Day: August 8, 2022

Year-End Is Too Late to Get Started on ASC 842 – The Time to Act Is Now

The new lease accounting standard – ACS 842 – took effect for private and non-profit organizations for fiscal years starting January 1, 2022 (or 2023 for non-calendar year-end entities). While that means at the earliest your organization must account for all leases on your financial statements by the end of this year, there’s a lot of work to be done to meet the new standards. If you haven’t started, now is the time. If you wait until year-end, it will probably be too late.

First, a number of departments/functions may be affected by the change. This includes accounting, tax, real estate, equipment leasing, procurement, treasury, information technology, and legal. Consider creating a task force with representation from all impacted areas to put together a project timeline and plan.

Second, there are several activities you’ll need to complete, from policy development to data management and extraction to technology design, workflow, implementation, and more. Perhaps one of the biggest considerations is whether you should be adopting a technology solution to automate identifying lease language, monitoring, bookkeeping and more, which is something we strongly recommend.

So, if you haven’t already started, you need to catch up now. Waiting for year-end is not an option. If you need a refresher or to get reacquainted with ACS 842, following is an overview (originally published by RBT CPAs in August 2021 and updated for manufacturing companies).

RBT CPAs has partnered with Trullion – a lease management software company – to use modern technology to streamline the process. If you are interested in learning more about how this may benefit your organization, give us a call.

* * * * * *

Did you know that, in a matter of months, your leases will be accounted for differently due to the new lease accounting standard? While previously only capital leases were recorded on the balance sheet, effective for fiscal years beginning after December 15, 2021, all leases will be on the balance sheet. That translates to January 1, 2022 for calendar year entities, and fiscal 2023 for non-calendar year end entities.

What does this mean moving forward? It means all manufacturing organizations need to make sure they have a thorough handle on all of their leases that are for longer than 12 months, including those related to real estate and operations. Especially if your organization has been leasing more equipment or space, the number of leases you may need to review and track could be quite large. Now is the time to review and evaluate contracts.

The new definition of a lease under ASC 842: “A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” This slight change means that all contracts should be evaluated to determine if they fall within the scope of this new criteria. Contracts that were previously considered leases may no longer meet the lease criteria and vice versa. Be mindful of lease language when you are reviewing your contracts.

There will still be two categories of leases. The leases formerly known as capital will now be called finance leases. The classification criteria remain essentially the same as under the existing standard; the only major difference is the elimination of the bright-line percentages. All leases that do not meet one of those criteria will be classified as operating.

If a lease contract includes a non-lease element, that non-lease component must be accounted for as a separate contract distinct from the lease itself. For example, the cost of an equipment lease that includes a maintenance contract must be allocated between the two elements and accounted for separately.

Lease liabilities for operating and finance leases will all be accounted for in the liability section the same way capital leases currently are: split between current and long-term. The offset to the liability will be a right of use (ROU) asset. There will be two lines: a ROU asset – operating lease line, and a ROU asset – finance lease line. These ROU assets are all long-term.

The new standard was designed so that there should be minimal impact to your income statement. Operating leases will continue to be recognized as a straight-line expense over the life of the lease. Finance leases will continue to be frontend loaded because the interest is higher at the beginning of the lease than at the end.

The most significant impact will be on the company’s current ratio. Because the ROU assets are all long-term, but the lease liability is split between current and long-term, the current ratio will be negatively impacted. This change will be particularly important for entities with debt covenants that reference the current ratio. If you have significant operating leases that may create an issue with your debt covenants, connect with your bankers now.

Ultimately, it’s important that both the borrower and the lender understand that this is a reporting change, not a change in a company’s financial situation. Having this conversation early on instead of waiting until the last minute will avoid confusion, and a lot of headaches.

A Q&A with RBT CPAs Partner Jennifer George about Lease Accounting Standard Changes

I want to follow up on some recent articles and information RBT CPAs has shared about the new lease accounting standards (called GASB 87) you need to be prepared for by year-end. Put simply, most leases will be recorded in your Long-Term Debt Account Group and Statement of Net Position at year-end; however, compliance is anything but simple and will require a significant amount of time and effort to accumulate and analyze the contracts, perform the calculations, and compile the required disclosures.

