Embedded Leases in Health Care: Be Aware of New Standards

Today’s blog is written by CLA’s Trent Fast and Chad Kunze. 

Leases are easy to identify because they have the word lease in the title of the contract — right? Not so fast. Under the new lease standards from the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB), contracts not previously considered leases may now qualify. Health care organizations will often use service contracts that rely on the use of underlying assets. The assets in those contracts may result in embedded leases and also may need to be reported on your financial statements when they have not in the past.

For example, does your organization contract for dietary services? If so, you may have an embedded lease! Any equipment provided by the dietary services contract may be an underlying asset that your organization controls. Other examples include laboratory or radiology contracts. A vendor might place laboratory or radiology equipment in your facility for use at no or low cost provided a minimum amount of related supplies are purchased. Use of the related assets could be considered an embedded lease.

Embedded leases in the health care industry can be easily overlooked. You can make embedded leases easier to identify with a few changes to your current business practices:

• Understand where embedded leases commonly occur in the health care industry. A list of contracts with the potential to include embedded leases commonly found in health care is included below.
• Develop controls to gather and identify new or existing service contracts as well as standard lease agreements.
• Review expenses recurring monthly and determine if an in-depth review is necessary and if they are material in nature.

How We Can Help

The initial identification process when adopting the new lease standards can be exhaustive. While the materiality of potential embedded leases should be considered while evaluating potential embedded leases it is important to identify all potential leases for analysis. 

Consider your availability to tackle the new standard. If you need help, reach out to a CLA advisor.