What is the Discount Rate? How do I determine what Discount Rate is appropriate?

For a lessee, the discount rate for a lease is the rate implicit in the lease unless that rate cannot be readily determined (which is often the case).

In that case, the lessee can utilize two methods to determine an appropriate discount rate:

1. An organization can use its incremental borrowing rate (IBR). The IBR should approximate the financing rate that an organization would pay if they would have purchased the leased asset outright using uncollateralized financing from a lending institution.

2. Another method to determining the discount rate is to utilize the United States' Risk-free Rate (RFR) as your discount rate. This method is only available for private organizations and is an expedient (or shortcut). The RFR is publically available data and can be found here.

Additional guidance on determining your IBR can also be found here.

The discount rate assumption is one of the most important judgements that management will need to make during the transition to ASC 842/IFRS 16 and the one which may have the largest quantitative impact on the lease asset and liability valuations.

Since the determination of the discount rate is a management estimate it is also often an area of focus during the audit process.