Amortizing Initial Direct Costs Of Capital Leases: Match Or Mismatch?

Abstract

In this paper, we discuss the treatment of initial direct costs associated with direct financing capital leases, as specified by SFAS No. 91 and SFAS No. 98. In particular, we show that this treatment results in a rather unusual (and, in our opinion, inappropriate) amortization pattern for initial direct costs over the lease term. We then discuss alternative amortization methods that conceptually may better satisfy the matching principle.