Lease Inception and the Commencement Date: What Each Date Does Under ASC 842

Lease inception is the date the lease is signed, or the date of an earlier written commitment. On that date you answer one question: is this contract, or part of it, a lease? The accounting waits for the commencement date, when the landlord makes the asset available for use. That is when ASC 842 classifies the lease, sets the discount rate and puts the right-of-use (ROU) asset and lease liability on the books.

The gap between the two dates can run for months. This page walks one office lease through it, date by date.

What does lease inception mean under ASC 842?

The ASC 842 Master Glossary defines lease inception as "the date of the lease agreement or commitment, if earlier." A commitment counts only if it is in writing and signed by the parties. It must also "specifically set forth the principal provisions of the transaction." A letter of intent with open rent or term points is not a commitment.

The one requirement tied to that date is ASC 842-10-15-2: "At inception of a contract, an entity shall determine whether that contract is or contains a lease." ASC 842-10-15-3 supplies the test. The contract must convey the right to control the use of an identified asset for a period of time in exchange for consideration.

On the books, inception is quiet. No ROU asset, no liability, no lease cost. The work is judgment and documentation. You identify the lease components, look for embedded leases in service contracts, and record the conclusion in the lease file.

Inception date vs commencement date: which one drives the numbers?

The commencement date drives almost all of them. The glossary defines it as "the date on which a lessor makes an underlying asset available for use by a lessee." On that date, three requirements apply:

• Classification. ASC 842-10-25-1 has an entity classify each separate lease component at the commencement date. See how the five classification tests work.
• Discount rate. ASC 842-20-30-2 bases the rate on information available at the commencement date, not at signing. That matters when the incremental borrowing rate moves between the two dates.
• Recognition and measurement. ASC 842-20-25-1 has the lessee recognize the ROU asset and lease liability at commencement. ASC 842-20-30-1 measures the liability at the present value of the lease payments not yet paid.

The lease term also starts here. ASC 842-10-55-25 says the lease term "begins at the commencement date and includes any rent-free periods provided to the lessee by the lessor."

PwC's Leases guide, section 3.2 gives the reason for waiting. No ROU asset or lease liability is recognized before commencement "because prior to that date, the lessor has not yet performed under the arrangement."

When does early access for a build-out start the lease?

Usually on the day the tenant gets the keys to build, not the day it opens. ASC 842-10-55-19 covers a lessee that takes possession before it begins operations or pays rent. During that period the lessee uses the space to construct its own asset, such as leasehold improvements.

ASC 842-10-55-20 then closes the door on rent timing: "The timing of when lease payments begin under the contract does not affect the commencement date of the lease." A free-rent fit-out period is therefore inside the lease term (ASC 842-10-55-25), and it carries lease cost (ASC 842-10-55-21).

There is one exception worth knowing. When the landlord owns the improvements, the leased asset is the finished space. KPMG's Leases Handbook, Example 5.1.10, dates commencement to when the completed space is made available in that case. Who owns the improvements is its own analysis; see tenant improvement allowance accounting.

Timeline: one office lease from signing to move-in

Here are the inputs. A private company signs a 5-year office lease (60 monthly rent payments) on March 2, 2026. It pays the first month's rent of $10,000 at signing. The landlord hands over the space on May 1, 2026 for the tenant to build its own improvements.

Rent of $10,000 a month is due on the first of each month from August 1, 2026 through July 1, 2031. That is 60 payments, or $600,000 in total. The tenant moves in on August 17, 2026, and the lease ends July 31, 2031.

Assume no renewal or purchase options, no initial direct costs and no incentives. The incremental borrowing rate at May 1, 2026 is 6% a year compounded monthly (0.5% a month). The lease classifies as operating.

Now the day-one numbers. Count months from May 1, 2026 as month 0. The August payment falls in month 3, and it is already paid. The remaining 59 payments fall in months 4 through 62.

Discounted at 0.5% a month, those 59 payments have a present value of $502,270.10. That is the lease liability. The ROU asset adds the $10,000 paid before commencement, for $512,270.10. The entry on May 1 is:

• Debit ROU asset $512,270.10
• Credit lease liability $502,270.10
• Credit prepaid rent $10,000.00

What happens to rent paid before the commencement date?

It goes into the ROU asset, never the liability. ASC 842-20-30-5(b) adds "any lease payments made to the lessor at or before the commencement date, minus any lease incentives received" to the asset. The liability under ASC 842-20-30-1 covers only payments not yet paid.

