Choosing a Discount Rate
Choosing a discount rate requires a few considerations
A major factor in determining the discount rate used for a lease is the underlying accounting guidance. To read more about discount rate determination under the accounting standard, select the links below or click on the question mark next to Discount Rate under the Step 2 when adding a lease:
If you're selecting to apply a discount rate to a class of assets, you can find the Lease Accounting Policy documents under Administration > Policies or review them below:
FASB ASC 842 & IFRS 16 Lessee Lease Accounting Policy Template
FASB ASC 842 Lessee Lease Accounting Policy Template
IFRS 16 Lessee Lease Accounting Policy Template
GASB 87 Lease Accounting Policy Template
GASB 96 Lease Accounting Policy Template
NOTE
Once the policy election around discount rates is made at the initial implementation of the standard, it should remain consistent moving forward. A change to the policy election for the discount rate would generally be considered a change in accounting principle and would need to be accounted for and disclosed as such.
Additional Considerations
Once you're aware of the choices you have under the accounting guidance when determining a discount rate, you may need to consider the effect of choosing a lower discount rate over a higher one.
In general, you can think of the effect as such:
Lower Discount Rate = Higher Liability & ROU Asset
Higher Discount Rate = Lower Liability & ROU Asset
For FASB
The FASB states you'll use the implicit rate when you know it. For transition leases, however, you'll use the following rule of thumb:
For an operating lease, determine the rate at transition since it was never on the Balance Sheet using either the original lease term or the remaining term; apply consistently for all leases.
For a finance lease, you'll use the rate from the beginning of the lease as these were already recorded on the Balance Sheet.