How Private Companies Can Determine the Incremental Borrowing Rate (IBR) Under ASC 842

This page covers deriving the rate from your own borrowing. For the full formula and the methodology behind it, see Incremental Borrowing Rate: Formula and Methodology, or use the IBR calculator.

Working closely with private companies on ASC 842 compliance, we often get asked how to determine the Incremental Borrowing Rate (IBR)—especially when leasing real estate, equipment, or vehicles. The challenge is real: lease agreements rarely disclose the rate implicit in the lease, leaving the IBR as the default input for discounting lease liabilities.

Here’s a step-by-step approach you can use to confidently and consistently determine your IBR, tailored for private companies managing different lease asset classes.

Step 1: Understand What the IBR Really Is

“The rate of interest that a lessee would have to pay to borrow, on a collateralized basis, over a similar term, an amount equal to the lease payments, in a similar economic environment.”

Translation? It’s your company’s estimated secured borrowing rate for a loan with terms matching the lease.

That wording is the definition in FASB ASC 842-10-20, and each clause in it is a constraint on the answer: collateralized rules out an unsecured rate, similar term ties the rate to the lease term rather than the contract's face period, and an amount equal to the lease payments means the size of the notional borrowing matters too. A rate that ignores any of the three is hard to defend.

Step 2: Decide Whether to Use the Risk-Free Rate (Optional for Private Companies)

Private companies can elect to use a risk-free rate like the U.S. Treasury rate. However, this often results in higher lease liabilities. For a more realistic picture of financial obligations, calculating your IBR is recommended.

The election sits in ASC 842-20-30-3 and is made by class of underlying asset, so it is not all-or-nothing — a common shape is electing it for a large population of small equipment leases while deriving a rate properly for a handful of significant properties. The full trade-off is in the risk-free rate election for private companies.

Step 3: Categorize Your Leases

• Real Estate Leases: Long-term (5–15 years), generally higher collateral value.
• Equipment Leases: Medium-term (3–7 years), often specific to operations.
• Vehicle Leases: Short-term (1–5 years), may be bundled in fleet leasing agreements.

Class matters because two of the three inputs move with it. Term sets which point on the curve you take, and collateral quality sets how far the spread comes down — a lender secured on a building prices differently from one secured on equipment that loses most of its value on installation. Grouping by class is what makes a single derived rate defensible across many leases.

Step 4: Gather Internal Borrowing Data

Review your existing debt agreements, terms, security status, and credit spread. These will inform your estimated IBR.

This is the strongest evidence you have, and it is worth being systematic about it. Pull the term loans, the revolver, any equipment or vehicle financing, and any sale-leaseback. From each, take the all-in rate, the reference rate it was priced against, the spread over that reference, the term, and whether it was secured and on what. A facility priced at SOFR plus 250 basis points tells you your secured spread directly — you are not estimating it, you are reading it.

Two practical problems come up. The first is age: a rate agreed three years ago reflects that year's credit conditions and your balance sheet as it was then, so it informs the spread rather than supplying the answer. The second is that a revolver is short-term and usually unsecured, which makes it a poor proxy for a ten-year secured lease — usable for the spread, not for the base. Where you have no usable debt at all, determining an IBR without external debt covers the alternatives.

Step 5: Identify a Risk-Free Base Rate

Use the U.S. Treasury yield curve or SOFR curve. Match lease term with the equivalent point on the curve to determine your base rate.

Step 6: Estimate the Credit Spread

• Use loan pricing tools or consult your lender.
• Refer to similar borrowers with known credit ratings.
• Involve your banker or valuation expert to refine the borrowing curve.

Whichever route you take, sanity-check the result against something real. If your own recent secured borrowing sits at one number and the spread you have built implies something materially different, one of the two needs explaining before it goes in the file. Asking your lender what they would quote today, for a secured facility of the lease's size and term, is the single most useful hour in this process and the evidence auditors find easiest to accept.

Step 7: Calculate the IBR by Asset Class

Lease Type	Lease Term	Risk-Free Rate	Credit Spread	IBR
Real Estate	10 years	3.5%	2.0%	5.5%
Equipment	5 years	3.0%	2.5%	5.5%
Vehicles	3 years	2.8%	3.0%	5.8%

Step 8: Document Your Methodology

Maintain detailed records of your assumptions, sources, and calculations. Update annually or when material changes occur.

The file an auditor asks for is narrower than it sounds: the curve extract with the date it was taken, the debt agreements the spread was derived from, the class definitions and which leases sit in each, and who approved the policy. Documenting the discount rate sets out what is typically requested, and common discount rate audit findings what typically goes wrong.

Step 9: Apply Consistently Across the Portfolio

Apply the IBR to grouped leases by asset class and term. Avoid calculating separate rates for every lease unless materially different.

"Materially different" in practice means a lease whose term or size moves it out of the group it was assigned to — a fifteen-year property sitting in a bucket built around five-year equipment, or a single lease large enough that a half-point of rate changes the liability by an amount you would have to disclose. Everything else belongs in its group, and the reason it belongs there is what you write down. When grouping is and is not defensible is covered in portfolio versus lease-specific rates.

Pros and Cons: IBR vs. Risk-Free Rate

Option	Pros	Cons
Incremental Borrowing Rate (IBR)	Better reflects economic reality Lower lease liabilities Aligns with actual borrowing risk	Requires assumptions and support More time-intensive May face auditor scrutiny
Risk-Free Rate	Easy to apply No subjective inputs Reduces compliance burden	Inflated lease liabilities Less accurate reflection of cost Impacts financial ratios

When and How to Reassess or Change the IBR During a Lease Term

Per ASC 842, you may only change the IBR when a lease liability is remeasured. This happens when:

• Lease term changes (e.g., exercising or forgoing options)
• Lease payments are modified (e.g., rate or index change)
• Purchase or termination option likelihood changes
• Lease is modified but not accounted for as a separate lease

Steps to update the IBR during remeasurement:

1. Determine the new lease term and revised payment stream.
2. Recalculate the IBR as of the remeasurement date.
3. Use current market conditions, credit profile, and risk-free base.
4. Document the reason and method behind the new IBR.
5. Update your lease liability and right-of-use (ROU) asset accordingly.

Note: You cannot revise the IBR due to market rate changes alone. A triggering lease event must occur.

Determining and applying the IBR correctly takes thoughtful analysis and clear documentation. While private companies can use the risk-free rate, developing a defensible IBR policy often results in more accurate and favorable financial reporting.

If you need help applying these steps or want to automate your ASC 842 compliance, consider a solution like iLeasePro, which offers IBR tracking, amortization schedules, and audit-ready reporting tools.

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