ASC 842 Leases is effective for years beginning after December 15, 2020 for most healthcare organizations, but certain entities that are conduit bond obligors will need to comply with the reporting requirements of ASC 842 sooner. As a reminder, the biggest change under ASC 842 is the recording of a right of use asset and lease liability on the face of the financial statements.
Generally, all leases (regardless of classification as either an operating or a financing lease) will now be recorded within the financial statements. Under current accounting guidance, only capital leases are recorded on the face of the financial statements, with operating leases being disclosed within the footnotes of the financial statements. Under ASC 842, this concept will change, and a calculation will need to be performed to determine the right of use asset and lease liability to be recorded on the face of the financial statements.
It is important to begin the implementation process early to ensure that a complete population of an organization’s leases are identified. Early results have indicated that there may be hidden leases that are lurking in agreements. For instance, a healthcare organization will need to begin to analyze their contracts with vendors to determine if a right of use asset needs to be recorded within the financial statements under ASC 842 for arrangements where the lease is tied to the purchase of product as part of the use of a separate stand-alone asset. Healthcare entities often enter into contracts for consumables, such as reagents, test strips, x-ray film, etc. to be used in conjunction with equipment for the treatment of patients. Under ASC 842, if these arrangements include the use of “free equipment,” this could be deemed an embedded lease. The hospital is receiving the right to use the equipment, and as a result may have an equipment lease that is embedded in a separate contract. Healthcare entities should be considering these types of arrangements to ensure that any of these embedded-type lease arrangements are appropriately captured as part of their lease inventory.
So, what steps could an organization be taking right now?
- Take inventory of your leases – it’s important to begin to work with all departments within your organization to ensure a complete listing of lease arrangements.
- Don’t wait to implement – avoiding surprises is important with all new accounting pronouncements. Given the number of internal departments that this may impact and the time and effort necessary to compile, value and report the leases defined in this standard, it is important to begin the process of evaluation of the impact early on in your annual reporting cycle.
Questions? Reach out to our experts at The Bonadio Group today to discuss.