Rent Commencement Date: Why the ASC 842 Lease Can Start Earlier

The rent commencement date is the date the lease says the tenant starts paying rent, often weeks or months after the tenant gets the keys. ASC 842 does not start the lease on that date. The accounting starts at the commencement date, when the landlord makes the space available for the tenant's use. Any months in between are inside the lease term and carry lease cost.

This page covers the clause itself, the gap between the two dates, and what that gap does on the books. For signing versus commencement, see lease inception vs commencement date.

What is rent commencement in a lease?

Rent commencement is the point at which the tenant's obligation to pay base rent begins. The lease defines it, and landlords and tenants negotiate it. It is a business term, not an accounting one.

Leases tend to set the date in one of a few ways:

• A fixed calendar date written into the lease.
• A set number of days after the landlord delivers the space.
• Substantial completion of the landlord's or the tenant's build-out work.
• The day the tenant opens for business.
• The earlier of an opening date and a fixed outside date.

Each version answers one question: when does cash start to move? None of them answers when the lease starts for accounting. The wording of your clause matters for cash forecasting and for the lease abstract, so read it closely. Its legal effect is a question for counsel.

Rent commencement vs lease commencement: which date does ASC 842 use?

ASC 842 uses the lease commencement date. The Master Glossary defines it as the date the lessor makes the underlying asset available for the lessee's use. Rent timing is not part of that test. The inception vs commencement article quotes the full definition.

ASC 842-10-55-20 says so directly. A contract "may require the lessee to make lease payments only after construction is completed and the lessee begins operations." It then adds: "The timing of when lease payments begin under the contract does not affect the commencement date of the lease."

Deloitte's Roadmap: Leases, section 5.1, makes the same point: "The commencement date may differ from the date stated in the contract" and does not depend on when rent is due. In its Example 5-1, the fixed term and rent begin June 1, 20X9. The tenant gets access on January 1, 20X9 to build improvements that it owns, and the lease commences on January 1.

In Example 5-2 the landlord owns the improvements and the tenant is only acting as its construction agent. So the space has not yet been made available for the tenant's use, and the lease has not commenced.

KPMG's Handbook: Leases, paragraph 5.1.10, lists when this happens. The asset can be available before the tenant begins operations, before payments are required, or before a commencement date stated in the contract.

Three requirements then run from commencement, not from rent start:

• Lease term. ASC 842-10-55-25 starts the lease term at the commencement date, and the term includes any rent-free periods the lessor provides.
• Initial measurement. ASC 842-20-30-1 measures the lease liability at the present value of the lease payments not yet paid, at the commencement date. The lease payments themselves are defined in ASC 842-10-30-5.
• Lease cost. For an operating lease, ASC 842-20-25-6(a) spreads a single lease cost over the remaining lease term, generally on a straight-line basis.

The practical result: the free months before rent commencement absorb part of the total rent as expense. See rent-free period accounting for abatements that fall later in a lease.

What happens on the books between commencement and rent start?

Here is one office lease, with every input stated. The landlord delivers the space on January 1, 2027, so that is the commencement date. The lease term is 60 months, January 1, 2027 through December 31, 2031. Rent commencement is May 1, 2027, four months later.

Rent is $12,000 a month, due in advance on the first of each month from May 1, 2027 through December 1, 2031. That is 56 payments, or $672,000 in total. The discount rate is 7.2% a year compounded monthly, or 0.6% a month.

Assume an operating lease with no options, initial direct costs, incentives or prepaid rent. Amounts are rounded to the cent each month.

Start with the two day-one numbers:

• Straight-line lease cost: $672,000 ÷ 60 months = $11,200 a month, from January 2027.
• Lease liability at January 1, 2027: the present value of the 56 payments, discounted from months 4 through 59 at 0.6% a month, is $559,192.15. With nothing paid at or before commencement, the right-of-use (ROU) asset is the same $559,192.15 (ASC 842-20-30-5).

Now the free months. The liability accretes interest with no payment against it. ASC 842-20-35-3(b) then measures the ROU asset as the liability adjusted for accrued lease payments. Accrued lease payments are the straight-line cost recognized minus the cash paid.

