Supply chain managers around the country have known for the past couple of years that they’d need to make significant changes in their processes to comply with new FASB/IASB regulations on lease accounting. The ASC842 (IFRS 16, too) regulations are taking effect now and must be incorporated into first quarter 2019 reporting.
Many privately held healthcare companies, reporting under ASC 842, have a January 2020 deadline for this transition, giving them a bit of breathing room, and opportunity to learn from the public firms who’ve had to make this never-been-done-before transition. Despite the later deadline, many private healthcare businesses are still scrambling to meet the deadline because the definition of “public” includes those with conduit debt obligations.
With these looming deadlines, time is short for everyone because of the extent of changes needed to existing accounting systems and procurement workflows to achieve compliance. Around the industry, the most common question I’m asked is “what are other people doing?” followed by “what do you recommend?”
The first and loudest piece of advice, delivered somewhat tongue in cheek, is “start yesterday.” What that really means is that the transition is more difficult and time consuming than you can possibly imagine. To support the new standards, companies need to inventory their lease contracts, update technology infrastructure, normalize and migrate data, validate systems and change some procurement processes.
A distinct healthcare perspective
The best way to navigate through this arduous journey is to learn from people who have already gone through the process or are in the final stages of it. I recently sat down with two key people we work with at Novant Health and asked what advice they could pass along to supply chain managers and others in the healthcare field. Novant Health is a not-for-profit network serving the Carolinas and Virginia with 15 hospitals and over 500 physician practices. After getting past the obligatory “start yesterday” response, they provided five tips that healthcare managers and execs will find helpful.
- Align the major stakeholder groups – While lease accounting sounds like a straightforward finance department responsibility, achieving compliance is crucially dependent on synchronizing efforts between them, procurement, real estate and operations. “When we started this process, we didn’t really understand one-another,” said Jackie Adams Milam, Senior Finance Director. Courtney Harrington, Real Estate Operations Manager agreed, “Now we’re learning from each other, with real estate folks knowing how their decisions affect the balance sheet.”
- Assign a dedicated project manager. The folks at Novant Health quickly realized the timeframe and complexity of the compliance project couldn’t be managed simply with internal resources. So, they contracted with a dedicated project manager (PM) for a year-long engagement to deal with the nuances, be the broker between finance, real estate and the equipment departments, and keep everyone on track. This PM manages assignments and schedules, makes sure data is properly formatted, and prepares all systems and processes for testing. “We recommend assigning a PM with a background in process and technical knowledge, who may have worked in internal auditing, building systems or project plans,” said Milam. The PM needs to have good skills and processes for following up with internal teammates and enabling the software.
- Streamline your RFP process. Getting back to the whole “start yesterday” dynamic, Milam added that, in hindsight, they should have pushed procurement to move through the RFP process more quickly. “We lost time looking at too many vendors. There are only so many software companies whose lease accounting and administration capabilities are sufficient. Get to your short list quickly, qualifying providers already experienced getting companies like yours compliant.”
- Watch out for embedded leases. While real estate is a finite resource managed by a single team, medical equipment is often managed at a location or department level. Tracking down, cataloging, and normalizing all that data is daunting. Procurement may have centralized records of which organizations have equipment contracts, but they may not have had to track down to the individual asset level. With the new accounting regulations, however, simply making a payment and logging an expense is no longer sufficient. Another example is consumables-driven purchasing contracts that have underlying provisions to install and use specific equipment, which may be provided without charge. “Now we place a value on all equipment,” said Milam. “Even if we’re only charged for consumables usage, we still have to account for the asset, and assign it a realistic balance sheet value.”
- Be prepared to change processes and workflows. As with stakeholder alignment, your new compliant lease accounting system will affect the way the people and departments in your organization work together. Real estate, for most healthcare companies, already has fairly centralized processes, with all the data in one place. However, when real estate changes an asset’s terms or schedules, your lease administration system needs to update the balance sheet simultaneously. Likewise, procurement might be tasked with responsibilities for ensuring a complete schedule of all balance sheet items when contracts are initiated or changed. And then, updates to specific units of medical technology equipment might be rolled back to clinic managers or facilities managers. “With a new centralized system, accessible throughout the company and no longer a file folder on a single computer, we can drive efficiencies and affect compliance and our own internal standards,” said Milam.
In the past, leasing was usually procured by real estate and accounting was taken care of by the finance department. The urgent deadline to comply with the new FASB/IASB standards is driving a lot of change, very quickly. The good news is that others are blazing the trail and are ready to share their experiences.