Noncash Expense

Noncash expenses are operating costs that are recorded in the financial statements during a particular period but do not necessarily reflect cash disbursements by the organization in that period. Some noncash expenses are discussed in the following paragraphs.

Depreciation is the periodic expensing of an asset that was capitalized when purchased. When a piece of property or equipment is purchased that meets certain material thresholds for capitalization, the cost of that asset is recognized over its useful life as periodic depreciation. For example, when a hospital purchases a piece of equipment for $2 million and that equipment is expected to have a useful service life of 10 years, the hospital does not expense the entire $2 million in the year of the acquisition. Assuming no residual value at the end of the 10-year useful life period and assuming a straight-line method of depreciation, the hospital would annually recognize $200,000 in depreciation expense related to that piece of equipment over its useful life. In those years, the hospital recognizes a $200,000 expense while expending no additional cash.

Like depreciation, amortization is the periodic recognition of the cost of a capitalized asset. However, amortization generally relates to intangible assets such as goodwill, bond issue costs, or bond discounts and premiums. Goodwill results when an organization pays more than fair market value for an asset. Historically, the excess goodwill was amortized and expensed over the expected remaining life of the underlying asset. Recent changes in accounting principles related to amortization of goodwill call for the value of the asset that created the goodwill to be evaluated periodically and the goodwill adjusted for any changes. The periodic adjustments are recognized as a noncash expense in that period.

In the health care industry, especially in the not-for-profit sector, bond-related costs are very common. Bond issue costs include underwriter fees, legal fees, and other costs associated with the issuance of debt. These costs are generally included in the financed amount of a project or netted from the proceeds of a debt issuance. Because those costs relate to the financing of a project or asset with a long service life, the costs are established in an asset account and amortized over the term of the related debt issue. Bond premiums or discounts arise when bonds are sold for more or less, respectively, than their face or par value. For example, when a hospital issues bonds above their par value, they must recognize the excess amount as a premium paid. That premium is amortized over the life of the bonds.

There are numerous other forms of noncash expenses that are more infrequent in nature. When assets are sold for less than their book value, a loss on the disposal of that asset is recorded. However, that loss does not reflect a cash outlay; the loss only reflects the reconciliation of the sales price to the carrying value of the asset. Other forms of noncash expenses include extraordinary losses on the early extinguishment of debt. When debt is retired early, and that debt has related unamortized issue costs or discounts, the remaining unamortized issue costs and discount are expensed in the period of the extinguishment, resulting in a noncash expense.

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