Recognizing this, we have strongly encouraged our clients to explore software solutions to help streamline the process. Then, we went one step further. We reviewed a number of lease maintenance software options and decided to partner with Trullion – a leader in the lease software industry. Clients who choose to independently engage with Trullion to automate their lease management process and who use RBT CPAs for year-end reporting will actually save on accounting fees because the automated process is less time and labor intensive than calculating everything manually.

You said the new reporting requirement applies to “most leases.” Are there any that I don’t have to worry about?

Yes, there are a couple of carve-outs. Leases that have a maximum life (including all options) of 12 months or less will be expensed as incurred. Leases that transfer ownership of the asset will be accounted for as debt. All other leases must be accounted for under GASB 87.

If my government only has a handful of leases, is it really worth the time and effort to automate?

In my opinion, yes. It is certainly possible to perform the calculations, generate journal entries, and compile the disclosure information manually, but it will be a significant time investment.

Can’t we just collect the required information in an Excel spreadsheet?

You can use Excel; however, if a lease has variable elements or is modified at any point, the formulas become more complex and cumbersome.

Can I just authorize my RBT team member to do it for me?

The simple answer is no. If RBT CPAs is auditing the government’s financial statements, then we are required to maintain our independence. Implementing the new standard “for you” would violate our independence rules and make RBT CPAs ineligible to perform the government’s audit. We will review the information generated from the software and can provide guidance and answer questions along the way, but we can’t just do the whole thing.

Can I choose to use a software other than Trullion and still engage with RBT CPAs to handle the year-end reporting?

Of course! We believe Trullion is the most cost-effective option for our clients, but there are other programs available. RBT CPAs would just need access to whatever program you choose to use.

What happens if I miss a lease that’s embedded in a larger contract?

It’s important for you to review all contracts to determine whether the arrangement contains a lease. The agreement could contain multiple elements, one or more of which may meet the lease criteria, even if the word “lease” isn’t included in the contract name.

It’s not the end of the world if you miss a lease this year and identify it later. Errors can be corrected. The method of correction will depend on the dollar value of the lease and can range from just expensing the lease in the current year to restating the financial statements for the year the lease was missed.

Why does my government have to start gathering the required information now, if we don’t need it until year-end reporting?

Remember that the new standard applies to both lessee and lessor arrangements. It will take time to review your contracts to determine if they meet the lease criteria. Then, either manually or utilizing software, you’ll need to perform the calculations, generate journal entries, and record the transactions. You’ll also need to reverse any entries you recorded during the year under pre-GASB 87 rules.

If my company uses lease management software this year, will I have to re-enter it every subsequent year? How will this impact RBT CPAs’ fees in subsequent years?

If you use the software, you do not have to re-enter the same information every year. The software will generate entries for each subsequent year. One caveat: you will have to add any new leases or modifications to existing leases that are already in the system. RBT CPAs’ fees will be for answering questions, reviewing any new information added to the system, and proposing any necessary adjustments.

If you have any additional questions or need clarification, please don’t hesitate to reach out to your RBT CPAs contact.

How New York Modifiers for Workers’ Comp Rates Are Changing

Like many states, New York has used the National Council on Compensation Insurance (NCCI) to determine the experience modifier (Mod) for calculating Workers’ Compensation (WC) premiums. After careful evaluation, the New York Compensation Insurance Rating Board (NYCIRB) decided to create its own rating plan and to withdraw from the NCCI interstate rating plan effective October 1. Overall, the NYCIRB rating plan gives employers more incentive (a.k.a., lower WC premiums) to focus on safety and reduce workplace injuries.

The NYCIRB and your insurance company will determine your Mod based on several factors and formulas.

Your business will continue to be assigned a four-digit classification code, which is used to group similar employers. However, under the NYCIRB rating plan, six classifications are being eliminated and integrated into other codes.

