One long-overdue update from the Financial Accounting
Standards Board (FASB) may have a profound impact on hospital balance sheets.
Known as ASU 2016-02 (Topic 842), the new ruling means
leases must be recognized differently on an organization’s balance sheet than
before. The last time lease guidance underwent such a significant change was
1976.
For hospital pharmacies, the leasing of automated dispensing
equipment and other large equipment purchases are the most likely items to
impact the balance sheet under the new rules.
In its official statement, FASB states:
“The core principle of Topic 842 is that a lessee should
recognize the assets and liabilities that arise from leases. All leases create
an asset and a liability for the lessee in accordance with FASB Concepts
Statement No. 6, Elements of Financial Statements, and, therefore, recognition
of those lease assets and lease liabilities represents an improvement over
previous GAAP, which did not require lease assets and lease liabilities to be
recognized for most leases.”
The reasons this change was implemented were to:
- Increase comparability and transparency among
entities. - Significantly reduce off-balance-sheet risk.
- Be more reflective of actual substance of
leasing transactions.
Publicly held companies had to become compliant by Dec. 2018
while privately held organizations have until Dec. 2019 to become compliant
with the new rule.
To prevent these changes from sneaking up on your accounting
team, CompleteRx recommends the following:
- Review your organization’s bonds and debt
covenants that may restrict liabilities and determine whether these accounting
changes present any challenges. - Be proactive and analyze whether any of your
leases will impact your debt load and thus debt covenants. - Communicate early and often with hospital
leadership, your bankers, and the companies leasing equipment to your hospital
to educate them about these changes to generally accepted accounting principles
(GAAP).
For an excellent review of Topic 842 and how it applies to
hospital operations, visit the webinar
presentation by BKD.
By Mark Stubbs, Chief
Financial Officer for CompleteRx
