Ask the Experts: Medical Equipment Leasing
What are the current leasing trends for medical equipment? We are a not-for-profit health system so a longer-term capital lease seems more attractive, but I would also like to consider what other types of hospitals are doing in this area.
Answer 1: As finance folks are well aware, lease accounting is changing in 2018, affecting balance sheets and capital structure ratios (equity financing, debt to equity, and debt to capitalization). All leases (except those under a year) will have to be reported as an asset and a liability—even operating leases. Criteria for classifying a lease as a capital lease―or as it will be called in the future, a finance lease―will become simpler:
• Ownership transfers to the lessee at the end of the lease, or the lessee has the option of purchasing the asset if the lessee is reasonably certain to exercise it.
• The lease term coincides with the expected economic life of the asset
• The present value of the lease payments equals or exceeds the fair value of the asset
• The asset has no alternative use to the lessor at the end of the lease
From an accounting perspective at least, operating leases (formerly off-balance sheet rentals) over a year in length will look like capital leases (balance sheet financing arrangements). While this doesn’t affect the business case for leasing short versus long term, it does impact financial reporting.
This question was answered by: Christoph Stauder, FHFMA, CPA, president, Stauder Consulting, LLC, and a member of HFMA’s Oregon Chapter.
Answer 2: Alternative funding sources are becoming more prevalent as cash flow tightens for capital expenditures. The benefit of the leasing option is that it can be customized to meet several objectives; the opportunity to have the appropriate device at the appropriate time with the right return on investment. For example, a five-year piece of X-ray equipment is offered with a five-year lease and two years of maintenance, thus only three years of maintenance are required. As a caution, you should always prepare an ROI matching cash flow and revenue.
This question was answered by: David A. Williams, FHFMA, CPA, partner, Horne LLP, and a member of HFMA’s Mississippi Chapter.
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