A Ticking Timebomb: How Recent Accounting Rule Changes Could Blow Up Health System’s Balance Sheet

A Ticking Timebomb: How Recent Accounting Rule Changes Could Blow Up Health System’s Balance Sheet

Introduction: That Ticking Sound? It’s Your Lease Liabilities

What if the biggest threat to your balance sheet weren’t a recession, a cyberattack, federal funding changes, or staffing shortages—but your leases?

That’s the reality many healthcare systems are waking up to with the full implementation of ASC 842, the FASB’s updated lease accounting standard. Though issued in 2016 and effective for fiscal years starting after December 15, 2021, the full impact is only now being felt—and in many cases, it’s not pretty.

Designed to increase transparency, ASC 842 requires most leases and lease options to be reflected on the balance sheet, potentially creating new long-term liabilities that many organizations weren’t expecting. For health systems with numerous specialized facilities and long-term lease strategies, this can be a balance sheet game-changer.

What Changed Under ASC 842?

Under the old standard (ASC 840), health systems typically only recorded capital leases on their balance sheets. Operating leases—often structured with short initial terms and multiple renewal options extending potentially 50 years beyond the initial lease term—were disclosed in the footnotes and expensed on the income statement annually.

Under ASC 842, things are different:

– All leases greater than 12 months must now be recognized as:

– A Right-of-Use (ROU) Asset

– A Lease Liability (short-term and long-term)

– These entries significantly increase reported liabilities, even for operating leases.

– Option periods must be included if the lessee is “reasonably certain” to exercise them—a higher bar than the “more likely than not” threshold under ASC 840.

Translation: Even if your lease term says 10 years, your liability might reflect all your optional extensions resulting in 35 years (assuming five 5 year options) if multiple renewal options are deemed “reasonably certain.”

So… Are You Reasonably Certain?

ASC 842 requires lessees to evaluate whether they’re reasonably certain to exercise renewal options. This isn’t guesswork—it requires thoughtful, evidence-based judgment.

Here are the key indicators health systems must consider:

What It Looks Like in Practice

In the past, healthcare executives often structured leases as 10–15 years with multiple 5-year options to avoid long-term balance sheet impact.

Let’s see how ASC 842 changes that. Assuming a $100 million asset, with rent in year one of $6 million with 3% annual escalations, this is how the lease liability would be recognized:

That’s nearly a $100 million increase in liability—just from reevaluating option periods.

If a health system concludes it is reasonably certain to exercise all five 5-year renewal options, it must record a liability for the entire 35-year term—even if the original lease only obligates 10 years. This could result in liabilities well beyond the useful life of the asset.

Why This Matters for Health Systems

Many health systems, especially non-profits, are vulnerable because of:

– Long-standing lease strategies built on short initial terms + long renewal chains

– Custom medical facilities that are difficult to relocate or repurpose

– Large portfolios with inconsistent lease management documentation

This sudden liability expansion can:

– Impact financial ratios

– Affect loan covenant compliance

– Hinder capital project planning

– Trigger unfavorable audit outcomes if not managed proactively

What You Should Do Now

– Evaluate Your Entire Lease Portfolio

– Update Lease Policies & Documentation

– Model Financial Impact

– Engage Advisors & Auditors Early

Let’s Talk: We’re Here to Help

ASC 842 is more than a compliance issue—it’s a strategic inflection point for healthcare organizations.

At Municipal Acquisitions, we specialize in working with non-profit health systems, higher education institutions, and municipalities to navigate complex lease structures and optimize financial positioning.

Want to review your lease portfolio or option treatment? Let’s have a conversation.

Reach out to us at office@municipalacquisitions.com to schedule a call.