5.1 Commencement Date of a Lease

The commencement date of the lease is important under ASC 842 because that date is when (1) lease classification is determined (see Sections 8.3.2 and 9.2 for more information about lessee and lessor classification, respectively) and (2) the lease is initially measured (see Sections 8.4.2 and 9.3.2 for discussion of lessee and lessor initial measurement, respectively). As noted above, the commencement date is the “date on which a lessor makes an underlying asset [i.e., the PP&E subject to the lease] available for use by a lessee.” The commencement date may differ from the date stated in the contract and is not affected by when the lessee (1) must make lease payments (e.g., if the lessor grants the lessee a rent holiday) or (2) expects to use or actually uses the underlying asset. A lease agreement may grant the lessee access to and control over the leased asset before the beginning of the fixed noncancelable term stated in the lease agreement. This is common, for example, when the lessee needs time to construct leasehold improvements or otherwise prepare the leased space for its intended use. It is also common for the lessee not to be required to begin making rental payments until the beginning of the fixed noncancelable lease term.

However, a lease can commence, for accounting purposes, before the beginning of the fixed noncancelable term stated in a lease agreement. ASC 842-10-20 defines the lease commencement date as the “date on which a lessor makes an underlying asset available for use by a lessee.” Further, ASC 842-10-55-19 states that “[i]n some lease arrangements, the lessor may make the underlying asset available for use by the lessee . . . before it begins operations or makes lease payments under the terms of the lease.” In such cases, the lease commences when the lessee has access to and the right to control the use of the leased asset (see Section 3.4 for a detailed discussion of when a customer has the right to control the use of an identified asset), even if that occurs before the beginning of the fixed noncancelable lease term stated in the lease agreement.

There may also be instances in which a lessee controls an underlying asset before the commencement date of the lease. For example, this may be the case for transactions in which the lessee is involved with a construction project (i.e., the underlying asset that will be subject to the lease is in the process of being constructed). In such cases, the lessee would be required to recognize the asset as the “deemed owner” of the asset before lease commencement and must determine whether derecognition is appropriate as a sale-and-leaseback transaction. (See Chapter 11 for a detailed discussion of when the lessee controls an underlying asset before the commencement date of the lease, and see Chapter 10 for more information about the accounting for sale-and-leaseback transactions.)

 

Changing Lanes

Inception Date Versus Commencement Date

Unlike ASC 842, ASC 840 required entities to classify leases on the basis of the facts and circumstances present at lease inception (i.e., the date of the lease agreement or commitment, if earlier) instead of at lease commencement, which may lead to different conclusions regarding classification if facts and circumstances change between the dates (see the Changing Lanes discussions in Sections 8.3.2 and 9.2).

In addition, while a lease was initially recognized at lease commencement under ASC 840 as it is under ASC 842, the inputs used to initially measure the lease under ASC 842 are determined at different times than they were under ASC 840. For example, under ASC 840, inputs such as discount rate and fair value, as well as the lease classification itself, were determined at lease inception; however, under ASC 842, the inputs and lease classification are determined at lease commencement. As a result, there could be differences between the initial recognition of a lease under ASC 842 and that under ASC 840.