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Leases: Other Lease Accounting Issues Executory Costs

This document discusses other lease accounting issues such as executory costs, discount rates, and lessor's initial direct costs. Executory costs are normally paid by the lessee but some agreements have the lessor pay and reimburse the costs which are treated as pass through costs. The lessee must use the lower of the implicit interest rate or incremental borrowing rate to calculate the discount rate. For initial direct costs, operating leases capitalize them and amortize over the lease term, direct financing leases defer by reducing unearned interest revenue, and sales-type leases expense them as selling costs.

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56 views1 page

Leases: Other Lease Accounting Issues Executory Costs

This document discusses other lease accounting issues such as executory costs, discount rates, and lessor's initial direct costs. Executory costs are normally paid by the lessee but some agreements have the lessor pay and reimburse the costs which are treated as pass through costs. The lessee must use the lower of the implicit interest rate or incremental borrowing rate to calculate the discount rate. For initial direct costs, operating leases capitalize them and amortize over the lease term, direct financing leases defer by reducing unearned interest revenue, and sales-type leases expense them as selling costs.

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Steeeeeeeeph
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Leases

Other Lease Accounting Issues

Executory Costs
These are the normal costs of ownership and include such things as maintenance, insurance,
taxes, etc. Executory costs are normally paid by the lessee. In some lease agreements the lessor
pays certain executory costs and is subsequently reimbursed by the lessee. In this situation, the
lessee expenses such costs as paid and the lessor treats this as a pass through cost, not part of the
lessors expenses.

Discount Rate
The lessee is required to use the lower of the interest rate implicit in the lease or the lessees
incremental borrowing rate.

Lessors Initial Direct Costs


Initial direct costs are those costs such as legal fees, commissions, etc. that are incurred by the
lessor in order to originate the lease. These costs are handled differently depending on how the
lessor classifies the lease.

1) Operating Leases: initial direct costs are capitalized (as an asset) and amortized over the
life of the lease.
2) Direct Financing Leases: initial direct costs are deferred by reducing the lessors
unearned interest revenue. The amortization of unearned interest revenue includes both
the recognition of interest earned and the expensing of the initial direct costs.
3) Sales-Type Leases: initial direct costs are expensed at the recognition of the transaction
as selling costs.

F:\course\ACCT3322\200720\module2\c15\tnotes\c15c.doc 12/11/2006 1

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