Lease Commencement Dates and What They Mean for Lessors and Lessees

The article explains that the lease commencement date, defined under ASC 842 as the date when the lessor makes the asset available for the lessee's use, marks the start of lease accounting for lessees who then measure lease liability, determine discount rates, and classify the lease, regardless of when the lease was signed or rent payments begin.

Lease Accounting

Lease Commencement Dates and What They Mean for Lessors and Lessees

By: Jess Vento

Lease Commencement Dates

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A lease commencement date is the date on which a lessor makes an underlying asset available for use by a lessee. Under ASC 842, it is the day lease accounting starts: the lessee measures the lease liability, sets the discount rate and classifies the lease, even if the lease was signed earlier or rent starts later.

Why are there different terms for what seems to be the same thing?

Read on for an overview on what a lease commencement date is and why lessors and lessees should pay attention to it, as well as a dispelling of confusion surrounding various lease commencement date terms.

Date	What it is	Why it matters
Inception date	The date the lease is signed, or the date the parties commit to its principal terms, if earlier	The entity determines whether the contract is or contains a lease
Commencement date	The date the lessor makes the asset available for use by the lessee	Lease accounting starts: measure the liability, set the discount rate, classify the lease
Effective date	The date the contract's terms take effect	Can fall on a different day than commencement; lease accounting follows commencement

A lease is signed November 1, the lessee gets the keys January 1, and rent starts March 1. Inception is November 1, commencement is January 1, and the two free-rent months are part of the lease term.

What Does Commencement Date Mean on a Lease?

A lease commencement date is the date an underlying asset is available for use by a lessee. ASC 842, issued by the FASB, defines the commencement date as the date on which a lessor makes an underlying asset available for use by a lessee.

Since the underlying asset is available for use by the lessee at the time of the lease commencement date, it is also the date that lease accounting must start, regardless of the date that the lease was signed.

What is the Initial Period of a Lease?

The initial period of a lease begins on the commencement date and ends on the date during which the initial terms of the lease expire. Even if the lease is renewed or extended by the two parties involved in the lease, the initial period is restricted to just the time period agreed upon by the parties in the initial contract.

How Do You Determine a Lease Commencement Date?

According to the rules laid out in ASC 842, the lease commencement date for accounting purposes is the date on which a lessor makes an underlying asset available for use by a lessee.

Furthermore,ASC 842specifies that the lease commencement date is the date on which the discount rate for the lease must be determined, as well as classifying the lease as finance vs operating.

What is the Difference Between Commencement Date and Effective Date?

The effective date is when the contract's terms take effect. The commencement date is when the lessor makes the asset available for use. They can fall on different days, and lease accounting follows the commencement date. If a leased asset is involved, there might be a difference between the effective date of a contract, which could include services beyond the leased asset, and the commencement date of the lease itself.

What is the Difference Between Commencement Date and Inception Date?

The inception date of a lease is either the date of the creation of the lease agreement or the date of the commitment by both parties for principal provisions of a lease. The inception date is whichever of these two dates is earlier.

The commencement date of a lease is the date that marks the beginning of the period of time during which a lessee is entitled to exercise the right to use a leased asset. This is the date on which lease accounting begins.

Lease Accounting Software and Lease Commencement Dates

Oftentimes, lease commencement dates and start dates are defined when contracts are initially drawn up. Lease accounting software can help both the lessor and lessee parties keep track of these dates and parameters with features such as:

1.A dashboard view of all active lease contracts and details
2.Standardized journal entries and amortization schedules that support ASC 842, GASB 87 and IFRS 16 compliance
3.The ability for both CPA firms and clients to go into a lease and check details for correctness

Best of all, Crunchafi offers a free demo to test out these capabilities so CPA firms can see for themselves just how easy lease accounting is with lease accounting software.

Frequently Asked Questions

What does commencement date mean on a lease?

Under ASC 842, the commencement date is the date on which a lessor makes an underlying asset available for use by a lessee. Lease accounting starts on that date, regardless of the date the lease was signed.

What is the initial period of a lease?

The initial period of a lease begins on the commencement date and ends on the date the initial terms of the lease expire. Even if the lease is renewed or extended, the initial period covers only the time agreed to in the original contract.

How do you determine a lease commencement date?

Under ASC 842, the commencement date is the date the lessor makes the underlying asset available for use by the lessee. It is also the date the lessee determines the discount rate and classifies the lease as a finance or operating lease.

What is the difference between commencement date and effective date?

What is the difference between commencement date and inception date?

The inception date is the date the lease agreement is signed, or the date the parties commit to its principal terms, if earlier. Under ASC 842, it is when an entity determines whether a contract is or contains a lease. The commencement date is when the lessee can start using the asset, and it is when lease accounting begins.

When does lease accounting start under ASC 842?

On the commencement date. That is when the lessee recognizes the right-of-use asset and lease liability, even if rent payments start later or the lease was signed months earlier.

Is the lease commencement date the same as the rent start date?

Not always. A lease can commence before the first rent payment is due, for example when the lessee gets the space during a free-rent or build-out period. The lease term, and lease accounting, start at commencement.

Schedule a free Crunchafi Lease Accounting demo!