Discount rates in FRS 102 (2026): OBR explained and key differences vs IFRS 16 | House of Control

From accounting periods beginning on or after 1 January 2026, lease accounting under FRS 102 has changed significantly. The updated standard introduces a single on-balance sheet lease model for lessees, similar in structure to IFRS 16.

This means discount rates are no longer a niche issue mainly affecting finance leases. Discounting is now required for most lease liabilities under FRS 102, making the selection and documentation of the discount rate a core compliance requirement.

For UK finance teams, this creates a practical question:

Which discount rate should be used under FRS 102, and how does it compare to IFRS 16?

This is also where the term OBR (Obtainable Borrowing Rate) becomes relevant: a practical and auditable way to describe the rate an entity could realistically obtain.

Summary

• From 1 January 2026, FRS 102 requires most leases to be recognised on the balance sheet, making discount rates a key input.
• The preferred discount rate is the interest rate implicit in the lease, if it can be determined.
• If the implicit rate is not available, a borrowing rate concept is used (commonly documented as OBR).
• OBR reflects the rate a company could realistically obtain for a similar term, currency and security profile.
• Small changes in discount rates can materially affect lease liabilities, gearing ratios and audit outcomes.

In this article: This article explains how discount rates work under the revised FRS 102 lease model from 2026, how to apply the interest rate implicit in the lease, and how to document an Obtainable Borrowing Rate (OBR). It also compares FRS 102 and IFRS 16 requirements and highlights common audit pitfalls. 

Why discount rates matter under the revised FRS 102

A lease liability is measured as the present value of future lease payments. That present value depends directly on the discount rate. A higher discount rate produces a lower lease liability. A lower discount rate produces a higher lease liability.

This affects:

• Balance sheet leverage
• Covenant reporting
• Net assets
• Interest expense recognition
• Comparability across subsidiaries and reporting periods

Because lease liabilities are now widely recognised under FRS 102, discount rate methodology has become a major focus area for auditors.

Read more: How to prepare for your next audit under FRS 102 Section 20.

Which discount rate does FRS 102 require?

 FRS 102 applies a hierarchy similar to IFRS 16. 

1. Use the interest rate implicit in the lease (if practicable)

The interest rate implicit in the lease is the rate that discounts:

• Lease payments, and
• Any residual value elements

to equal the fair value of the underlying asset at lease commencement.

In practice, this rate is often difficult to determine because it requires information the lessee may not have, such as:

• The lessor’s assumptions
• The lessor’s costs
• The lessor’s view of residual value

If the implicit rate cannot be reliably determined, FRS 102 requires an alternative.

2. If the implicit rate cannot be determined, use a borrowing rate concept

Where the implicit rate is unavailable, the lessee uses a borrowing rate concept, which in practice means:

The rate the entity would pay to borrow funds to obtain an asset of similar value over a similar term.

This is where UK finance teams often use the term OBR (Obtainable Borrowing Rate).

Explore our FRS 102 software.

What is OBR (Obtainable Borrowing Rate)?

A practical definition is:

The Obtainable Borrowing Rate (OBR) is the interest rate a company could realistically obtain at the measurement date to borrow funds over a similar term, in a similar currency, and with a similar security profile, to acquire an asset of comparable value.

This framing matters because it focuses on:

• Evidence
• Realism
• Consistency

… rather than theoretical modelling.

Read more: FRS 102 lease changes 2026 compared with IFRS 16.

How should OBR be determined in practice?

A defensible OBR should reflect four main factors:

1. Lease term

A 2-year lease should not automatically use a 10-year borrowing rate.

2. Currency

For UK entities, most leases are in GBP, but international groups may need separate curves for EUR or USD.

3. Credit standing

The rate should reflect the lessee’s credit risk at the measurement date.

4. Security / collateral

Lease liabilities are often viewed as secured-like in substance, because the underlying asset can act as collateral. The chosen approach must be consistent and documented.

Read more: FRS 102 Section 20: Why spreadsheets break – and how to get it right.

Typical evidence sources for OBR in the UK

Auditors typically expect OBR to be supported by observable inputs. Common evidence sources include:

• Actual borrowing rates from recent bank facilities
• Bank quotes (even indicative quotes can support reasonableness)
• SONIA-based yield curves plus credit spreads
• Public bond yields (for large corporates)
• Internal group treasury curves, where they reflect external funding and are credit-adjusted

The key is not to prove an exact rate, but to demonstrate that the chosen rate is reasonable, consistent, and based on evidence.

