Overview:
The lease payments made before the lease commencement are not included in the lease liability calculation.
However, in the circumstance you have made a lease payment before commencement, it will be captured under the Right of Use Asset section of the Initial Recognition tab.
What Happens to the Lease Payment Before the Lease Commencement?
All the lease payments before the lease commencement will be removed.
The lease liability opening balance will exclude those payments, as the opening balance is calculated based on the net present value of lease payments within the lease term.
The lease payments made before the lease commencement should be included in the opening balance of the right-of-use asset.
How to Input Lease Payments Before the Lease Commencement?
Video Length: 1 minute
The video above demonstrates how to input lease payments before the lease commencement. Alternatively, you can read the step-by-step guide below. Here are the steps:
Step 1: Determine the amount before the lease commencement. For example, if the lease commencement date is January 1, 2023, monthly lease payment is $8,000, assuming there is a $8,000 payment paid on December 1, 2022.
Step 2: Scroll down to Right of Use Asset → Prepaid Amount Before Comm.
Step 3: Key in the amount before the lease commencement date, then click Save Changes
FAQs:
Why is the payment made before the commencement date included as part of the right-of-use asset? This is a requirement of all the lease accounting standards.
ASC 842 states that under 842-20-30-5 (B), "At the commencement date, the cost of the right-of-use asset shall consist of... B. Any lease payments made to the lessor at or before the commencement date, minus any lease incentives received.”
IFRS 16 states that under IRFS 16:24, “The right-of-use asset is initially measured at the amount of the lease liability plus any initial direct costs incurred by the lessee. Adjustments may also be required for lease incentives, payments at or prior to commencement and restoration obligations or similar.”
GASB 87 states that under GASB 87:30(b), “Lease payments made to the lessor at or before the commencement of the lease term, less any lease incentives received from the lessor at or before the commencement of the lease term”
GASB 96 states under GASB 96:26, “...prepayment should be reclassified as an addition to the initial measurement of the subscription asset at the commencement of the subscription term.”
Further Reading: