In commercial real estate, critical dates are sprinkled throughout your lease contract. These dates or milestone events can have significant financial consequences within your lease portfolio. In this blog post, we are going to discuss the importance of the lease commencement date in general and as applied to the lease accounting process.
What is the Lease Commencement Date?
Yes, your lease commencement date is when your lease commences. But there is much more intricacy to this date than one might expect. In its simplest form, the lease commencement date refers to the first date of the lease term. It is worth noting that this isn’t always the date in which the tenant begins paying rent. There are numerous dates that seem similar but in actuality act differently than lease commencement:
- Rent Commencement Date: This is when the tenant is obligated to start paying rent.
- Lease Start Date: The lease “starts” on the date possession is passed from the landlord to the tenant on paper.
- Lease Move-In Date: The date in which the tenant takes physical possession of the leased premises.
- Early Occupancy: When the tenant is granted access to the leased premises prior to the lease start date.
- Lease Execution Date: The date any lease is executed between tenant and landlord.
While on the surface, all these dates seem the same. There are legally-binding differences that affect both the tenant, the landlord and impact financial obligations under ASC 842.
The Lease Commencement Date Impact on Lease Accounting
The GAAP lease accounting overview of ASC 842 defines the lease commencement date as follows, “a lessee will recognize a lease liability, which represents the lessee’s obligation to make lease payments to the lessor, and a ROU asset, which represents the lessee’s right to use the underlying asset during the lease term.”
And, IFRS 16 states that the lease commencement date is “the date on which a lessor makes an underlying asset available for use by a lessee.”
The lease commencement date reigns when it comes to lease accounting. In essence, this date kickstarts the lease accounting process. When the lease commencement date is established, then the finance team will recognize the right of use asset and lease liability on the balance sheet for both their finance leases and operating leases. Read here to learn How to Perform the Lease Classification Test.
Once the lease is recognized, then the right of use (ROU) asset is amortized on a monthly straight-line basis. And the lease liability will decrease as each lease payment is made. Your lease calculations, journal entries, amortization schedules, and financial statements will all be grossly inaccurate if your team has the lease commencement date wrong. This mishap is adjacent to making one wrong move in a game of chess. Kick starting the new lease accounting process is complex so take a look at our Ultimate Guide to Navigating the Lease Accounting Lifecycle Under ASC 842 Compliance.
There is a risk to managing your critical dates like lease commencement in spreadsheets. Instead, check out how Occupier can help your team collaborate in one-single-source of truth. Accountants can receive notifications when the real estate team signs a new lease and it needs financial recognition. Sit in with our team, to get a look into how Occupier can work for your organization.