A Walkthrough Guide to Lease Accounting for Healthcare Organizations
Introduction
This guide will walk you through the basics of lease accounting in healthcare. It’s important to understand the basics of lease accounting because it can help you make sense of your finances. By understanding how lease payments are calculated and what these numbers mean, you’ll be able to tell if a deal is beneficial to your organization or not.
What is Lease Accounting?
Lease accounting is a form of accounting that tracks the payments made by a company for the use of an asset. This type of accounting is used to determine the cost of an asset over its life and can be used to determine what will happen to an asset at the end of its lease.
This form of accounting differs from other types, in that it does not take into account depreciation, which is a common practice in other types of accounting. Instead, lease accounting takes into account only the initial cost and any additional payments made during the course of leasing. It also only recognizes as revenue those payments received during the course of leasing and not those received at the end or before leasing begins.
This type of accounting can be challenging for healthcare organizations because they often have many different types and values for assets, and liabilities. Generally, the amount of assets that a healthcare organization typically owns can range from very low to high. In other words, it is important for healthcare organizations to identify and value their assets accurately in order to make decisions about what they should sell versus keep, or where they need to improve their accounting processes. Additionally, some types of assets cannot be sold because of laws or regulations, so leasing makes sense in those cases.
Why is Lease Accounting Important to Healthcare Organizations?
If you’re like most healthcare organizations, lease accounting is important because it can help you make better decisions about your real estate assets. This includes understanding the risks associated with those assets and how to manage them effectively.
The first step in understanding lease accounting is to understand what it means for an organization. Lease accounting refers to the tracking of all leases that are signed with tenants (who are often referred to as lessees). A lease is simply an agreement between two parties where one party agrees to pay money or provide goods and services over an agreed period of time (usually until termination) in exchange for receiving those same goods or services at a fixed price called rent per month during this time period.
How to Calculate the Minimum Present Value of a Lease?
The dreaded calculations! It’s tiresome I know, but a little bit of math is necessary to properly visualise what we’re talking about here. Once you understand the math however, it’s a simple matter of supplementing the numbers with the payments you’ve made to find the present value of your investment.
The minimum present value (MPV) is the amount you’ll need to pay on your lease if it’s written out in terms of minimums and payments. It’s also known as the “fair market value” or “lease price.” To calculate MPV, use this formula:
Present Value = FV / (1 + r) ^ n
Where:
- FV is the future value
- r is the required rate of return
- n is the number of periods
What are the Next Steps for Healthcare Organizations?
You should now be well-equipped to learn more about lease accounting, and you should be able to take steps toward maximizing your return on investment. To sum up what we’ve gone through regarding lease accounting in this article:
- Understanding the basics of lease accounting is key to maximizing the value of your leases. Find guides that offer step-by-step instructions on how to calculate the fair market value (FMW), minimum present value (MPV), and other critical numbers.
Conclusion
We hope that this guide has been helpful in helping you understand the basics of accounting for healthcare organizations. There is obviously a lot more information out there pertaining to lease accounting and its intricacies. Still, if you are on your journey as an accountant in healthcare, hopefully we have given you enough information here, so when it is time for your next audit or review, you can be confident that your knowledge on this subject is covered!
Learn how we can help you processing your lease accounting for healthcare organization, contact us online or call us at +1-307-368-8003 or email us at alexa@v-etico.com.
Danielle Ezra
Executive – Social Media Marketing
V-Etico Services LLC
Phone: 1 (307) 368-8003
E-Mail: alexa@v-etico.com