With the year 2018 coming to an end, the new year will bring in effect the new Financial Accounting Standards Board (“FASB”) update to the leasing standards for many Healthcare organizations. If you’re a public company, the new leasing standard takes effect in just a matter of days for fiscal years beginning after December 15, 2018. If you’re a private company, that date is December 15, 2019 (for fiscal years beginning after that date) or December 15, 2020 (for interim periods within fiscal years beginning after that date).
To briefly summarize the accounting changes, basically, if your lease agreements have terms greater than 12 months, the present value of all fixed lease payments are to be recorded as right-of-use (“ROU”) assets and liabilities on the books. There are also a host of additional disclosures necessary to document management assumptions in calculating lease payments. Lessees will still have two options for categorizing their leases. The first option is financing leases, which are essentially the same as capital leases, and the second is operating leases, which will be recorded on the balance sheet for the first time.
The lease accounting changes will affect nearly every industry; however, the impact will depend on each individual company’s use of leases. As an example, in the healthcare industry, hospital systems and large multi-physician practices who have several locations through real estate leases will see a substantial impact from the implementation of these standards.
As the new year approaches, here are a few things to consider in making sure your organization is in compliance with these upcoming standards.
1. Study the new regulations
- Researching and understanding ASU No. 2016-02, Leases (Topic 842) is a great starting point. Since the introduction of the new leasing standard, the FASB has issued several updates to ease the burden of implementation. They include some clarifying language on some perceived inconsistencies and the ability to elect a “year of adoption” implementation, rather than an “earliest period presented” model.
2. Create a transition team
- Assign a group of colleagues and staff with the suitable skills necessary to combat understanding the new standards and to spearhead the implementation efforts to reduce the risk of noncompliance.
3. Develop an implementation timeline
- A transition team should consider developing a timeline for compliance efforts.
4. Inventory your leases
- Probably the greatest undertaking of complying with the new leasing standards will be compiling your lease portfolio and extracting the relevant detail from each agreement to ensure you have the necessary information for reporting purposes.
5. Assess your technological capabilities
- Determine if your organization has the technological capabilities to maintain and report the data necessary to comply with the new accounting standards.
6. Select the right technology
- There are several options available in the marketplace that can greatly assist in the preparation, transition and implementation phases of the new FASB leasing standards. From tracking lease renewals, date monitoring, and document management, toncalculating the monthly lease liability and ROU asset, the right technology suitable for your organization will ensure you have the information you need to account for the new FASB standards.
7. Evaluate other implications of implementation of the new standard
- Considerations should be made to determine the implications of the new lease standards on key performance metrics, debt covenants, taxes, and internal operations. Key performance metrics that are expected to be affected by these changes are the leverage ratio (debt/equity), current ratio (current assets/current liabilities) and debt to earnings before income taxes, depreciation, and amortization (“EBITDA”) due to the new standards adding the liabilities to the books. These effects could also lead to lease negotiations as these standards could affect the organization operationally.
8. Communicate with those charged with governance
- Ensure that governing bodies of the organization are up-to-speed with the overall impact of these standards on the organization as well as the ongoing implementation efforts.
This is a great starting point for ensuring that your organization starts the new year on the right foot on your journey to complying with the new lease accounting standards.
Author: Maria Inciardi, MS, CPA | firstname.lastname@example.org