A routine stub-period charge on a floating-rate fleet lease can push an operating lease into finance-lease territory — here’s what lessees need to know before it happens.
For lessees managing floating-rate fleet leases, interim rent is one of those details that rarely gets a second look — until it changes the accounting outcome. Many lessees still classify leases based on the base rents quoted in a lessor’s proposal letter, without realizing the actual lease document may include an interim rent charge that affects both lease classification and subsequent measurement under ASC 842. The distinction matters: legitimate interim rent, calculated on an interest-only basis during a construction period, is a normal cost of financing an asset like a jet or specialized truck. But some lessors use stub-period charges that include amortization — a practice that quietly inflates yield at the lessee’s expense. Below, Bill Bosco answers the questions lessees most often raise about interim rent, lease classification, and related edge cases under ASC 842.
As a lessee, how do I account for interim rent in a floating-rate fleet lease under ASC 842?
Interim rent is a rent payment that must be capitalized along with other rents and payments. Under the lease, there are two ways to handle the interim rent. The first and correct way (though it may not fit your lessee accounting system) is to treat the lease term as having a fractional first period. The second way is a workaround where the interim rent is treated as a period-zero cash outflow.
Is interim rent considered in lease classification under ASC 842?
Under FASB ASC 842, interim rent is treated as a lease payment and is included in both lease classification and the subsequent measurement of your Right-of-Use (ROU) asset and lease liability. Under FAS 13, interim rent was always treated as a lease payment for the classification test, but it was often ignored because the test was run assuming only base rents, based on the lessor’s lease proposal letter, and the lessee did not realize there might be interim rent in the actual lease document. Some lessors claim their system allows only the first of the month as the lease commencement date, and if the lease commences after the first of the month, they charge stub-period rent. This may have been true in the 1970s, when lease accounting systems were “batch” systems that ran once a month, but in the 1980s, real-time systems were developed, allowing the lease commencement date to be any day of the month. Now, charging stub-period interim rent is a deceptive practice designed to increase a lessor’s yield, as the stub-period rent includes amortization, and the lessee receives no credit for it. The legitimate type of interim rent is calculated on an “interest-only” basis and commonly occurs when a leased asset has a construction period, such as a truck with components, a corporate jet, or a building.
Lease classification (as either an operating or finance lease) depends on meeting specific tests at lease commencement. Interim rent directly influences this classification because it affects the total payment amount used in these calculations:
- Lease Payments: Any payment a lessor can force a lessee to pay is a lease payment. To classify a lease, ASC 842 explicitly defines lease payments to include all fixed and variable payments based on a rate or index, assuming the spot rate. Variable payments based on usage are not considered in the classification test, but variable payments, such as a residual guarantee, are considered, assuming the maximum amount of the guarantee. Note that variable payments other than those based on a rate or index are not capitalized but are accounted for on a cash basis. Any interim rent charged before the standard billing cycle begins (e.g., stub periods or construction periods) is factored in.
- Present Value Test: One of the five main classification criteria evaluates whether the present value of the lease payments (which includes interim rent) equals or exceeds 90% of the fair value of the underlying asset.
- Asset Value: Higher total lease payments (including interim rent, restocking fees, fixed penalties, and onerous redelivery provisions) increase the Present Value, which can sometimes push a lease classification from an operating lease to a finance lease.
How do I account for the premium I paid when purchasing an equipment operating lease from another leasing company?
The premium is considered a part of the cost and is capitalized as part of the ROU asset under ASC 842. For IRS tax purposes, you are buying personal property, and your basis for MACRS deductions is the purchase price you paid.
When I purchase a lease from another lessor, do I test the lease for classification using the remaining rents and my purchase price?
No, under FASB ASC 842, the lease classification is determined at the lease commencement date and does not change simply because the lease is sold or transferred to another lessor (i.e., a change in lessor). You continue to classify it as an operating lease.
Bill Bosco is the President/CEO of Leasing 101, a lease training consulting company. Bill has over 50 years’ experience in the leasing industry. His areas of expertise are accounting, tax, financial analysis, sales, structuring, and training. He served on the EFLA accounting committee for 30 years, including 10 years as chairman. He is a frequent author and speaker on leasing topics. He has won awards from the Monitor and ELFA. He can be reached at [wbleasing101@aol.com](mailto:wbleasing101@aol.com). Visit https://leasing-101.net/about/
