Hospital financial teams could face a major change in their accounting of leases on their balance sheets under an exposure draft floated by the Federal Accounting Standards Board.
Under the proposed change, companies would need to include operating leases, such as real estate agreements, to their balance sheets in addition to previously accounted capital leases for items like medical equipment. Adding the second lease category could add more debt to their financial reports, according to Mindy Berman, managing director of commercial real estate firm Jones Lang LaSalle.
The move, not expected to be made official for another year or more, if approved at all, could immediately drive hospital and health system's reported debt loads much higher, altering financial metrics that could breach covenants with lenders, Ms. Berman says.
Accounting for operating leases historically has been a rules-based practice with typically straight line amortization, but the FASB's proposal would introduce a greater level of strategic accounting and subjectivity to the practice, Ms. Berman says. "Administratively, everyone is going to have to do a lot more work to account for leases because the change requires a lot more reporting around leases and accounting around them, and [they'll be] more subjective."
The change would have significant implications on a healthcare industry that is rapidly moving to penetrate a broader reach of outpatient and even retail facilities, often through operating lease agreements rather than property acquisitions, she adds.
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Under the proposed change, companies would need to include operating leases, such as real estate agreements, to their balance sheets in addition to previously accounted capital leases for items like medical equipment. Adding the second lease category could add more debt to their financial reports, according to Mindy Berman, managing director of commercial real estate firm Jones Lang LaSalle.
The move, not expected to be made official for another year or more, if approved at all, could immediately drive hospital and health system's reported debt loads much higher, altering financial metrics that could breach covenants with lenders, Ms. Berman says.
Accounting for operating leases historically has been a rules-based practice with typically straight line amortization, but the FASB's proposal would introduce a greater level of strategic accounting and subjectivity to the practice, Ms. Berman says. "Administratively, everyone is going to have to do a lot more work to account for leases because the change requires a lot more reporting around leases and accounting around them, and [they'll be] more subjective."
The change would have significant implications on a healthcare industry that is rapidly moving to penetrate a broader reach of outpatient and even retail facilities, often through operating lease agreements rather than property acquisitions, she adds.
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