Initial Direct Costs

Initial direct costs are costs that wouldn’t have been incurred if the lease had not been executed. Commissions paid to selling agents and legal costs related to executing the lease or preparing lease documents thereafter are examples of initial direct costs. Legal costs incurred
prior to executing the lease, advertising costs, depreciation, and employee salaries are not considered initial indirect costs.

For the lessee, initial direct costs increase the right-of-use asset but don’t affect the lease liability. The right-of-use asset is then depreciated, so the initial direct costs are eventually expensed.

For the lessor, the treatment of initial direct costs depends on the type of lease.
• With operating leases, initial direct costs are expensed over the term of the lease
• With finance leases, initial direct costs are expensed upon commencement of the lease if sales revenue is recognized by the lessor. If the lessor does not recognize a sale, the initial direct costs are expensed over the term of the lease
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