would have to pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. It is used to discount the lease payments when the rate implicit in the lease is not readily determinable.

How do I evidence my incremental borrowing rate?

Almost no entity has a quote for exactly the borrowing the definition describes, so the rate is normally built up in three documented components: a term-matched and currency-matched risk-free rate, the entity's own credit spread, and an adjustment for the security the underlying asset provides. Record the source and date of each component.

Can I use one IBR for every lease?

No. The rate is term-specific, so a three-year lease and a twenty-year lease should not share a rate, and it is measured at the date each lease commences. A portfolio of leases with similar terms, security and start dates can reasonably share a rate, but that grouping is itself a judgement to document.

Should I use the rate implicit in the lease instead?

Where it is readily determinable, yes — both IFRS 16 and FRS 102 require it. In practice a lessee rarely knows the lessor's initial direct costs or the unguaranteed residual value, so the rate is not determinable and the incremental borrowing rate is used instead. Finance leases of equipment are the common exception.

IFRS 16 · FRS 102 · Discount rates

Incremental borrowing rate calculator

The discount rate moves the lease liability more than any other input, and it is the one your auditor will push hardest on. Build it in three documented components — and get the evidence note with it.

Component build-up Yield curve interpolation Implicit rate solver Evidence trail

Build the rate

Lease term

mths

Currency

Risk-free rate term-matched

Government bond yield at the lease-term point of the curve, on the commencement date

Entity credit spread

Margin over the risk-free rate on your own recent borrowings

Lease / asset adjustment

Negative where the asset is well secured, e.g. re-lettable property. Positive for specialised plant.

Evidence

Source of the risk-free rate

Source of the credit spread

Rationale for the adjustment

Read a rate off a yield curve

Paste tenor points as years, rate% — one per line. The term-matched rate is interpolated linearly, and flat-extrapolated beyond the ends of the curve rather than inventing a trend.

Solve for the rate implicit in the lease

Where you know the fair value of the asset, this is the rate both standards require you to use in preference to an IBR. If no non-negative rate reconciles the inputs, that is a legitimate answer — use the IBR instead.

A rate is a judgement, and judgements get challenged

Record the rate against the lease, not in a spreadsheet cell nobody can explain

AuditLease makes the discount rate a documented field on every lease, with the source and the date, and locks it into an immutable audit trail. When the auditor asks where 5.6% came from eighteen months from now, the answer is already written down.

Start free — up to 3 leases Read the IBR guide

What a defensible rate looks like

Both IFRS 16 and FRS 102 define the incremental borrowing rate as the rate you would pay to borrow, over a similar term, with similar security, the funds needed to obtain an asset of similar value in a similar economic environment. Four qualifiers, and each one is a place where a single portfolio-wide rate falls down. For when the implicit rate applies instead, and how to document the judgement for audit, see the incremental borrowing rate guide.

The three-component build-up

This is the approach auditors expect, because it makes each piece separately evidenced:

Risk-free rate. A government bond yield in the lease currency, at the tenor matching the lease term, on the commencement date. A ten-year lease takes the ten-year point, not the base rate.
Credit spread. The margin your entity actually pays over risk-free. Your own recent facility is the best evidence; failing that, spreads on comparable debt for similar credit standing.
Asset-specific adjustment. A lease is secured on the asset. Prime property a landlord can re-let easily supports a lower rate than specialised plant with no second-hand market. This is usually the smallest and the hardest to defend, so keep the reasoning short and concrete.

Where it goes wrong

Three recurring problems. Using one rate for the whole portfolio — defensible only where terms, security and start dates genuinely cluster, and that grouping is itself a judgement to write down. Using the base rate as the risk-free component, which ignores the term structure entirely and understates the rate on long leases. And using a rate measured at the wrong date: the IBR is set when each lease commences, and on transition it is the rate at the date of initial application — not the rate when the lease originally started.

Nominal or effective?

A 6% annual rate on a monthly-paying lease can mean 0.5% a month (nominal, rate ÷ 12) or 0.4868% a month (effective, compounding to exactly 6%). Over a ten-year lease the two conventions differ by roughly 1% of the liability. These calculators default to effective annual, the basis AuditLease itself uses, so the numbers here reconcile with the product; nominal (rate ÷ periods) remains selectable and is common in practitioner spreadsheets. Pick one, state it, and apply it consistently.

Common questions

Can I just use my bank's base rate?

No. The base rate is an overnight policy rate with no term structure and no credit risk. It bears no relation to what you would pay to borrow for ten years, and using it will understate the liability on any long lease.

Can I use one rate across all my leases?

Only where term, security and commencement date genuinely cluster — and you should document why you grouped them. A three-year vehicle lease and a twenty-year property lease should not share a rate.

What if my company has never borrowed?

Then you build the rate rather than observing it, which is exactly what the three-component method is for. Use spreads on comparable debt for entities of similar size and credit standing, and be explicit that the spread is estimated rather than observed. A group entity may be able to start from the parent's borrowing rate adjusted for its own standing.

Do I revisit the rate later?

Not routinely — the liability is not re-discounted just because rates moved. But you do use a revised rate on certain remeasurements, such as a change in the lease term or a modification. Each new lease gets its own rate at its own commencement date.

Incremental borrowing rate calculator

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