Clarifying the Requirements Under the New Lease Accounting Rules
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Clarifying the Requirements Under the New Lease Accounting Rules

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Clarifying the Requirements Under the New Lease Accounting Rules

Clarifying the Requirements Under the New Lease Accounting Rules

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  • Information taken, in part, from the FASB website: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176154540204
  • Information taken, in part, from the FASB website: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176154540204
  • Information taken, in part, from the FASB website: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176154540204
  • Information taken, in part, from the FASB website: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176154540204
  • Information taken, in part, from the FASB website: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176154540204
  • Information taken, in part, from the FASB website: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176154540204
  • Information taken, in part, from the FASB website: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176154540204
  • Information taken, in part, from the FASB website: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176154540204
  • Financials taken from the SEC’s Edgar website.
  • Information on this slide came from the FASB website: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176154540204More information on lease project is found at FASB website:http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=900000011123
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the PYA “white paper” on leases by Matt Neilson
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10
  • Taken primarily from the AICPA’s technical practice aid TIS Section 6400, .48 Accounting for Costs Incurred During Implementation of ICD-10

Clarifying the Requirements Under the New Lease Accounting Rules Clarifying the Requirements Under the New Lease Accounting Rules Presentation Transcript

  • Page 0July 18, 2013 Prepared for Georgia HFMA Summer Institute Georgia HFMA 2013 Summer Institute Clarifying the Requirements under the Proposed Lease Accounting Rules and Accounting for ICD-10 Implementation Costs July 18, 2013 Doug Arnold, CPA – PYA Principal
  • Page 1July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now • FASB Statement No. 13, Accounting for Leases, was issued in 1976 and created the basic framework we currently use for lease accounting – For perspective, the current lease standard is a contemporary of: • The founding of Apple Computer
  • Page 2July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now • The movies Rocky, Taxi Driver, and Carrie (the original one) • Jimmy Carter being elected President of the United States
  • Page 3July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now • Statement No. 13 specifies that a lessee should recognize both an asset and a liability for a lease that transfers substantially all benefits and risks associated with the ownership of the property – Currently, this is what is known as a “capital lease”
  • Page 4July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now • Criteria for capital leases: 1) The lease transfers ownership of the property to the lessee by the end of the lease term 2) The lease contains a bargain purchase option 3) The lease term is equal to 75% or more of the estimated economic life of the leased property 4) The present value of minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair value of the leased property at lease inception
  • Page 5July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now • The asset and liability will initially offset each other on the balance sheet • The asset recorded under a capital lease is typically grouped in the “Property, Plant, and Equipment” (PP&E) section of the entity’s balance sheet • The asset is depreciated (amortized) like any other depreciable fixed asset • The liability recorded under a capital lease is typically recorded in debt
  • Page 6July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now ASSETS LIABILITIES AND EQUITY CURRENT ASSETS CURRENT LIABILITIES Cash 10,000$ Accounts payable 1,000$ Inventory 4,000 Accrued payroll 3,000 14,000 4,000 CAPITAL ASSETS LONG-TERM LIABILITES Land 8,000 Long-term debt 50,000 50,000 Capital lease liability 5,000 Capital lease asset 5,000 55,000 63,000 EQUITY 18,000 77,000$ 77,000$ TOTAL CURRENT LIABILITIES TOTAL LONG-TERM LIABILITIES BALANCE SHEET - CAPITAL LEASE TOTAL ASSETS TOTAL CAPITAL ASSETS TOTAL CURRENT ASSETS TOTAL LIABILITIES AND EQUITY Equipment
