Why Healthcare CFOs Don’t Need to Struggle with the New Lease Accounting Standards

“More than 80 percent of healthcare companies have not started or are only in the initial phases of implementing the new lease accounting standard (ASC 842 or GASB 87). With implementation taking six to nine months on average, healthcare CFOs have to act now. This is costing most health systems up to USD 1 million, but if you start early, you can defray some of the costs,” says Joni Noel, Senior Vice President, RGP Healthcare.

How can healthcare companies successfully comply with these new standards? What do CFOs need to do before the 2020 deadline?

Meeting the new accounting standard (ASC 842 or GASB 87) will require more than implementing a new lease accounting software system. Sustained compliance with the new standards will involve a comprehensive finance transformation effort requiring changes to existing procurement, treasury, finance, and accounting processes. Key activities that will need to be addressed during the project lifecycle include assessment and policy elections, process transformation, data collection and abstraction, technology implementation, project and change management. Allocating the appropriate resources, applying proper project management, and selecting an experienced implementation partner can lead to a successful adoption and sustained compliance.

What are the biggest challenges they encounter? What policy and process modifications are often required?

Above all, the biggest challenge organizations face in the adoption of the standards is the accumulation of all the necessary data that is required to perform accurate accounting under the new standards, especially embedded leases. Additionally, adequately evaluating all of the policy and practical expedients afforded for the adoption prior to starting data collection can significantly impact the quantity and scope of data that may be required to be gathered.

How can this transition period be simplified and streamlined?

Key activities that can simplify and streamline the adoption include partnering with an experienced implementation partner that can provide a clear and concise roadmap of activities to compliance. Comprehensive project management and a dedicated project manager can ensure that key workstreams are aligned, dependencies are identified and key milestones are achieved to keep the project phases of assessment, process transformation, data collection and system implementation on track.

What is the best way of identifying (and closing) gaps in policy, processes, controls and technology?

A formal assessment process should be the starting point for all healthcare organizations. This assessment process should include formal lease discovery activities, policy and practical expedient analysis and decision, and evaluation of the current state processes and controls to understand what modifications will be necessary to ensure compliance with the new standards over time. Based upon the information gathered during assessment, most organizations are choosing to deploy a software platform to handle the accounting requirements. Due to the labor-intensive work of ongoing maintenance of leases in a manual database, software platforms provide automation of much of the administrative activities.

Once implemented, what ongoing lease management is required?

The date of adoption is not a finish line for healthcare organizations, but rather, a starting point. Sustained compliance with the standards over time poses the greatest risk to the organization. New leases, lease modifications, and lease terminations will need to be managed in a timely manner to ensure the proper presentation of assets and liabilities on the financial statements. Failure of sustainability could result in audit failures and, potentially, a complete re-implementation of the standards.

How can the implementation project end up costing more and taking longer than expected? How can CFOs make sure that does not happen?

Proper program governance and allocation of resources is the key driver to success as you prepare for the adoption of the new accounting standards. Most program overruns are due to competing priorities within organizations which pull resources from the leasing initiative. Executive sponsorship of this key initiative by the CFO can set the tone for the organization as to the importance of getting this done and getting it done right. CFOs that engage and remain engaged during the lifecycle of the project can ensure that resources remain dedicated to completion and can assist in eliminating any roadblocks the implementation team may encounter.

This post was originally published by the marcus evans National Healthcare CFO Summit Fall 2019.