Discount Rate
Category
General Concepts
The discount rate in lease accounting is the rate used to calculate the present value of future lease payments. Under ASC 842, lessees should use the rate implicit in the lease if readily determinable, otherwise the lessee's incremental borrowing rate.
Why it matters
The discount rate is one of the most sensitive inputs in lease accounting. Small changes in the rate produce significant changes in the lease liability and ROU asset. For a 10-year lease with $100,000 annual payments, the difference between a 4% and 6% discount rate is approximately $70,000 in present value. material for financial reporting.
Most lessees cannot determine the rate implicit in the lease because it requires knowledge of the lessor's residual value estimate. As a result, the incremental borrowing rate (IBR) is used in practice for the vast majority of leases.
How Arvexi handles this
Arvexi supports both the rate implicit in the lease and the incremental borrowing rate. Rates can be set at the entity, portfolio, or individual lease level. The platform automatically applies the appropriate rate during present value calculations and recalculates when rates change due to modifications or remeasurement events.