Initial Direct Costs (FRS 102): Legal, Broker Fees
Initial direct costs are the incremental costs of obtaining a lease: what you paid that you would not have paid had you not taken it. One question decides every case, and it is worth applying literally, because a cost that fails it does not belong on the right-of-use asset at all: FRS 102 sets the cost of that asset as a closed list, and initial direct costs are one item on it.
The Test
Would you have paid this if you had not obtained the lease? If you would have paid it anyway, it is not an initial direct cost, whatever else it is. If you paid it to get the lease, and only because you got the lease, it is.
FRS 102 Reference: FRS 102.20.47(c), Glossary
What Qualifies
Costs that pass the test and are capitalised into the right-of-use asset:
Legal Fees
Solicitor fees for negotiating and completing this lease.
Broker or Agent Commission
Fees for securing the lease.
Survey and Valuation Fees
Building surveys and valuations obtained for the lease.
Stamp Duty Land Tax
Land transaction tax arising on the grant of the lease.
Lease Premium
A premium paid to take the lease.
Payment to a Previous Tenant
A sum paid to an outgoing tenant to take the lease on, for example to have it surrendered early.
What Does Not Qualify
These are real costs and they are properly capital in their own right. They are simply not part of the lease.
The one that catches people
Your Own Fit-Out and Leasehold Improvements
Shopfitting, partitioning, cabling, an asset under construction: these are your assets, not a cost of obtaining the lease. They are held separately as property, plant and equipment and depreciated over the lease term, because a legal limit such as the expiry of the related lease caps their useful life (FRS 102.17.21(d)). Putting them here instead adds them to the right-of-use asset, which changes depreciation, the disclosure notes and every figure derived from them.
Costs You Would Have Paid Anyway
Internal staff time, general legal advice, and the cost of negotiations that came to nothing. None of them is incremental to obtaining this lease.
Anything the Landlord Pays or Contributes
A fit-out contribution or reimbursement is an incentive, not a cost. Record it under Incentives, where it reduces the right-of-use asset rather than increasing it. Recording it as a direct cost moves the figure the wrong way twice over.