Final answer:
Under an operating lease, initial direct costs are expensed. In a sales-type lease, initial direct costs are capitalized and amortized. In a direct financing lease, initial direct costs are capitalized but not amortized.
Step-by-step explanation:
Under an operating lease, the initial direct costs are expensed in the period incurred. They are not capitalized as part of the leased asset.
In a sales-type lease, the initial direct costs are capitalized and added to the carrying amount of the leased asset. They are amortized over the lease term.
For a direct financing lease, the initial direct costs are also capitalized and added to the carrying amount of the leased asset. However, they are not amortized over the lease term. Instead, they are included in the net investment in the lease and recognized as interest income over the term of the lease.
In summary, while the treatment of Initial Direct Costs may vary depending on the type of lease, the consistent principle across lease classifications is that these costs must be allocated over the period in which the lease is in effect, either as part of an asset amortization or as an adjustment to the rate of interest.