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?
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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 ASC 840 as well as the 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.
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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 on 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.
If a 5 year commercial lease date starts on February 12, 2020, is the ending date February 11, 2025. Please confirm.
Thank you.
Hi Jessica,
Yes, you are correct, if the lease term is 5 years from February 12, 2020 it would end on February 11, 2025.
Thanks for reaching out!
Hi Kiley,
Would you then count 2/12/20 – 2/29/20 as a full “period” to calculate straightline expense?
What if it had started on 2/25/20?
Thanks
Good question!
To be completely accurate in the question from Jessica above, both the period from February 12 – 29, 2020 and the period from February 1 – February 11, 2025 should be treated as partial periods.
Additionally the period from February 25 – 29, 2020 would also be treated as a partial period.
Thanks for reaching out!
LeaseQuery
Hi Kiley,
I just want to be certain I understand your responses to Jessica and Vince above. I am familiar with the concept that possession date triggers the recording of rent expense under U.S. GAAP. My question is – If the date of possession is at any time after the 1st of the month, I would record a prorated rent expense for the first month (starting with month of possession)? As an example, if possession occurred on the 15th of a 30 day month, 2.5 months prior to the commencement of a 10 year facility lease, I would record the total rent, straight line, over 122.5 months, with the first month’s rent equaling a prorated amount of 50.0% of a full month’s rent? Thank you very much for your help!
Hi Marie,
Thanks for your question!
The answer depends on the lease term specified in the lease agreement. If the lease term is specified to begin on July 1, 2020 for a period of 10 years and the lessee was granted access on April 15th, 2020, the total amount of payments required over the lease term would be amortized over the 122.5 month period (April 15, 2020 – June 30, 2030). The expense recognized at the end of April 2020 would be 0.5 Xs the total expense and the expense recognized for May 2020 – June 2030 would be the remaining 122 months, straight-lined.
My company started to lease an office space tow years ago (operating lease), and last week the lessee signed a purchase agreement of the leased office. However, the title of the office will be transferred next month. In that case, when a journal entry of the sale of the office should be made to the general ledger?
Thank you!
Liz
Hi Liz, If no money changed hands related to the signed purchase agreement for your company (the lessee) to purchase the office space from the lessor, the sale transaction should be recorded when title transfers.
Have a great day!
LeaseQuery
What is the difference between date of contract lease and actual commencement date?
Hi Ednoa,
The lease commencement date is the date a lessor makes the underlying asset available for use by the lessee. Typically, this occurs simultaneously with the lessee taking possession or control of the physical use of the asset. The commencement date is also the date the lessee or lessor uses to determine the lease term. The date of contract for a lease agreement is sometimes referred to as the date when all parties have agreed to the terms of the lease or excecuted the lease, also sometimes called the lease execution date.
For accounting purposes, a tenant or lessee must start recording a lease on the date they take possession of, or are granted control over, the asset. Sometimes possession may be granted before the commencement date specified in the lease agreement. However tenant will use the actual date possession was granted as the date to begin accounting for the lease and not the later commencement date.
How do you know when the lessee has taken possession of the property? Would moving a piece of furniture in constitute possession?
Hi Candace,
The commencement date of a lease for accounting purposes is the date that the landlord/lessor makes the underlying asset available for use by the tenant/lessee. This typically occurs simultaneously with the lessee taking control of the physical use of the asset, or taking possession. Some examples of a landlord/lessor transferring control of use to the tenant/lessee would be giving the tenant/lessee full access to the property, allowing the tenant/lessee access to the property to make leasehold improvements, allowing the tenant/lessee to move in furniture and equipment.
Judgement is required here regarding the furniture in your example – if the tenant/lessee has moved in one pieces of furniture and does not have full/unrestricted access to the property from the landlord/lessor, they are not controlling the use of the asset. However, if the tenant/lessee is moving in mutiples pieces of furniture and equipment, has full/unstricted access to the property and is controlling how the asset is being used, the lessee has taken possession.
Regards,
Kiley Arnold