To start, the expected loss amount or total anticipated loss during an experience period (the timeframe that the policies being used to determine the Mod were in effect) will be determined. It is calculated for each classification using this formula:

Expected Loss Rate (ELR) X payroll)/100

Then, the results for all classifications are added together to calculate expected losses.

Next, a split point is determined. The split point divides losses for each claim into primary and excess components using a dollar value. Split points vary based on expected losses during an experience period for each classification. They range from $1,000 for the smallest risks to $170,000 for the largest.

The split point is used to determine an employer’s corresponding D-ratio, which is assigned based on the ratio of primary losses to expected losses for each class and risk size.

Expected Primary Losses = expected losses for the classification X D-Ratio
Expected Excess Losses = expected loses – expected primary losses
Actual Primary Losses = reported losses limited by the split point value

Finally, the new modifier (based on experience rather than merit) is calculated:

Mod = (Actual Primary Losses + Expected Excess Losses)/Expected Losses

There’s one more thing that will happen: a new capping methodology which protects against overly harsh Mods will be applied. For one claim, the maximum Mod is 1.12; for 2 claims, the max is 1.4; for 3 claims, the max is 1.75; and for four or more claims, the max is 2 + .000003 X expected losses. For the first year (October 1, 2022 through September 30, 2023), if a Mod under the new plan is more than what it would have been under the prior formula using updated experience by more than .30, the Mod will be capped at the Mod resulting from the prior formula plus .30.

You can find more details in the NYCIRB Experience Rating Plan Manual. For change highlights, including an example and updated rating worksheet, refer to the NYCIRB’s Changes to the Experience Rating Program Explained pamphlet. You may also want to check out the Mod Estimator tool on the NYCIRB’s website and this video explaining the new formula.

It’s definitely a lot to take in but the good news is insurance companies will be doing the calculations. We just want to make sure you’re aware of them because they may result in a decrease (or increase) to your WC premiums come October 1 and give you another reason to focus on your workplace safety efforts.

If you have any questions about this or any accounting, tax, or auditing topic, please don’t hesitate to reach out to RBT CPAs.

Time Is Up! Fines Are Being Issued for Hospitals Failing to Comply with Transparency Rules

Over a year-and-a-half ago, all 6,000 or so U.S. hospitals were required to provide pricing information online so patients could comparison shop and avoid surprises. After audits, warning letters, and requests for plans to take corrective actions, the Center for Medicare and Medicaid Services (CMS) recently started issuing fines for noncompliance – and they’re not cheap.

Starting January 1, 2021, hospitals were required to provide clear, accessible pricing information about the items and services they provide, as a machine-readable file and in a consumer-friendly format. CMS began auditing a sampling of hospitals that same month. Since that time, it issued over 350 warnings for noncompliance, followed by more than 150 corrective action plan requests from those who didn’t do anything after the initial warning. After addressing citations, 170 hospitals received case closed notices.

This past June, the CMS issued the first Civil Monetary Penalties to two hospitals in Georgia for noncompliance. One penalty was for over $200,000 and the other was for almost $900,000. Penalties are based on the number of beds at the facility and number of days out of compliance; they can range from $300 to $5,500 per day.

Should hospital administrators now expect a floodgate of fines? It depends on who you ask.

PatientRightsAdvocate.org conducted its own analysis of 1,000 websites and found just 14% fully met the transparency requirements. Over 85% didn’t include all information required in their machine-readable files. Less than one-third posted charges for 300 shoppable services in the format required. While 85% did provide a price estimator tool, 20% did not show discounted prices for the uninsured and self-paying clients.

As reported by Roll Call, “Turquoise Health, which was formed at the end of 2020 to analyze data and help providers and payers become compliant with the rules, has found that about 4,500 of the nation’s 6,093 hospitals have posted data files.”

The American Hospital Association asserts that most hospitals are in compliance, and that data that indicates otherwise may be misleading or not telling the whole story.

Perhaps the more interesting information comes from what the newly available data can tell us. A study of outpatient imaging at 89 of the leading pediatric hospitals conducted by the JAMA Network found 98% complied with the shoppable services requirement, but less than 40% complied with both the shoppable services and machine-readable file requirements. Data showed an 84% cash price variation for retroperitoneal ultrasound; 82% for a CT of the head without contrast; and 74% for abdominal ultrasonographies. The actual charge variations were much lower: 45%, 52% and 48%, respectively.

