Initial direct costs of a lease
A lessee includes qualifying initial direct costs in the initial measurement of its right-of-use asset. Costs incurred regardless of whether the lease is obtained, such as many legal or negotiation expenses, are not initial direct costs simply because they relate to negotiations. Lessor accounting includes specific rules, including separate requirements for manufacturer or dealer lessors.
Worked example
A lessee pays a $2,000 commission only if a lease is signed and also incurs $500 legal advice fees whether or not it signs. If the commission meets the definition, include $2,000 in the right-of-use asset; the non-incremental legal fee is not an initial direct cost.
Common mistake
Capitalising all legal and negotiation costs automatically or including qualifying initial direct costs in the lease liability rather than the right-of-use asset.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |