What does Lease Commencement Date mean? And how do I figure out what it is?
The Lease Commencement Date is a crucial factor in lease accounting. It doesn’t matter which standard you’re using - ASC 842, IFRS 16 or GASB 87 - you’ll have to be able to tell the exact Commencement Date in order to create proper journal entries for the lease you’re examining.
The first thing that’s important to note is that the lease commencement date is often different from the start date included in the lease.
While the start date may signify the date when the agreement comes into effect, the lease commencement date is the date when possession or control of the leased asset is transferred from the lessor to the lessee.
Take an office lease, for example. The lease may state that August 1 is the start date, and that is when the first rent payment will take place. However, the new tenant (the lessee) may be granted access to the premises a month early, on July 1, in order to furnish and renovate the offices. That would make July 1 the Lease Commencement Date for accounting purposes.
This can get very confusing, fast. The following language is standard:
THIS LEASE is made and entered into this 20th day of February, 2020, by and between Cool Widgets, LLC (“Landlord”) and Nifty Toys Corp (“Tenant”).
Premises. Landlord hereby leases to Tenant and Tenant leases from Landlord, for the term and upon the terms, conditions and agreements set forth in this Lease, office space with a combined total of 2,000 rentable square feet, commencing on February 25, 2020.
Term. The term of this Lease, and Tenant’s obligation to pay rent, shall be for a period of three (3) years (the “Lease Term”), commencing on February 28, 2020 and ending February 28, 2023.
In this example, the lease is entered into effect on February 20, and its term commences on February 28. However, the tenant’s actual possession of the office space beings on February 25, so that will be the Lease Commencement Date.
Our software, Smrt, uses AI to automatically detect the Lease Commencement Date. Just upload your PDF contract and Smrt will extract key data and magically prepare journal entries under ASC 842, IFRS 16 or GASB 87. Check it out!
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