Overview
Optional; found on the Additional Data tab
“Incremental costs of a lease that would not have been incurred if the lease had not been obtained.” [842- 10-20] “Initial direct costs for a Lessee or a Lessor may include, for example, either of the following:
- Commissions;
- Payments made to an existing tenant to incentivize that tenant to terminate its lease.” [842-10-30-9]
“Costs to negotiate or arrange a lease that would have been incurred regardless of whether the lease was obtained, such as fixed employee salaries, are not initial direct costs.” [842-10-30-10] Examples of costs that cannot be considered initial direct costs include general overhead, advertising, and legal work.
Initial direct costs of a Lessee are added to the Right-of-Use asset and amortized over the life of the lease.
Lessor
For a Lessor, treatment of initial direct costs depends on the lease classification:
- ASC 842 sales-type lease: If the fair value and cost or carrying amount are not equal, initial direct costs are recognized as an expense at the start of the lease. If the fair value and carrying amount are equal, initial direct costs are deferred and amortized over the life of the lease, and are included in the calculation of the implicit interest rate.
- ASC 842 direct financing lease & IFRS 16 finance lease: Initial direct costs are deferred and amortized over the life of the lease, and are included in the calculation of the implicit interest rate.
- ASC 842 & IFRS 16 operating lease: Initial direct costs are deferred and amortized over the life of the lease.
- GASB 87: Initial direct costs are recognized as an expense at the start of the lease.
Related Links:
Calculating Initial Liability & ROU | Lease Incentive (Tenant Allowance) | Asset Adjustment