Two things to notice. The liability grows during the free months, from $559,192.15 to $572,734.03, because interest accretes with no payment against it.

And the ROU asset is not the liability. By April 30 it is $44,800 lower, four months of cost with no cash. From May, each $12,000 payment exceeds the $11,200 cost, so the gap closes by $800 a month and reaches zero after 56 payments.

One check on the arithmetic. The April 30 liability, $572,734.03, equals the present value of the same 56 payments measured on May 1.

If you wrongly started the lease on May 1, you would book a $560,734.03 liability for the 55 payments not yet paid. The ROU asset would be $572,734.03, because it includes the $12,000 paid that day (ASC 842-20-30-5). That is $44,800 more ROU asset than the correct $527,934.03 at April 30, and January through April would show no lease cost.

The entry on January 1, 2027 is a debit to the ROU asset and a credit to the lease liability, both $559,192.15. For the full build-up of each balance, see the ROU asset calculation and what a lease liability is.

What if rent starts only when a future event happens?

Some clauses tie rent to an event, such as the tenant opening for business or the build-out being finished. ASC 842-10-55-20 names that exact pattern and keeps the commencement date where it is. The lease still starts when the landlord makes the space available.

The harder question is measurement. At commencement, you have to decide which payments go into the liability. ASC 842-10-30-5(a) includes fixed payments, "including in substance fixed payments." ASC 842-10-55-31 describes in-substance fixed payments as payments that "are, in effect, unavoidable."

So the analysis turns on what the tenant cannot avoid. A fixed outside date caps how late rent can start, so record it in the abstract. Whether that makes the rent from the outside date in substance fixed is a judgment. So is a clause with no outside date, or one tied to an event the tenant controls.

Deloitte's Roadmap: Leases, section 6.2 covers fixed and in-substance fixed payments. Document the reasoning in the lease file, because you can expect the auditor to ask how the payment stream was built.

If the tenant gets early access to build out the space, first settle who owns the improvements. Under Deloitte's Examples 5-1 and 5-2, access to build improvements the tenant owns starts the lease. Access only to build the landlord's improvements does not. See tenant improvement allowance accounting for the ownership question.

How should the lease abstract record both dates?

Abstract both dates in separate fields. The commencement date drives the term, the discount rate and the schedule. The rent commencement date drives the first payment in that schedule. A single "start date" field is how one date quietly gets used for both.

The rent commencement date ties to the lease clause and, later, to the first rent invoice. For the evidence behind the commencement date itself, see the auditor section of lease inception vs commencement date.

Expect a recalculation too. An auditor will typically recompute it by dividing total payments by the full term, not by the months of paid rent. In the example, that is $11,200 a month over 60 months, not $12,000 over 56. The ASC 842 glossary of terms has the defined terms if your team uses them loosely.

Frequently asked questions

What does rent commencement date mean in a lease?

It is the date rent starts under the lease. The landlord and tenant set it, so it governs cash, not when the lease starts for accounting.

Is the free-rent period part of the lease term under ASC 842?

Yes, under ASC 842-10-55-25. The term starts at commencement, so the free months carry straight-line lease cost.

Does the lease liability go down during the free-rent months?

No. With no payments due, it only accretes interest. In this page's example it grows by $13,541.88 over the four free months.

Sources and further reading

• ASC 842 Master Glossary — Commencement Date of the Lease.
• ASC 842-10-55-20 — the timing of lease payments does not affect the commencement date.
• ASC 842-10-55-25 — the lease term begins at commencement and includes rent-free periods.
• ASC 842-10-30-5 and 842-10-55-31 — lease payments, including in-substance fixed payments.
• ASC 842-20-30-1 and 842-20-30-5 — initial measurement of the lease liability and ROU asset.
• ASC 842-20-25-6 and 842-20-35-3 — the straight-line single lease cost and subsequent measurement of an operating lease.
• Deloitte Roadmap: Leases, section 5.1, Commencement Date of a Lease — including Examples 5-1 and 5-2.
• Deloitte Roadmap: Leases, section 6.2, Fixed Payments.
• KPMG Handbook: Leases, section 5.1 — commencement date, including paragraph 5.1.10.

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