What is the accounting treatment for initial direct costs the lessor pays? The lessor treatment of initial direct costs depends on the lease classification (operating, sales-type, or direct financing lease) and the existence of selling profit or loss. a. In the case of an operating lease, initial direct costs are b. In the case of a sales-type lease, initial direct costs are if the fair value of the underlying asset is different from the carrying value of the asset, otherwise initial direct costs are c. In the case of a direct financing lease, initial direct costs are deferred and recognized over the life of the lease expensed