How is IDC accounted for on Lessor financial statements?

• A. IDC is expensed in the period incurred.
• B. IDC is added to the asset cost.
• C. IDC incurred by lessor are capitalized, reduced from expense and amortized on a straight-line basis over the term of the lease to offset income.
• D. IDC is never amortized.

Answer: (C)

Initial direct costs are costs directly related to negotiating and arranging the lease. For a lessor, these costs are capitalized as part of the net investment in the lease and then amortized over the lease term, with the amortization reducing lease income each period. This matching of costs to the period over which the lease generates revenue ensures the financial statements reflect the economics of the lease. Therefore, IDC is not expensed in the period incurred, not added to a fixed asset, and not left unamortized. For example, if the initial direct costs are allocated over a 5-year lease, they are amortized straight-line over those five years, lowering reported lease income each year accordingly.