  • Page 7July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now REVENUE Patient revenue, net 50,000$ Other 5,000 TOTAL REVENUE 55,000 EXPENSES Depreciation 1,500 Interest 1,500 Lease expense - Supplies 1,000 Salaries and other 10,000 TOTAL EXPENSES 14,000 NET INCOME 41,000$ INCOME STATEMENT - CAPITAL LEASE
  • Page 8July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now • Statement No. 13 also specifies that if a lease does not transfer substantially all benefits and risks associated with the ownership of the property, it should be treated as an operating lease • An operating lease is not recorded on the balance sheet. Rather, as lease payments are made, an entry is made to debit lease (or rental) expense • Operating lease payments for future periods are disclosed in a footnote to the financial statements
  • Page 9July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now REVENUE Patient revenue, net 50,000$ Other 5,000 TOTAL REVENUE 55,000 EXPENSES Lease expense 3,000 Supplies 1,000 Salaries and other 10,000 TOTAL EXPENSES 14,000 NET INCOME 41,000$ INCOME STATEMENT - OPERATING LEASE
  • Page 10July 18, 2013 Prepared for Georgia HFMA Summer Institute Leases: Where We Are Now • The following is an example operating lease disclosure taken from HCA’s 12/31/12 10-K: Note 12 – Leases We lease medical office buildings and certain equipment under operating lease agreements. Commitments relating to noncancellable operating leases for each of the next five years and thereafter are as follows (dollars in millions): 301$ 283 225 178 145 870 2,002 (44) 1,958$ 2016 2015 2014 2013 Less sublease income For the Year Ended December 31,* Thereafter 2017 *Financials taken from SEC’s Edgar Website
  • Page 11July 18, 2013 Prepared for Georgia HFMA Summer Institute A (Very) Brief History of the Leases Joint Project • In June 2004, the International Accounting Standards Board (IASB) and the FASB agreed that lease accounting was in need of an overhaul • In August 2010, the first Proposed Accounting Standards Update (PASU) on leases was released. Not well received
  • Page 12July 18, 2013 Prepared for Georgia HFMA Summer Institute A (Very) Brief History of the Leases Joint Project • This brings us to the present. On May 16, 2013, the FASB released a revised version of the 2010 PASU on lease accounting • One driver behind revised lease guidance is that many financial statement users felt that the current treatment was not presenting a fair representation of all lease transactions • The biggest criticism relates to the fact that operating leases do not require an entity to recognize an asset or a liability
  • Page 13July 18, 2013 Prepared for Georgia HFMA Summer Institute A (Very) Brief History of the Leases Joint Project • Oftentimes an entity is able to work with the lessor to structure a lease in such a way that it qualifies as an operating lease and thus is kept “off the books”
  • Page 14July 18, 2013 Prepared for Georgia HFMA Summer Institute A (Very) Brief History of the Leases Joint Project • Many airlines had few airplanes recorded on their balance sheets Average Seating Capital Operating Equipment Type Capacity Owned Leased Leased Total American Airlines Aircraft Boeing 737-800 153 86 - 109 195 Boeing 757-200 181 81 2 23 106 Boeing 767-200 ER 168 4 9 2 15 Boeing 767-300 ER 218 45 - 13 58 Boeing 777-200 ER 247 44 3 - 47 Boeing 777-300 ER 310 - - 2 2 McDonnell Douglas MD-80 140 106 19 66 191 Total 366 33 215 614
  • Page 15July 18, 2013 Prepared for Georgia HFMA Summer Institute A (Very) Brief History of the Leases Joint Project • For healthcare entities, this could be especially important since capital leases often factor into an organization’s calculation of financial debt covenants associated with existing debt while operating leases do not
  • Page 16July 18, 2013 Prepared for Georgia HFMA Summer Institute What’s New • For leases with a maximum possible term of more than 12 months, a lessee would be required to recognize an asset and liability • The lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term • Lessor accounting will also be impacted
  • Page 17July 18, 2013 Prepared for Georgia HFMA Summer Institute What’s New • A lease for less than 12 months would be treated in a similar fashion to how we currently treat operating leases • The subsequent accounting for a lease greater than 12 months will be based upon its classification as either a Type A or a Type B lease. The classification as Type A or B is based upon the nature of the leased asset. Classification not reassessed unless contract is modified
  • Page 18July 18, 2013 Prepared for Georgia HFMA Summer Institute Type A Leases • If the underlying asset is not property (defined as land or a building, or part of a building, or both), a lessee would classify the lease as a Type A lease – However, if the lease term is for an insignificant part of the total economic life of the underlying asset or the present value of the lease payments is insignificant relative to the fair value of the underlying asset at the commencement date, it would be classified as a Type B Lease
