By LeaseCrunch® on July 20, 2022 at 3:47 PM
When a lease “starts”, is it the same thing as a lease “commencing?” Is the initial start date of a lease the same as the commencement date?
Why are there different terms for what seems to be the same thing?
Read on for an overview on what a lease commencement date is and why lessors and lessees should pay attention to it, as well as a dispelling of confusion surrounding various lease commencement date terms.
What Does Commencement Date Mean on a Lease?
A lease commencement date is the date an underlying asset is available for use by a lessee. The terms and conditions surrounding a lease commencement date and its definitions and presentation in lease contracts were updated in the release of ASC 842 by the GASB.
Since the underlying asset is available for use by the lessee at the time of the lease commencement date, it is also the date that lease accounting must start, regardless of the date that the lease was signed.
What is the Initial Period of a Lease?
The initial period of a lease begins on the commencement date and ends on the date during which the initial terms of the lease expire. Even if the lease is renewed or extended by the two parties involved in the lease, the initial period is restricted to just the time period agreed upon by the parties in the initial contract.
How Do You Determine a Lease Commencement date?
According to the rules laid out in ASC 842, the lease commencement date for accounting purposes is the date the control of an underlying asset is passed from lessor to lessee.
Furthermore, ASC 842 specifies that the lease commencement date is the date on which the discount rate for the lease must be determined, as well as classifying the lease as finance vs operating.
What is the Difference Between Commencement Date and Effective Date?
According to contract law, there is no legal difference between the terms “commencement date” and “effective date.” If a leased asset is involved, there might be a difference between the effective date of a contract, which could include services beyond the leased asset, and the commencement date of the lease itself.
What is the Difference Between Commencement Date and Inception Date?
The inception date of a lease is either the date of the creation of the lease agreement or the date of the commitment by both parties for principal provisions of a lease. The inception date is whichever of these two dates is earlier.
The commencement date of a lease is the date that marks the beginning of the period of time during which a lessee is entitled to exercise the right to use a leased asset. This is the date on which lease accounting begins.
Lease Accounting Software and Lease Commencement Dates
Oftentimes, lease commencement dates and start dates are defined when contracts are initially drawn up. Lease accounting software can help both the lessor and lessee parties keep track of these dates and parameters with features such as:
- A dashboard view of all active lease contracts and details
- Automatic lease standard compliance checks
- The ability for both CPA firms and clients to go into a lease and check details for correctness
Best of all, LeaseCrunch offers a free demo to test out these capabilities so CPA firms can see for themselves just how easy lease accounting is with lease accounting software.
Click here to schedule a free demo!