Do not leave the prepaid payment in the liability. If the $10,000 were left in the liability, the liability would be overstated by the present value of a payment already made. The same logic applies to a first payment due on the commencement date itself. See the ROU asset calculation for the full build-up.

The free months need no special entry. Because the term starts on May 1, straight-line cost runs from May 1. The rent-free months simply widen the gap between cost and cash, as covered in rent-free period accounting.

What goes in the footnotes between signing and commencement?

Between signing and commencement, no ROU asset or lease liability is recognized. Any rent paid in advance sits in prepaid rent, and a significant signed lease is described in the annual notes under ASC 842-20-50-3(b). A lessee that controls the asset during construction is the exception: it accounts for the asset itself, and the sale-and-leaseback guidance applies (ASC 842-40-55-1 through 55-6; Deloitte's Roadmap: Leases, section 11.1).

In annual financial statements, ASC 842-20-50-3(b) requires a lessee to disclose "information about leases that have not yet commenced but that create significant rights and obligations for the lessee." That includes "the nature of any involvement with the construction or design of the underlying asset."

In the example, the March 31 quarter-end falls in that window, but 842-20-50-3(b) is an annual requirement. As Deloitte's Roadmap: Leases, section 15.5.2 notes, "no disclosures are prescribed for lessees and lessors on an interim basis" beyond one lessor item; ASC 270 governs interim reports.

If a fiscal year-end fell in the window, a lease this size would usually be described in the notes. Private companies have applied these disclosures for fiscal years beginning after December 15, 2021. See qualitative lease disclosures for what the narrative covers.

What does the auditor ask for to support the commencement date?

Evidence of when the space was actually available. That means the delivery or access letter, the landlord's turnover notice, or contractor mobilization records. The rent-start clause alone does not prove it.

KPMG's Handbook: Leases, paragraph 5.1.20, explains why the date carries weight. A wrong commencement date can misstate the ROU asset and liability, measure them with the wrong rate, and start lease cost in the wrong period. In the example, the May 1 date puts $28,571.43 of lease cost in the fit-out quarter (3 × $9,523.81). An August 1 date would leave that quarter with none.

Frequently asked questions

What is the lease inception date in plain terms?

Lease inception is the date on which ASC 842-10-15-2 requires you to decide whether a contract is or contains a lease. It is the date of the lease agreement, or of an earlier written commitment signed by the parties that sets out the principal provisions. No ROU asset or lease liability is recognized yet.

Is a lease recorded at inception or at the commencement date?

At the commencement date. ASC 842-20-25-1 has the lessee recognize the right-of-use asset and lease liability at commencement, and ASC 842-10-25-1 classifies the lease on that date. Between signing and commencement, no ROU asset or lease liability is recognized. Rent paid in advance sits in prepaid rent, and ASC 842-20-50-3(b) has a significant signed lease described in the annual notes.

Does early access for a tenant build-out start the lease?

Usually, yes. Under ASC 842-10-55-19 and 55-20, the lease commences when the landlord makes the space available for the tenant's use, including to build its own leasehold improvements. The date rent starts does not move the commencement date.

Sources and further reading

• ASC 842 Master Glossary — Lease Inception; Commencement Date of the Lease.
• ASC 842-10-15-2 and 15-3 — identifying a lease at contract inception.
• ASC 842-10-25-1 — classification at the commencement date.
• ASC 842-10-55-19 through 55-21 — commencement date implementation guidance, including construction periods.
• ASC 842-10-55-25 — the lease term begins at commencement and includes rent-free periods.
• ASC 842-20-25-1, 842-20-30-1, 842-20-30-2 and 842-20-30-5 — lessee recognition, the liability, the discount rate and the ROU asset.
• ASC 842-20-25-6 — the single straight-line operating lease cost.
• ASC 842-20-50-3(b) — disclosure of leases not yet commenced.
• KPMG Handbook: Leases, section 5.1, paragraph 5.1.20 and Example 5.1.10 — commencement date and leasehold improvements; paragraph 6.3.40 on leases not yet commenced.
• PwC Leases guide, section 3.2, Overview of lease classification.
• Deloitte Roadmap: Leasing, section 5.1, Commencement date of a lease.
• Deloitte Roadmap: Leases, section 15.5.2, Annual and interim disclosures.
• Deloitte Roadmap: Leases, chapter 11, section 11.1 Overview.
• Lease accounting key concepts.

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