What is the difference between Inception of lease and Commencement of lease?

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IAS 17 distinguishes between Inception and Commencement of lease and the two terms represent two different instances of time which may be occurring at different or the same date. Usually inception and commencement of the lease occur at the same date but if they are occurring at different dates then the two have significant effects on accounting and the difference must be understood as stated under IAS 17 Leases so that proper accounting is done for lease agreements.

Inception of the lease is the date whichever is earlier of the following:

  • date of lease agreement
  • date of commitment by the parties for principal provisions of the lease

Commencement of the lease is the date from which the lessee is entitled to exercise the right to use the leased asset.

Why distinction is important – Few major reasons?

The distinction between the two is extremely important for accounting purposes. Some of the many reasons are as follows:

  • Classification of lease i.e. whether it is a finance lease or an operating lease is done at the inception of the lease and not at commencement
  • The recognition (under finance lease) takes place at the commencement of the lease and not at the inception of the lease
  • The amounts to be recognized (under finance lease) are determined at the inception of the lease and not at the commencement of the lease.

Above are some major reasons why distinction is important but there are other factors some which are connected with inception and some are connected with the date of commencement. Therefore, students and accountants must be careful about these two different dates and should not take them as same.

Source: pakaccountants.com

Category: Credit

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