How FASB and debt markets will grade healthcare organizations’ leases
- Because of the prevalence of capital leasing for many companies, FASB and IASB have amended accounting guidance (ASC 842) to provide more reporting on lease transactions.
- IASB and FASB differ on how operating leases will be disclosed and valued on the financial statements. For this purpose, we will focus on the FASB guidelines.
- The new accounting standards require organizations to recognize all lease obligations (over 12-months) on their balance sheets, to ensure greater transparency in financial reporting.
- Healthcare providers will need to begin monitoring the potential effect of these changes on their debt-to-capital ratio and related debt covenants.
- Regulations take effect in 2019 and 2020, but back reporting begins in 2017 (for public companies) and 2018 (for private, non-profit and government organizations), so time is short to understand and manage implementation.
- Hospitals and health systems will be particularly affected by the new reporting standards due to the capital-intensive nature of healthcare service delivery.
- Missteps in managing this change can result in loan covenant defaults, souring investor sentiment and/or failure to meet benchmarks.