Implementation Considerations for Leases: Initial Direct Costs

As financial institutions work toward successful implementation of Accounting Standards Codification Topic 842, Leases (ASC 842), one area that may be of particular importance is accounting for the initial direct costs of obtaining a lease. Under legacy ASC Topic 840, Leases (ASC 840), initial direct costs of obtaining a direct financing lease are capitalized and included in the net investment in the lease and amortized over the term of the lease by the lessor. These include costs to originate a lease where the cost results directly from and is essential to acquiring the lease and costs that would not have been incurred had the leasing transaction not occurred. ASC 840 limits these costs to certain costs directly related to specific activities performed by the lessor. However, under ASC 842, initial recognition of similar direct costs may differ, primarily regarding which costs qualify for deferral. This is a result of the change in definition of what constitutes an initial direct cost in ASC 842 vs. ASC 840.