Are there other terms in the agreement? For example, what happens if you terminate the contract prematurely – specific payment for the equipment or simply a return of the equipment? If you renew at the end of the specified period, will you receive new devices? Are the costs for the equipment assessed and reported separately? Are there any additional charges for VAT, property tax and/or insurance? Who is responsible for the repair and insurance? What is the relative value of the equipment in relation to the obligation to purchase reagents? I think these other facts will help determine whether the equipment provided is actually incidental to the obligation to purchase the reagents. If this is the case, I would always say that the equipment provided by the seller is random and has no distinct value to you. Answer: The Financial Accounting Standards Board (FASB) has published its new standard for the accounting of leases. Under the new standard, a tenant is required to include most leases on their balance sheet, which is a significant change from current accounting standards. The analysis of current value becomes critical. Many of our laboratory operating leases through reagent leases are converted to capital leases. We look at reagent agreements for the hospital, where the seller sets the price of the different reagents when we commit to a minimum purchase quantity each year. The seller also “gives” us the processing instrument/equipment for the reagents – he integrates the cost of the equipment into our minimum purchase quantity. The problem arises when we evaluate these agreements to classify them as “operating” or “capital” leases under FAS 13 for accounting purposes. We need to have the cost of the equipment to properly evaluate the lease.
Some suppliers are very reluctant to specify the cost. A second different problem arises when a contract is classified as a capital lease and there are no regular payments for the lease – we can buy the entire minimum purchase amount of the year in one month or buy different amounts each month. Your comments and comments will be greatly appreciated! Allan scores good points. Even if there is no resale market value for the equipment, the fair value of FAS157 is close to zero, which in turn argues for random treatment of the equipment with the reagent load recorded as incurred. Ray, the problem is, how would she build the value to be written off? Presumably, it would have to raise a rental amount and depreciate it as a purchase in exchange for payments for the reagents. I have a problem with the recording of this responsibility in the books as it could not/could not be confirmed as payable. Again to the question of what happens in the event of early termination. Of course, I am practically inclined. Practical and GAAP don`t always work well together. Is this agreement a capital lease in which the value of the equipment and any related liabilities must be recorded? If so, how do you identify the value of the equipment, since many suppliers do not disclose the cost of the equipment separately from the cost of consumables? Or would that, since there is no resale market value for the equipment and its fair market value is therefore close to zero, support the argument for randomizing the equipment with the reagent costs recorded as supply costs? Allan, I think the key in this one is to read the final contract.
Presumably, there would be periodic minimum purchases and puns on what happens in the event of early termination. Unless the contract is a loss factor for the reagant seller, the annual minimum should cover the cost of the Reagants and equipment, so there should be enough to “share.” Even if this is not the case, the fee can still be booked. Another way to approach this would be to look at the cost of Reagants with another supplier. The difference must reflect the implicit cost of the equipment. Another option is to ask the seller for the names of other hospitals outside the area that have used the reagents/equipment. I found that CFOs of non-competing companies were very willing to give brief ideas and advice. Maybe I`m misreading. Do you mean that you purchase consumables (the reagents) on a minimum quantity basis per year and that your supplier provides you with the processing equipment “free of charge”, even if the cost of that equipment is included in your consumables fee? If that`s the case, I don`t see how it`s supposed to be a lease anyway, because you don`t “rent” the equipment. You seem to be paying for consumables and that`s it.
If Pepsi lent you a soda machine for free so you could sell their sodas in your store, you wouldn`t “rent” the soda machine, even if you paid Pepsi an extra $0.02/can of soda. Capital lease: A lease that meets one or more of the following criteria, which means that it is classified as a purchase by the tenant: the rental period is greater than 75% of the estimated economic life of the property; the lease contains an option to purchase the property for less than the market value; Ownership of the property passes to the tenant at the end of the rental period; or the present value of lease payments exceeds 90% of the fair value of the property. Operating lease: A lease in which the tenant acquires the property for only a small portion of its useful life. An operating lease is commonly used to purchase equipment on a short-term basis. Any lease that is not a capital lease is an operating lease. If I miss the check mark, please specify. How do you understand reagent agreements for which the seller sets the price of different reagents when the hospital commits to a minimum purchase quantity each year? It`s true that integrated leases are already everywhere and ASC 842 raises the stakes for proper capture and billing. LaSalle Solutions simplifies the tracking process with LAMP, our cloud-based platform that brings together all the important information in one place and makes it easy to track end-of-life and renewal data. ASC 842 introduces new complexity in lease accounting. Based on the example above, it is possible that the hospital does not need the number of strips required for the purchase contract.
The cost of the bands would be recorded as a debt and possibly as a loss after it expires, since the comprehensive agreement is now classified as a capital lease under CSA 842. This can lead to budget pressure and require tedious analysis of rental/non-rental components. How do you understand reagent agreements for which the seller sets the price of different reagents when the hospital commits to a minimum purchase quantity each year? The seller also “gives” the reagent processing instrument/equipment to the hospital. In principle, the seller integrates the cost of the equipment into the minimum purchase quantity. Reagent and placement agreements are fundamental to healthcare in the U.S., but as we can see, they can be complicated to manage to comply with ASC 842. One possible course of action is to ask for the current value of a medical device instead and purchase the associated consumables separately. This could provide greater financial stability, as it would open up an operating lease instead of a capital lease. Given the low-price purchase ($1.00 at the end of the period) and the duration of the agreement (over 75% of the useful life), it`s pretty clear that you have a capital lease. To evaluate the equipment, I would look for other suppliers. Where could you find similar devices if your contracted supplier went bankrupt and new equipment was needed? And how much would it cost? This can be used to cover the “cost” of the equipment. To amortize the equipment, you can simply guide it directly over the duration of the contract.
Sorry, I forgot to include some important facts… The seller gives us ownership of the equipment for $1 at the end of the lease. We will use the equipment for more than 75% of its useful life (5 years). The lease seems to meet the criteria of a capital lease, but it`s still a confusing term. If the seller refuses to specify which portion of the payment relates to the cost of the equipment, we will not be able to create the depreciation plan required by the capital lease. We are not allowed to purchase deliveries in the same quantity each month, so we do not receive monthly invoices or invoices that have the same amount each month. How can this be compared to a recovery plan? What to do with the consumable? Thank you again for taking this question into account. A corporation is required to determine the classification of a lease at the beginning of the lease. The classification criteria according to the new standard apply to both tenants and landlords. The valuation focuses on whether control of the underlying asset is actually transferred to the lessee (e.g.B. almost all of the risks and benefits associated with ownership of the underlying asset are transferred to the lessee).