How to Calculate the Weighted Average Discount Rate for Leases

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Weighted Average Discount Rate (WADR) Calculator

Weighted Average Discount Rate:

0.00%

How to Calculate the Weighted Average Discount Rate for Leases

Under accounting standards such as ASC 842 and IFRS 16, entities are required to disclose the weighted average discount rate used for their lease portfolios. This rate provides investors and auditors with an understanding of the financing costs associated with the company's lease liabilities.

The WADR Formula

The weighted average discount rate is calculated by weighting the discount rate of each individual lease by its remaining lease liability. The formula is as follows:

WADR = Σ (Remaining Lease Liability × Discount Rate) / Total Remaining Lease Liability

Steps for Calculation

  1. Identify the Liability: For each lease in the portfolio, determine the current remaining lease liability (the present value of unpaid lease payments).
  2. Determine the Rate: Identify the specific discount rate or Incremental Borrowing Rate (IBR) used for each individual lease.
  3. Weight the Rate: Multiply each lease's liability by its respective discount rate.
  4. Sum the Products: Add all the products calculated in step 3 together.
  5. Divide by Total Liability: Divide the sum by the total aggregate lease liability of the entire portfolio.

Practical Example

Suppose a company has three office leases with the following details:

  • Lease A: $500,000 liability at 4.0% interest
  • Lease B: $300,000 liability at 5.5% interest
  • Lease C: $200,000 liability at 6.0% interest

Step 1: Calculate individual weighted values:
(500,000 × 0.04) = 20,000
(300,000 × 0.055) = 16,500
(200,000 × 0.06) = 12,000

Step 2: Total the products: 20,000 + 16,500 + 12,000 = 48,500

Step 3: Total the liabilities: 500,000 + 300,000 + 200,000 = 1,000,000

Step 4: Final WADR: 48,500 / 1,000,000 = 4.85%

Why WADR Matters in Lease Accounting

WADR is a critical metric for financial reporting. A higher WADR suggests that a company's lease obligations are financed at higher rates, potentially indicating higher risk or a period of higher market interest rates when leases were signed. Consistent calculation is necessary to ensure compliance with the disclosure requirements of major accounting frameworks.

function addLeaseRow() { var container = document.getElementById('lease-rows-container'); var newRow = document.createElement('div'); newRow.className = 'lease-row'; newRow.style.display = 'flex'; newRow.style.gap = '10px'; newRow.style.marginBottom = '15px'; newRow.style.flexWrap = 'wrap'; newRow.style.paddingBottom = '15px'; newRow.style.borderBottom = '1px solid #f0f0f0'; newRow.innerHTML = '
' + '' + " + '
' + '
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'; container.appendChild(newRow); } function calculateWADR() { var liabilityInputs = document.getElementsByClassName('lease-liability'); var rateInputs = document.getElementsByClassName('lease-rate'); var totalWeightedProduct = 0; var totalLiability = 0; var validRows = 0; for (var i = 0; i 0) { totalWeightedProduct += (liability * (rate / 100)); totalLiability += liability; validRows++; } } var resultBox = document.getElementById('wadr-result-box'); var resultValue = document.getElementById('wadr-value'); var resultSummary = document.getElementById('wadr-summary'); if (validRows === 0 || totalLiability === 0) { alert('Please enter valid liability and rate values for at least one lease.'); resultBox.style.display = 'none'; return; } var wadr = (totalWeightedProduct / totalLiability) * 100; resultValue.innerText = wadr.toFixed(2) + '%'; resultSummary.innerText = 'Calculated from ' + validRows + ' lease(s) with a total liability of $' + totalLiability.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); resultBox.style.display = 'block'; resultBox.scrollIntoView({ behavior: 'smooth', block: 'nearest' }); }

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