Overview
When accounting for leases, one key aspect that often arises is how to handle partial months. Partial months occur when a lease does not commence or end on the first or last day of a calendar month. Properly accounting for these partial periods is essential to ensure financial statements reflect accurate lease expenses or income.
Partial months happen in two primary situations:
- Lease commencement after the 1st of the month: If the lease begins partway through a month, that month is considered a partial month.
- Lease termination before the last day of the month: If the lease ends before the last day of a month, the remaining days of that month must be accounted for as a partial month.
Setting up partial months in EZLease
Most often, a lease with partial months starts in the middle of a month, then is paid monthly on the first of the month, and ends at the end of a month. EZLease requires a rent step with a Monthly frequency to cover a whole number of months. If the dates don't match up, you'll get the error: Dates not even multiple of payment length (This also happens for longer periods, such as a Yearly rent step that isn't a whole number of years):
The fractional month should be set up using the OneTime payment frequency, with the amount of rent that applies just to that month (which might be zero, or prorated, or another amount):
If you upload a lease using a bulk import template, EZLease provides the option to automatically calculate prorated rent for a fractional [partial] month, as part of the upload setup. For If rent includes partial period, choose Prorate First/Last (the default). In that case, you can enter the rent for this lease as $1000 monthly for the entire life of the lease (1/21/2024 to 1/31/2028), and EZLease will create the OneTime rent step automatically.
If the rent for a partial month is within 4% of the exact prorated amount, EZLease does not consider it a scheduled rent increase that necessitates rent leveling.
Example
Consider a lease with a begin date of January 21, 2024, and end date of January 31, 2028, for a total of 48.35 months. The rent is $1000 per month. For January 2021, the prorated rent is $350.
- First rent step: Gross rent $350, Step end date 1/31/2021, Pmt frequency: OneTime.
- Second rent step: Gross rent $1000, Step end date 1/31/2025, Pmt frequency: Monthly.
Impact on Finance leases
For finance leases, the situation is a bit different. The right-of-use asset and lease liability are calculated based on the present value of lease payments, and the interest and depreciation expenses are recognized separately. While the pro-rata calculation may apply to the first and last months’ payments, interest and depreciation are handled based on the effective interest method and the lease term.
However, if the lease commences mid-month, interest will still be accrued on the outstanding lease liability for the portion of that month, and depreciation will begin as soon as the lessee gains control of the asset.