The term executory costs refers to the normal expenses associated with owning a leased asset, including insurance, maintenance, and taxes. Executory costs are typically paid by the lessee, and may be included as part of the rental payment or a pass through expense paid directly by the lessee.
Companies oftentimes enter into contractual agreements that include the right to use specific property. Since the terms and conditions of these contracts will vary, the Financial Accounting Standards Board issued FAS No. 13 – Accounting for Leases, which outlines the criteria used to determine if the agreement should be treated as a capital versus operating lease.
Executory costs are those expenses typically associated with owning an asset; this includes property taxes, maintenance expenses and insurance. Executory costs are sometimes referred to as “additional rent” and may be included as part of the monthly lease payment, a pass-through cost, or paid directly by the lessee.
When determining if a lease agreement should be classified as a capital lease, four tests are performed. As part of the recovery of investment test (90% test), the present value of the minimum lease payment is calculated. FASB Accounting Standards Codification Topic 840 – Leases, requires executory costs paid to the lessor be subtracted from the minimum lease payment when performing this calculation. If the lease agreement does not specify the amounts paid for executory costs, then this value should be estimated.
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