When does a lease start for accounting purposes? How can you tell when the lease starts and when is the lease end date?
Every lease has a “start date,” but many people, accountants included, do not understand what that date really is or how to find it. When precisely does a lease start? Is it the execution date? The move-in date? The date the company opens for business at the location? Which one is correct?
Move-in Date vs Possession Date vs Commencement Date vs Execution Date: Which Is the Lease Start Date?
The lease start date is the date that possession is passed from the landlord to the tenant. On that date, the lessee, or tenant, should begin recording straight-line expense even if that date is earlier than the “commencement date” specified on the lease. Under both the current and new lease accounting rules, the commencement date specified on the lease document has no bearing whatsoever on the lease start date.
However, the commencement date specified on the lease document may be used to determine the lease end date. This is because, most of the time, the “lease term” specified on the lease document “starts” on the commencement date. So, if the commencement date in a lease document was January 1, 2020 and the lease term specified in the document was 24 months, then the lease end date would be January 1, 2022.
Finding a Lease Start Date in Lease Document Language: Two Examples
You’ve probably seen language in a lease as follows:
Lease Term: A term commencing on January 1, 2016 (Commencement Date) and continuing for sixty-six (66) full calendar months. Tenant shall be granted access to the Premises sixty (60) days prior to the Commencement Date to install equipment and furnishings (the “Early Access Period”). Such access shall be subject to all the terms and conditions of this Lease, except that the Commencement Date and the payment of Rent shall not be triggered thereby.
Based on the language above, for accounting purposes, the lease start date in the example is actually November 1, 2015 (or whenever access is granted), and the lease term is actually 68 months. The tenant would record expense in the months of November and December (the offset is to deferred rent), even though the lease explicitly asserts that the commencement date is January 1, 2016.
Here’s a second example:
The Lease Term shall be for a period of one hundred twenty (120) months commencing one hundred fifty (150) days after the date upon which Tenant Opens for business at the Demised Premises (the “Commencement Date”).
In this example, assuming the tenant takes possession of the premises on January 1, 2016 (to construct leasehold improvements) and opens for business on June 1, 2016, then the commencement date per the lease document is November 1, 2016. However, for accounting purposes, the lease start date is actually January 1, 2016 (the possession date), and the tenant would have to record expense for January through October 2016, even though the lease asserts that the commencement date is November 1, 2016. Additionally, the accounting lease term is actually 130 months, as opposed to 120 months as stated in the lease.
So there you have it; now you know the difference between the commencement date as stated in a lease and the lease start date for accounting purposes. As you are comparing reviews and making decisions about your lease accounting software, make sure to ask vendors if their software solutions track both the commencement date as well as the possession date. Also ask if the software amortizes rent expense from the possession date and not the commencement date. LeaseQuery accounting software performs these functions effortlessly.
Talk to One of Our Expert Lease Accountants Today.
Unlike other software vendors, we aren't former real estate professionals trying to learn accounting on your dime. We're accountants just like you.
Sign up for a demo today and let us prove it.