  • Page 19July 18, 2013 Prepared for Georgia HFMA Summer Institute Type A Leases • If the lease is determined to be a Type A lease, a lessee would: • Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments • Recognize the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset which is to be amortized on a straight-line basis, with certain exceptions
  • Page 20July 18, 2013 Prepared for Georgia HFMA Summer Institute Type A Leases • The following are example journal entries related to recording Type A leases – To record the lease asset and liability: • DR Right-of-use asset XXX • CR Lease liability XXX
  • Page 21July 18, 2013 Prepared for Georgia HFMA Summer Institute Type A Leases • If the lessee expects to consume the right-of-use asset’s future economic benefits evenly on the straight-line basis, this entry would be recorded to recognize lease expenses: • DR Interest expense XXX • CR Lease liability XXX • DR Amortization expense XXX • CR Right-of-use asset XXX
  • Page 22July 18, 2013 Prepared for Georgia HFMA Summer Institute Type B Leases • If the underlying asset is property, a lessee would classify the lease as a Type B lease. However, if the term of the lease is for the major part of the remaining economic life of the underlying asset or the present value of the lease payments account for substantially all of the fair value of the underlying asset at the commencement date, it would be classified as a Type A Lease
  • Page 23July 18, 2013 Prepared for Georgia HFMA Summer Institute Type B Leases • If the lease is determined to be a Type B lease, a lessee would: • Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments (Same as a Type A Lease) • Recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right-of-use asset, on a straight-line basis
  • Page 24July 18, 2013 Prepared for Georgia HFMA Summer Institute Type B Leases • The following are example journal entries related to recording Type B leases – To record the lease asset and liability: • DR Right-of-use asset XXX • CR Lease liability XXX
  • Page 25July 18, 2013 Prepared for Georgia HFMA Summer Institute Type B Leases • The following entry is made to record the lease expense when a payment is due: • DR Lease expense XXX • CR Lease liability XXX • CR Right-of-use asset XXX
  • Page 26July 18, 2013 Prepared for Georgia HFMA Summer Institute Insignificant Portion of Economic Life • Unfortunately, the PASU does not specifically define what is considered to be the insignificant portion of the economic life • Several examples are provided, however: – A lease of three years for a car that has an economic life of seven years is considered to be significant
  • Page 27July 18, 2013 Prepared for Georgia HFMA Summer Institute Insignificant Portion of Economic Life – A lease of two years for an office floor in a building that has an economic life of 50 years is considered to be insignificant
  • Page 28July 18, 2013 Prepared for Georgia HFMA Summer Institute Discount Rate • An entity should use the rate (either explicit or implicit) that the lessor charges the lessee as the discount rate used to initially determine the present value of lease payments
  • Page 29July 18, 2013 Prepared for Georgia HFMA Summer Institute Options to Extend the Lease Term • At the commencement date of a lease, an entity assesses whether the lessee has a significant economic incentive to exercise, or not to exercise, an option • An entity’s assessment should consider contract-based, asset-based, market-based, and entity-based factors
  • Page 30July 18, 2013 Prepared for Georgia HFMA Summer Institute Disclosures • An entity would be required to provide expanded disclosures to meet the objective of enabling users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases
  • Page 31July 18, 2013 Prepared for Georgia HFMA Summer Institute Disclosures • Information about the nature of the lease that could be disclosed includes: – A general description of the lease – The basis on which variable lease payments are determined – The existence, and terms and conditions, of an option to extend or terminate the lease, or purchase leased asset – Any restrictions or covenants imposed by leases – Reconciliations of opening/closing balances on balance sheet
  • Page 32July 18, 2013 Prepared for Georgia HFMA Summer Institute Retrospective Approach • At the date the guidance becomes effective, organizations are expected to recognize and measure leases at the beginning of the earliest period presented using either a full retrospective approach or a modified retrospective approach
