Initial Direct Costs
Initial direct costs (IDC) are incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained, such as commissions paid to brokers or sales staff.
Leasing
Explanation
Costs that would have been incurred regardless of whether the lease is executed, such as general overhead, internal salaries, or legal advice on negotiating terms, are not initial direct costs under ASC 842. IFRS 16 uses a similar incremental-cost concept.
Treatment depends on the party and the lease classification:
• Lessees include IDC in the initial measurement of the right-of-use asset under both standards.
• Lessors, operating lease: IDC are deferred and recognized as expense over the lease term, on the same basis as lease income.
• Lessors, sales-type lease (ASC 842): IDC are expensed at commencement if fair value of the underlying asset differs from its carrying amount; otherwise they are deferred and included in the net investment.
• Lessors, direct financing lease (ASC 842) or finance lease (IFRS 16): IDC are included in the net investment through the rate implicit in the lease and reduce income over the lease term. Under IFRS 16, manufacturer or dealer lessors expense them when selling profit is recognized.
Why It Matters
IDC change the effective yield and the timing of expense, so they must be captured per contract. For lessors using SAP RAR, they need to be part of the lease calculation and deferral logic rather than posted directly to expense.
Related Terms
Net Investment in the Lease · Interest Rate Implicit in the Lease · Sales-Type Lease · Operating Lease · Right-of-Use Asset · Selling Profit
Related Articles
• Sales-Type Leases: Asset Derecognition and Selling Profit in SAP
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