What does a Lease Commencement Date mean and how do I figure out what it is?
In this article, we’ll dive a little deeper into what a Lease Commencement Date is, why it matters so much, and how you can easily ascertain the Lease Commencement Date for each of your contracts.
Now, you might be thinking, “Of course I know when a lease commences – it’s so obvious!”
Well, there’s a bit more to Lease Commencement Dates than meets the eye. Let’s find out.
Lease Commencement Date: Definitions
The Lease Commencement Date is a crucial factor in lease accounting. It doesn’t matter which standard you’re using – ASC 842, IFRS 16 or GASB 87 – you’ll have to be able to tell the exact Commencement Date in order to create proper journal entries for the lease you’re examining.
Common definitions in terms of the Lease Commencement Date include:
This is the date when the rights and obligations of each party according to the lease begin. It is not necessarily the same thing as the Lease Effective Date or the Lease Start Date (more on this below).
Rent Commencement Date
In many cases, there are certain improvements that need to be made to the property before the tenant moves in. So the Rent Commencement Date is the date when payment for use of the asset starts – often after these improvements have been completed.
This is the date when the tenant actually takes possession of the asset in question. Again, this is not necessarily the same as the Commencement Date or Rent Commencement Date.
Lease Start Date
This is the date upon which possession is passed from the landlord to the tenant – but note that this can be defined very differently across lease agreements.
So which date should be used when it comes to the correct accounting treatment under ASC 842, IFRS 16 or GASB 87?
It’s critical to note that the lease commencement date is often different from the start date included in the lease.
While the start date, move-in date, rent commencement date or commencement date may signify the date when various aspects of the agreement come into effect, the Lease Commencement Date is the date when possession or control of the leased asset is transferred from the lessor to the lessee.
Let’s look at a couple of examples to make this point a bit clearer.
Lease Commencement Date Example 1
Take an office lease, for example. The lease may state that August 1 is the start date, and that is when the first rent payment will take place. However, the new tenant (the lessee) may be granted access to the premises a month early, on July 1, in order to furnish and renovate the offices. That would make July 1 the Lease Commencement Date for accounting purposes.
This can get very confusing, fast. The following language is standard:
THIS LEASE is made and entered into this 20th day of February, 2020, by and between Cool Widgets, LLC (“Landlord”) and Nifty Toys Corp (“Tenant”).
Premises. Landlord hereby leases to Tenant and Tenant leases from Landlord, for the term and upon the terms, conditions and agreements set forth in this Lease, office space with a combined total of 2,000 rentable square feet, commencing on February 25, 2020.
Term. The term of this Lease, and Tenant’s obligation to pay rent, shall be for a period of three (3) years (the “Lease Term”), commencing on February 28, 2020 and ending February 28, 2023.
In this example, the lease is entered into effect on February 20, and its term commences on February 28. However, the tenant’s actual possession of the office space begins on February 25, so that will be the Lease Commencement Date.
Lease Commencement Date Example 2
Acme Corp and Trulli-Ventures enter into a 5-year lease of a converted shipping container to be used as a site office. The start date of the lease was 1 February, when payment of $50,000 was due.
However Acme Corp allowed the Trulli-Ventures to start accessing and decorating the interior of the converted shipping container from 1 January.
In this example, despite the fact that the official start date according to the signed lease agreement was 1 February, the asset was available to the lessee from January 1, and therefore this is the Lease Commencement Date.
Conclusion: Staying On Top Of The Lease Commencement Date
As we’ve seen, nailing down the actual Lease Commencement Date can be more challenging than first suspected. Getting this date wrong can have a massive impact as the resulting difference will be carried through all the way from calculations, to journal entries, to financial statements – and unravelling this, as we all know, can be quite a mess.
As we’ve seen, to ensure compliance under ASC 842, IFRS 16 or GASB 87, identifying the correct Lease Commencement Date is critical.
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