initial direct costs

Broad Transactions2

1. 842-30Lessor842 Leases

   ASC 842-30 governs how lessors account for leases already classified under 842-10 as sales-type, direct financing, or operating leases. For sales-type and direct financing leases the lessor derecognizes the underlying asset and recognizes a net investment in the lease (lease receivable plus unguaranteed residual asset, discounted at the rate implicit in the lease), with selling profit recognized immediately in a sales-type lease but deferred into the net investment in a direct financing lease; interest income then accretes at a constant periodic rate. For operating leases the lessor keeps the asset on its books and recognizes lease payments as income straight-line (or another systematic and rational basis) over the lease term, and a collectibility-not-probable assessment overrides normal recognition in all three models.

2. 842-974Real Estate—Real Estate Investment Trusts842 Leases

   This narrow subtopic tells a real estate investment trust (REIT) how much it may capitalize when a related service corporation performs leasing services for it. The service corporation is never treated as an independent third party, no matter how the REIT accounts for its investment in it (equity method, consolidation, etc.). Capitalized amounts are capped at the initial direct costs the REIT could have capitalized under 842-10-30-9 through 30-10 had it incurred the leasing costs directly.