Executory costs are costs like building maintenance, utilities, property taxes, insurance, and common area expenses that lessors may pass on to lessees. The way the lessee should account for these costs depends on whether the costs are:
a) a fixed component of the lease payments or
b) a variable component that is paid either to a third party or directly to the lessor.
If the executory costs are fixed, they should be included when calculating the lease liability (thus, they are also part of the right-of-use asset). This type of arrangement is called a gross lease.
If the executory costs are variable, they should be expensed as incurred. They would not be included in the lease liability or right-of-use asset. This type of arrangement is called a net lease.
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