Only time will tell whether the new requirements (and fines) will ultimately lead to lower overall health care costs due to consumerism. Still, one big question remains: Will consumers use the website data to shop for their health care like a car or a home? To be continued…

In the meantime, you can always count on RBT CPAs to handle all your tax, accounting, audit, and other needs, so you’re freed up to focus on more important things like patient care and compliance. Please don’t hesitate to give us a call.

Preparing Your District for School Meal Program Changes

On June 25, 2022, President Biden signed the Keep Kids Fed Act to fund summer food programs through September 30 and the Universal School Meals Program through June 30, 2023. However, there are a few changes districts, parents and students need to know going into the 2022-2023 school year.

First, a little background… The Universal School Meals Program was a temporary measure adopted during the COVID pandemic to ensure all school-aged children would have access to a free breakfast and lunch. Food services requirements like having to serve meals in congregate settings, parents having to meet certain income for free and reduced cost programs, and what could be served were waived given the impact of COVID and supply chain issues.

Now that the worst of the pandemic has passed, the Keep Kids Fed Act extends some flexibilities offered through the Universal School Meals Program and ends others for the 2022-2023 school year. Here’s what’s happening:

For the first 30 operating days of the 2022-2023 school year, a student’s eligibility for free meals is determined by the preceding year’s eligibility, unless eligibility determination for the current school year occurs first – then that takes precedence.
Free and discounted meals will only be available to a student whose family meets income eligibility guidelines and completes the required application. (The only exception is if your school uses the “Community Eligibility Provision” – in this case, meals will be free to all).
To help offset cost increases for food and operations, the reimbursement rate is changing. Schools will receive 40 cents more for each lunch and 15 cents more for each breakfast served, along with an annual inflation adjustment. However, according to ABC 7 Eyewitness News, this will still amount to less than the reimbursements provided during COVID.

In addition, the USDA granted certain waivers by state that apply if meal service is interrupted by the pandemic again. Click here to view waivers for each state, including New York.

If your district hasn’t already started getting everything set to comply with the new law, now is the time. Numerous districts have already started communicating with families via email to let them know schools are returning to meal program guidelines and processes used pre-Covid:

Unless a child is approved for the reduced price or free meal program, he/she will be responsible for paying the full cost of in-school meals. Due to inflation, those who do pay the full price for lunch will likely be paying higher prices than those in effect before the pandemic.
If your district requires families to set up and fund an account to pay for meals at school, you’ll need to provide instructions on what to do and how. This will be especially important for families whose child(ren) entered the school system in 2020 or 2021, as they may not have any experience with the process.
Children in families with income under certain limits may be eligible for free or reduced cost meals. Families must complete and submit an application to be approved for this program through the 2022-2023 school year. Consider sending information to families, providing details about the application process (i.e., how to apply and when) and letting them know the school will communicate the outcome (whether they are approved for reduced price, free, or full-price meals). Note: If a family receives TANF and/or SNAP benefits, they can submit a certification letter from the Local Department of Social Services or complete an application by simply providing case number, children’s names, and an adult signature.

At the same time, all the behind-the-scenes work needs to take place to ensure your school breakfast and lunch programs are ready to be up and running the first day of school. This includes School Food Authorities completing their Annual Renewal prior to the start of the school year.

This may not be the end of the free breakfast and lunch discussion. Several states have opted to continue the program and others are putting it on the ballet. New York isn’t there yet, but you never know.

For more details about eligibility, applications, and more, visit the New York State Education Department Child Nutrition Knowledge Center and check out the USDA FAQs.

If you need accounting, tax, or auditing assistance related to your district’s meal program, or any school finances for that matter, contact RBT CPAs. We’ve been helping school districts in the Hudson Valley and beyond for over 50 years with their accounting, taxes, and audits so their leaders are freed up to focus on their biggest priority: educating children.