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?
The lease start date and how to determine it
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.
Download our 12-step lease accounting guide to ASC 842 and IFRS 16 transitions:
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.
Hi, I have a renewal lease which it was fully executed in Feb 26/2021 and its commencement day is March 1/21. The prior term ran from March 2016 to Feb 28/21. Should I consider for the new ROU asset a borrowing rate as of Feb 28 date of the lease or as March 1/21 the commencement lease date?. Borrowing rate are not so different but I want to know what is the most appropriate rate
The Company should reassess the lease term as of the day the Company is reasonably certain to exercise the renewal option. When the lease term is reassessed this also leads to a remeasurement of the lease liability and ROU asset and an update to the discount rate.
Since the renewal was fully executed, i.e. agreed upon by the lessee and the lessor as of 2/26/2021, this would be the date of remeasurement and the date of the discount rate update, or an earlier date may be appropriate, though not shared here. The remeasuremend date is the date the lessee beceomes reasonably certain they will extend the lease.
Dear Kiley,
We just completed a 7 year lease ending 12/31/20. On Feb 21, 2020 we signed a renewal, an amendment to our original lease, to extend our lease to commence on 1/1/21 continuing through 4/30/26. The amendment includes rent abatement and escalation of rents. Do we need to recalculate straight line rent beginning 2/21/20 (the date the amendment was signed) through 4/30/26 or start a new SLR schedule beginning 1/1/21 for the renewal term?
Thank you,
Mary Wortham
Mary,
That is a great question! To accurately calculate the straight-line rent expense under ASC 842, items such as lease incentives, rent abatements, and rent escalations should be factored into the calculation when the renewal is reasonably certain to occur. In this instance it was prior to the amendment being signed, but internal information would be needed to know whether or not it was as of the renewal date or even earlier. Thanks!
Notwithstanding that the term of this Lease commences on November 1, 2020, the Tenant is entitled
to possession of the Property at 12:00 noon on October 25, 2020.
Hi, so my lease currently has the above, currently there is tenants living there and was told to move in Nov 1st however my lease says i can have possession now, so am i able to move in.
Hi – per the terminology quoted here, you are entitled to possession now, but the landlord will need to give you keys and/or access the building/property in order for you to actually have the right to use the property, and for the lease to commence from an accounting perspective.
what does this line mean in the lease “This Commencement begins the later of November 15, 2020…”
Hi Tara,
This line is stating the lease term begins on one of two dates and between the two dates, you pick the later one. The commencement date on this line is the date the lease term begins, but would only be the date to begin accounting for the lease as the lessee only if it is also the date possession passes from the landlord to the tenant (or from the lessor to the lessee).
ASC842 will be effective for us on 1/1/2021 (as an emerging growth company).
Should ROU asset and lease liability values be calculated as of 1/1/21, based on the lease remaining payments and incremental borrowing rate as of 1/1/21?
Or calculated as of lease start date (with incremental borrowing rate at lease start), with ROU asset and lease liability as of 1/1/21 after X months (from lease start to 1/1/21) of payments and amortization?
The first part of your question is correct – You would measure the ROU asset and lease liability values as of the transition date (1/1/21) based on the remaining lease payments and borrowing rate as of 1/1/21. For leases that start prior to the transition date of 1/1/21, you would include the lease’s accumulated balances of prepaid/deferred rent etc. that existed up until that date (i.e. 12/31/2020).
If you have a lease that starts after transition (after 1/1/21) you would calculate the lease liability and ROU asset as of the lease commencement date using the borrowing rate applicable as of the lease commencement date.
Hi,
Can I confirm the above not only refers to timing we recognise straight line rental expense but also when we recognise the ROU/ROL? Example
1. Lease contract signed aug20
2. Moving in date sep20
3. Contract lease term begins oct20
We only recognise all rental, ROU/ROL on sep20. Even though asset and obligation legally was contracted on aug20?
Hi,
Thank you for your question. Under ASC 842, we are requried to recognize the lease liability and ROU asset on the possession date. In this example, Sept 20 is the appropriate date for recognition, as the move in date is the “possession date” of the asset.
If the lease commencement date is 8/1/20 and the term is until the last day of the 85th months would the expiration date by 9/30/28?
Hi Leah,
If the lease commencement date is also the date that the lessee takes control of the asset than the lease term would be 8/1/2020 until 8/31/2027.
Thanks for reaching out!
What is a demised tax?
Hi Anna,
In property law, demise refers to a property that has been transferred by lease. The term “demised tax” is most likely referring to some kind of transfer tax.
Thanks for reaching out!
Hi, do I enter into a lease agreement on the day I sign or the day the leasing term starts?
Hi,
Thank you for your question. From a legal perspective, once the lease agreement has been signed, you have entered into a binding contract. However, the day you should start accounting for the lease agreement is the date that you obtained access or possession of the asset for use. ASC 842-10-20 defines the lease commencement date as the “date on which a lessor makes a underlying asset available for use by a lessee.” This might be the same date as the day the leasing term started, or it could be before or after depending on when the lessor made the asset available for your use. The commencement date and possession date of the asset can differ in some cases. These differences can be due to early access periods, or construction that could delay the lessee obtaining possession of the asset.
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
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.
Hi Kiley,
Can you please advise what would be the Accounting Start date for a 2 year lease that follows this date pattern:
Contract Start date – 1/1/2020
Access and Control date – 1/1/2020
Lease Signed (fully executed by both parties) – 4/1/2020
Would you recognize the Initial ROU asset and liability as of 4/1/2020 as this when the contract is legally binding (with total lease payments being calculated from 1/1/2020) OR you would consider the Accounting Start Date to be 1/1/2020 as this is when the lessor made the underlying asset available for our use (possession date).
Thank you!
Hi Michal,
Under ASC 842, the accounting start date of the lease is the date the lessor makes the underlying asset available for use by the lessee. The execution date in ASC 842 is only used to determine if the contract is a lease or contains a lease. This scenario seems a bit opposite from most where parties may execute a lease a few months before making the asset available for the lessee’s use, however from the guidance the accounting would follow the control or access date.
Thank you Kiley! I was thinking the fact that the obligation was not accepted by both parties until 1st of April would actually result in holding with recognizing the ROU asset earlier?
Hi Michal,
In the facts presented with the situation it was stated that the lessee was granted access and control on 1/1. If the lessee accepted access and control on 1/1 and recognized the related ROU asset, they would also be assuming the obligation related to the ROU asset at that time. When the ROU asset is placed in use, the lessee is likely to owe the obligation to that asset.
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
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.
If lease start 12-1-2019 when does a 12 month lease actually ends.
Hi Theresa,
If a lease starts 12/1 and has a 12 month term, it would end 11/30 of the next year.