In January 2016, the Financial Accounting Standards Board (FASB) finalized changes to lease accounting rules. The changes to FASB13 detailed in ASC842 — were made to offer better clarity into debt obligations for a transparent depiction of a company’s overall financial health. So what do changes to FASB13 mean for your hospital?
Our goal is to help your purchasing and accounting departments understand what FASB13 is and isn’t. That way, you know what options are still available to meet your hospital’s purchasing needs. In this blog post, we’ll answer the following questions about FASB13:
- What is FASB compliance?
- What new financing options — such as subscription-based models — are allowed with FASB13?
- What did the original FASB13 guidelines say?
- How are the new FASB13 rules different?
- What contracting options are available to provide the needed equipment to satisfy your unique requirements — and how can we help?
What is FASB compliance?
According to the Washington Post, FASB was implemented to demonstrate the strength of consistent accounting standards over time and circumstance to better weather shifts in public opinion.1
Under the traditional FASB guidelines, if a lease for medical equipment qualified as an operating lease, payments on the lease were treated as normal operating expense. And unlike a capital lease, it wasn’t necessary to capitalize and then depreciate the asset.
Changes to FASB13 closes the loopholes created by the original guidelines.
New FASB13 rules: How do they affect medical equipment leases?
Instead of categorizing leases as capital or operating, they are now either finance or operating. The same basic rules of FASB13 apply. The difference is that operating leases will now be capitalized (shown on the balance sheet) and recognized as right of use (ROU) assets. Depending on the asset, term, and credit quality of the lessee, the value reported under the ROU may be significantly lower than if purchased.
Additionally, the lease liability for an operating lease will not be reported as debt. Instead, this obligation will be listed as a component of other liabilities. Because of these nuances, operating leases may be preferred over paying cash or using a capital lease structure. Income statement treatment will be the same, with operating lease payments treated as an expense. Finance leases will be accounted for as with previous capital leases.
These new rules require hospitals to capitalize assets within a lease contract for nearly every transaction that is likely to last one year or longer.2 The reporting requirements for capital leases — and the impact it has on your balance sheet — can make them less desirable than operating leases.2
For example, if your hospital uses a capital lease to acquire new medical devices, the balance sheet will disclose the asset as well as the corresponding liability. The inclusion of additional assets and liabilities could affect the appearance and leverage ratios of the balance sheet. As a result, some analysts believe that investors and creditors will perceive the financial health of your hospital differently.2
Related: We provide value far beyond our products. Learn about the additional benefits of becoming a Medtronic customer.
What capital equipment contracts are available for hospitals?
It’s important to know that even though FASB13 changes the way you can acquire capital, you still have several contracting options.
To help provide the equipment you need to satisfy your unique requirements, our contracting options include:
- Cash purchase. If you agree to purchase a certain amount of equipment for a certain price, we bill you against the purchase order. We would then give you the equipment and transfer the title to you.
- Co-op. FASB13 does not affect co-ops because they are not considered leases. With this option, you get a title on day one and your payable balance is written down by your sensor usage. Make sure your accounting department is aware of this nuance.
- Capital partnership program (CPP). Instead of getting capital on day one, you accrue credits over the year to gain capital equipment credits to purchase new equipment. As soon as you decide to use those credits, you get the equipment and the title. However, you only have 12 months to use them.
- New subscription model financing. If you have a monthly subscription model tied to a variable cost — but not tied to index — the cost of the subscription changes based on your census level. You can include the change in your operating budget.
- 364-day lease. Because the term is less than a year, and if the traditional FASB13 operating lease rules are satisfied, you may still be able to keep the transaction off the balance sheet.
Your Medtronic representative will work with you to structure a program that meets your needs. Contact your representative today.
1. Financial Accounting Foundation. What We Do: FASB. Financial Accounting Foundation Website. https://www.accountingfoundation.org/jsp/Foundation/Page/FAFSectionPage&cid=1351027541293.
2. Muna E. FASB 13: How New Accounting Standards Could Impact Your Business. Hughes Marino. https://hughesmarino.com/san-diego/blog/2014/04/16/fasb-13-how-new-accounting-standards-could-impact-your-business/. Published April 16, 2014.
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