How does FRS 102 differ from IFRS 16 on discount rates?

While FRS 102 and IFRS 16 now share a similar lease recognition model, IFRS 16 remains more detailed in practical guidance.

Key differences in practice

In short: the conceptual approach is aligned, but IFRS 16 tends to require more granular segmentation and documentation.

Working example: How much does the discount rate change the lease liability?

Scenario:

• 5-year equipment lease
• Annual payments: £50,000 (in arrears)
• No purchase option
• Discount rate determined at commencement

Option A: Discount rate of 4.0%

PV factor (approx.) = 4.4518
PV ≈ £50,000 × 4.4518 = £222,590 

Option B: Discount rate of 7.0%

PV factor (approx.) = 4.1002
PV ≈ £50,000 × 4.1002 = £205,010 

Impact 

A 3% difference reduces the lease liability by approximately £17,580.

For property leases or fleet portfolios, the impact can be far larger.

This is why discount rates now receive increased audit scrutiny under FRS 102.

Should companies use one discount rate for all leases?

Using one discount rate for all leases is risky unless the lease portfolio is highly consistent.

A practical approach is to segment discount rates by:

• Lease term bands (e.g., 1–3 years, 4–7 years, 8+ years)
• Currency (GBP, EUR, USD)
• Asset type (property vs vehicles vs equipment)
• Entity credit risk (if group reporting covers multiple subsidiaries)

This improves consistency and reduces audit challenges.

Common pitfalls in discount rate selection under FRS 102

The most common issues arise when the process is inconsistent or undocumented.

Typical audit findings include:

• Using a single rate with no term or currency adjustment
• Applying group treasury rates without evidence that they reflect external borrowing
• Failing to document whether rates reflect secured vs unsecured borrowing
• Inconsistent treatment between new leases and modified leases
• Using spreadsheet assumptions with no evidence trail

Under the revised FRS 102, discount rates are now applied to a broader population of leases, which increases the importance of governance.

Read more: FRS 102: Can any leases still remain off-balance sheet?

Practical checklist: What auditors expect to see

A robust discount rate file typically includes:

• Confirmation that the implicit rate was not determinable (if applicable)
• The source of the base rate (facility, SONIA curve, bank quote, bond yields)
• Credit spread rationale
• Term matching evidence
• Currency matching evidence
• Policy decision on secured vs unsecured assumption
• Approval and documentation trail

This makes the OBR defensible even if the rate itself is judgemental.

FAQ: Discount rates and OBR under FRS 102 (2026)

What discount rate should be used under FRS 102?

The interest rate implicit in the lease should be used if practicable. If not, a borrowing rate concept is used.

What is OBR and why is it used?

OBR is a practical term used to describe the rate the entity could realistically obtain for a similar term, currency and security profile. It helps build an audit-ready discount rate methodology.

Is OBR the same as IFRS 16 incremental borrowing rate?

They are conceptually similar. OBR is often used as a more practical and evidence-driven way of describing that rate.

Can a company use the same discount rate for all leases?

It is possible, but often difficult to justify. Most entities need some segmentation by term and currency.

How often should discount rates be updated?

Discount rates are set at lease commencement and are typically only updated if a lease is modified or remeasured.

Key takeaways

• From 1 January 2026, FRS 102 requires discounting for most lease liabilities, making discount rates a core compliance topic.
• The preferred discount rate is the interest rate implicit in the lease, but this is often not determinable in practice.
• OBR provides a practical and audit-friendly approach to documenting a borrowing rate.
• Term, currency, credit risk and security assumptions should be reflected in the methodology.
• Even small changes in discount rates can materially impact lease liabilities, covenants and reported leverage.

Disclaimer: House of Control is a software company. We do not offer FRS 102 compliance consulting services. Thus, following this guidance does not guarantee compliance with all FRS 102 legal requirements. The contents of the article are based on our own research of the FRS 102 requirements and our experience with lease accounting, and includes inspiration from various actors offering compliance services. We do not assume any responsibility or liability for any failure to comply with FRS 102 requirements or resulting from the use of this guidance.