The accounting industry has indicated forthcoming changes to lease guidance for years. Accounting Standards Codification Topic 842, Leases (ASC 842) is the first major overhaul of lease accounting since 1973. After multiple delays and guidance that has continued to evolve, the current effective date for the new lease standard for private companies is for annual reporting periods beginning after December 15, 2021—meaning the standard is effective now. What does this mean if you operate a private equity-backed multisite healthcare entity that has yet to adopt ASC 842? What blind spots should you be considering now?
Potential Considerations & Blind Spots
As most are aware, the new guidance requires lessees to recognize substantially all leases on their balance sheet as lease liabilities and a corresponding right-of-use asset. Bright-line tests have been eliminated and management judgments and assumptions will increase. Depending on the number of leases and variability of contract terms, implementation can be a significant undertaking, especially for multisite healthcare organizations with many real estate and equipment leases. What other considerations should your organization be considering leading into the first year of reporting under ASC 842?
- Board & Management Preparation – If you have not already started discussion surrounding the changes, it will be key to educate management who are not involved in day-to-day financial reporting and your board of the significant changes expected in the monthly financial statements due to balance sheet impacts.
- Covenant Calculations – Due to the unique terms of indenture clauses and varying state legislation, legal counsel may be required to determine if lease obligations are considered debt-for-debt service and leverage covenant calculations.
- Documentation – For many multisite healthcare entities, inventory of lease agreements, organization, and lease administration may be limited given numerous acquired locations and anticipated growth each year. One of the key factors in adoption will be the organization’s ability to gather and accumulate all lease agreements and identify terms or amendments that may be unclear. Depending on historical document maintenance, it may be time-consuming for organizations to locate all executed agreements and amendments.
- Disclosures – Not only will changes occur in financial statement presentation, but the adoption of ASC 842 also will result in expanded disclosures in footnotes to the financial statements. Additional data collection, monitoring, and record-keeping will be required on an ongoing basis.
How Your Organization Can Prepare Now
If your organization has yet to prepare, it’s not too late and now is great time to start. If you’re asking where to start, key tips for preparation include:
- Ownership – It is imperative to identify a key employee or task force to oversee and take ownership of the implementation and adoption of ASC 842. This will include understanding the accounting guidance, overall project management in information-gathering phases and understanding the requirements for lease calculation, presentation, and disclosure.
- Completeness of Leases – ASC 842 requires lessees to recognize all leases on their balance sheets. The following matters should be considered when identifying such leases:
- Lease Identification –Consider all potential leases, including real estate leases and equipment leases.
- Documentation Gathering – Management of lease documents is cumbersome. It is imperative to identify and gather all lease agreements, including amendments, through the date of adoption or begin discussions with lessors to obtain such agreements.
- Lease Terms – Identify all of the relevant lease terms (length of contract, payment amounts, etc.) and obtain confirmation from lessors if terms are not explicit in the document.
- Calculation Methodology – Now that your organization has identified a key employee to take ownership and oversee the adoption and implementation of ASC 842, and identified all leases and lease terms, your organization must determine the below key factors in order to calculate the right-of-use assets and corresponding lease liabilities that will need to be recognized within your financial statements:
How BKD Can Assist Your Organization
It is a significant undertaking for many organizations to adopt and implement the new lease guidance. You may face numerous challenges, including separating lease and nonlease components, performing lease calculations and identifying required monthly journal entries, collecting additional data for disclosures, making necessary IT system updates, capturing remeasurement triggers, and seeking assistance with debt covenants. BKD can help.
To help organizations implement the lease standard with ease, we created a three-part solution called BKD LeaseVision.
- BKD LeaseVision – BKD has developed an excel-based tool to help you perform calculations and develop lease amortization schedules. It’s simple for management to implement, assists in building the additional disclosures necessary for adoption, and simultaneously provides simple monthly journal entries.
- AI-Powered Software – BKD uses a tool powered by artificial intelligence (AI) to extract key lease terms from various types of leases, helping you quickly review and compile lease terms.
- Adoption Assistance & Technical Consultation on the Standard – In addition to the tools available, BKD also offers overall adoption assistance to your team by providing an in-depth process framework for smooth implementation. If your team has any questions throughout the implementation, BKD can provide technical consultations on the standard and help implement ASC 842 in the following ways:
Want to learn more or ready to schedule a meeting? Reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.