Proposals have been made within GAAP for new standards that would eliminate the

Question

Proposals have been made within GAAP for new standards that would eliminate the differences between long-term and short-term leases (at least according to how they are treated on balance sheets.) Discuss the probable impact this would have on the attractiveness of short-term leases to health care organizations. Provide specific examples to support your response. From the first e-Activity, describe a situation where the lease agreement would make sound business sense from the perspective of the lessee. Explain your rationale.

Explanation / Answer

This lease agreement is for a place to live, aka a residential real estate lease. This particular lease is month-to-month, which is abnormal. Usually, a landlord will request a six month to one year lease agreement. From the perspective of the lessee, they have the flexibility of finding another place to live and leaving with proper notice. From the perspective of the lessor this is a short term operating lease, so they don't have to record it on the balance sheet, rather record the rental payments as income as they are earned each month.

The downfalls for the lessor are that the lessee can leave without notice. Likewise, the lessor can raise the monthly rental fee with a relatively short notice.

2) The newly proposed standards to leases will negatively impact healthcare organizations who utilize short term leases. Many healthcare organizations chose short term leases to avoid having to record assets and liabilities on their balance sheet. Under the proposed standards, the organization would need to record a liability for the payments under the lease.This would impact their working capital.

According to HFMA.org, "Our research indicates that this accounting change would increase the interest-bearing debt reported on the average company

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