Discussion on Capitalization of Standby Letter of Credit Fees under ASC 842
A company enters into a 5-year office lease and uses a standby letter of credit instead of a security deposit, incurring upfront and annual commitment fees. Based on the definition of 'initial direct costs' in ASC 842, the author proposes three treatment options and seeks peer opinions.
Our company will sign a 5-year office lease this year. As part of the lease, instead of paying a deposit, we opened a standby letter of credit (LOC). An upfront commitment fee must be paid to the bank when the LOC is issued, and this fee will continue to be incurred annually.
I am trying to find guidance in ASC 842 to determine whether these fees can be capitalized into the right-of-use (ROU) asset. I noticed that "initial direct costs" can be included (ASC 842-20-30-5, initial measurement of the ROU asset), and this cost is defined as "incremental costs that would not have been incurred if the lease had not been obtained."
The standby LOC is indeed issued solely for this lease, but the examples in ASC 842 regarding initial direct costs are more like one-time commissions or buyouts of existing lessees, rather than recurring commitment fees incurred annually during the period the lease requires the standby LOC.
What do members of this forum think about this?
- Should all recurring commitment fees over the 5-year period of the standby LOC be included in the initial measurement of the ROU asset?
- Should only the commitment fee for the first year be included in the initial measurement of the ROU asset?
- Does this commitment fee not meet the criteria for "initial direct costs" and should be expensed as incurred?