A new Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB) spells significant changes to the way healthcare entities account for leasing arrangements. The FASB recently released ASU 2016-02 Leases (Topic 842), which will require healthcare provider lessees to recognize a “right to use asset” and corresponding liability for all current leasing arrangements with original terms in excess of 12 months. The current “operating lease” treatment many hospitals and physician groups utilize for equipment and other assets will be effectively eliminated.
All new and existing leases will be evaluated and classified as a finance lease (much like the current capital lease) or an operating lease (which, unlike the current operating lease, also will be reflected on the balance sheet as an asset and liability). The distinction between the two new types of leases depends upon the manner in which they are amortized/depreciated by healthcare entities (see table below). These healthcare entities will need to exercise judgment to determine if a lease is a finance lease or an operating lease. The impact of this new lease standard on healthcare entities’ compliance with debt covenants will require careful evaluation of existing debt agreements and, likely, modification of those agreements.
Implementation of these new lease rules will be a challenge for healthcare providers. Although the effective date for many non-profit healthcare entities will be fiscal years beginning after December 15, 2018, (as a conduit bond obligor) it is critical that the following steps for implementation begin immediately.
Listen to our latest podcast about the new ASU:
If you have any questions about the substance of this new ASU or what it means for your healthcare organization, contact one of our executives listed below, (800) 270-9629.