  • Page 33July 18, 2013 Prepared for Georgia HFMA Summer Institute Full Retrospective Approach • The full retrospective approach would require a lessee to calculate the carrying amounts of all outstanding leases individually at the date of transition as if those leases had always been accounted for in accordance with the proposed guidance
  • Page 34July 18, 2013 Prepared for Georgia HFMA Summer Institute Modified Retrospective Approach • The modified retrospective approach would require a lessee to calculate lease assets and liabilities in a manner similar to the full retrospective approach, but the lessee would be allowed to use information available at the date of transition and would be able to calculate a discount rate on a portfolio basis for leases with similar characteristics rather than calculate a specific discount rate for each individual lease
  • Page 35July 18, 2013 Prepared for Georgia HFMA Summer Institute Comment Period • The comment period for this PASU ends September 13, 2013
  • Page 37July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • Implementation of ICD-10 is mandatory by October 1, 2014 (delayed from October 1, 2013) • Expands the number of diagnostic codes from approximately 24,000 to greater than 155,000 • In July 2012, the AICPA issued Technical Information Service Inquiries and Replies (TIS) 6400.48, Accounting for Costs Incurred During Implementation of ICD-10
  • Page 38July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • Some interesting new ICD codes: – R46.1 “Bizarre personal appearance” – W22.02XA “Walked into lamppost, initial encounter” – W22.02XD “Walked into lamppost, subsequent encounter” – V91.07XA “Burn due to water-skis on fire”
  • Page 39July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • The AICPA has identified four “major” types of costs associated with the implementation of ICD-10: – Modify existing computer systems to make them ICD- 10 compliant, or else replace those systems that cannot be made ICD-10 compliant – Enhance electronic medical records – Train clinical coders to use ICD-10 – Train clinicians to improve their documentation so that the information necessary to bill under ICD-10 is available
  • Page 40July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • The guidance in ASC 720-45 is applicable in considering how to best account for ICD-10 implementation costs • Project costs should be segregated amongst: – Process reengineering activities – Activities that develop or modify software – Costs associated with the acquisition of fixed assets
  • Page 41July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • Costs associated with process reengineering (examination of business office workflow and tasks, for example) are expensed as incurred • Costs associated with developing or modifying internal-use software can either be capitalized or expensed based on FASB’s internal-use software guidance • Costs associated with the acquisition of fixed assets are accounted for in accordance with an entity’s fixed asset capitalization policy
  • Page 42July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • If an outside consultant is hired by the healthcare provider to conduct the entity’s ICD-10 implementation, the price of the consulting project should be allocated (and either expensed or capitalized, as appropriate) based on the values of each “type” of work performed
  • Page 43July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • ASC 720-45-55-1 provides the following table outlining which items can, and cannot, be capitalized
  • Page 44July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs
  • Page 45July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • Per ASC 350-40-25, it is important to remember that all training costs should be expensed as incurred, even if those costs are incurred during the application development stage • ASC 350-40-25 also states that costs to modify software should only be capitalized when the modifications result in “additional functionality” • Costs that only pertain to routine maintenance should be expensed as incurred
  • Page 46July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • Assessing “additional functionality”
  • Page 47July 18, 2013 Prepared for Georgia HFMA Summer Institute Accounting for ICD-10 Implementation Costs • The best course of action is to discuss what costs can and cannot be capitalized with your auditors ahead of time • As a public service announcement on behalf of auditors everywhere, please do not wait until after the end of the year to begin the discussion on what costs should be capitalized versus those that should be expensed
  • Page 48July 18, 2013 Prepared for Georgia HFMA Summer Institute Questions? Contact information for Doug Arnold (800) 270-9629 darnold@pyapc.com