How does ASC 842 change reagent agreement accounting?
Hospitals and other care providers regularly receive equipment from vendors at no stated cost, while still being subject to minimum purchase agreements for consumables. For example, a blood analyzer might be furnished “for free” if the hospital purchases a certain number of test strips each month. Under ASC 842, this type of reagent rental agreement – which contains an embedded lease – must be recorded on the balance sheet as a capital expense.
What does this mean for hospitals and equipment vendors?
ASC 842 introduces new complexity into lease accounting. Using the above example, it’s possible that the hospital doesn’t need the number of strips required by the purchase agreement. The costs of the strips would be recorded as debt and then eventually as a loss upon their expiration, due to the overall agreement now being classified as a capital lease per ASC 842. That can create budgetary pressure and require time-consuming analysis of lease/non-lease components.
How can a healthcare organization tell what’s really a lease?
Counterintuitively, something doesn’t have to be explicitly labeled as a lease to count as one under ASC 842. All that’s needed for something to qualify as a lease is a specific asset being furnished and an estimation that the lessee will obtain most or all of the economic benefits from using that asset. ASC 842 carves out a few exceptions for assets that do not indicate a lease. These specifications are discussed in our full white paper on this topic, which can be downloaded at the end of this FAQ.
What recourse do providers have to avoid costly capital leases?
Reagent/placement agreements are fundamental to healthcare in the U.S., but as we can see, they can be complicated to manage when complying with ASC 842. One possible course of action is to instead request the cash value of a piece of medical equipment and purchase its associated consumables separately. This could provide more financial stability since it would open an operating lease instead of a capital one.
I can’t keep track of all the leases. How do I gain better visibility?
It’s true that embedded leases are already everywhere, and that ASC 842 raises the stakes for properly recording and accounting for them. LaSalle Solutions makes the tracking process easier with LAMP, our cloud-based platform that puts all crucial information in one place and makes it more straightforward to track end-of-life and renewal dates.
When does ASC 842 take effect?
For private firms, ASC 842 becomes effective for annual reporting periods from Dec. 15, 2019, and calendar periods from Jan. 1, 2020, so time is of the essence in ensuring compliance with the updated regulations. To learn more about how to be ready for ASC 842, check out our white paper on this topic, or reach out to our team directly for additional guidance.