Initial Direct Costs
Related terms
Category
ASC 842
Initial direct costs are incremental costs of a lease that would not have been incurred if the lease had not been obtained. Under ASC 842, these costs are added to the right-of-use asset at the commencement date. Examples include commissions paid to brokers and certain legal fees.
Why it matters
Initial direct costs increase the ROU asset, which increases the total amount amortized over the lease term. Only costs that are incremental to obtaining the lease qualify. general overhead, allocated costs, and costs that would have been incurred regardless do not.
The most common initial direct costs are broker commissions and external legal fees for lease negotiation. Internal costs, such as employee time spent on lease negotiations, do not qualify even if they are directly related to the lease.
How Arvexi handles this
Arvexi allows you to record initial direct costs during lease setup. These costs are added to the ROU asset at commencement and amortized over the lease term along with the base ROU asset. The platform tracks initial direct costs separately for disclosure purposes.