Preparing Health Care Organizations For The New Lease Accounting Standard

Healthcare

Preparing Health Care Organizations For The New Lease Accounting Standard

In April 2018, the Center for Audit Quality (“CAQ”) issued a publication to assist audit committees with their oversight of the implementation of the new lease accounting guidance (Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842)).

The CAQ’s new publication, entitled Preparing for the New Leases Accounting Standard: A Tool for Audit Committees, assists audit committees with understanding the new lease accounting standard, evaluating its potential impact, assessing the implementation plan, and other considerations. This tool also includes key implementation questions for consideration by the audit committee, as well as technical resources to promote a more successful transition.

Effective Date and Transition

ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for any of the following:

  • A public business entity
  • A not-for-profit entity that has issued, or is a conduit bond obligor for,
  • securities that are traded, listed, or quoted on an exchange or an over-the-counter market
  • An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).

For all other entities, AUS 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application of the new standard is permitted for all entities.

Subsequent Updates to the New Lease Accounting Guidance

Since the publication of ASU No. 2016-02, the Financial Accounting Standards Board (FASB) issued one finalized update to clarify implementation. Another update was proposed in January 2018 and is expected to be issued as final in the second quarter of 2018. ASU 2018-01. This proposed Accounting Standard Update (entitled Leases (Topic 842): Targeted Improvements) was issued by FASB in January 2018. It is intended to reduce costs and ease implementation of the new lease guidance for financial statement preparers.

If finalized, this proposal will simplify certain transition requirements and, for lessors, provide a practical expedient for the separation of non-lease components from lease components. Specifically, the amendments would:

  • Add an option for transition to ASU No. 2016-02, Leases (Topic 842), that would permit an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements; and
  • Add a practical expedient that would permit lessors to not separate non-lease components from the associated lease components, if certain conditions are met. This practical expedient could be elected by the class of underlying assets; if elected, certain disclosures would be required.

The FASB also issued in final form ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. This guidance clarifies the application of the new lease guidance to land easements and eases adoption efforts for some land easements. In particular, ASU 2018-01:

  • Provides an optional transition practical expedient that, if elected, would not require an organization to reconsider their accounting for existing land easements that are not currently accounted for under the old lease standard; and
  • Clarifies that new or modified land easements should be evaluated under the new lease standard, once an entity has adopted the new standard.

For questions or more information, contact a member of our Lease Consultation Team by filling out the form below.

Author:Maria Inciardi, MS, CPA | [email protected]

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