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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Lease accounting: lease classification: inception and commencement

The concepts of inception and commencement both relate to the start of a lease, but SSAP21 is different to both IAS 17 and FRS102 with regard to inception and commencement. These differences are important.

SSAP 21 defines the inception of a lease as the earlier of the time the asset is brought into use and the date from which rentals first accrue (paragraph 29).

Both FRS102 and IAS 17 (paragraph 4) distinguish between inception and commencement

  • the inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease.
  • the commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the date of initial recognition of the lease (ie the recognition of the assets, liabilities, income or expenses resulting from the lease, as appropriate).

Thus the SSAP 21 concept of inception is closer to the IAS 17 and FRS102 concept of commencement than it is to the IAS 17 and FRS102 concept of inception.

IAS 17, paragraph 4, and FRS102 Section 20 paragraphs 8 and 9, provide that it is at inception that

  • a lease is classified as either an operating or a finance lease
  • in the case of a finance lease, the amounts to be recognised at the commencement of the lease term are determined.

However, the assets, liabilities, income or expenses resulting from the lease, as appropriate, are not recognised until commencement.

The need to distinguish between inception and commencement is usually only significant where the leased asset takes a long time to construct and the lease is entered into before the assert is complete. The latter is quite common, particularly in ship leasing, where the lease may be entered into (IAS 17 and FRS 102 ‘inception’) several years before the ship is available to the lessee (IAS 17 and FRS102 ‘commencement’). Where provision is made in a lease agreement to adjust for changes in the construction or acquisition costs of the leased asset or changes in some other measure of cost or value between inception and commencement, such changes are deemed to have taken place at inception.