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ACCOUNTING AND AUDIT UPDATEHFMA FL Regional Education Session
November 14, 2017
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Agenda – Accounting and Auditing Update
Topic Field of study Minutes
Accounting Update- Recent KEY Accounting Standards Updates
- Emerging Issues
Accounting 50
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Objectives – Accounting and Auditing Update
By the end of this section, you will be able to:
• Identify recent accounting pronouncements and
reporting topics that directly affect the health care
industry
• Be aware of emerging issues in accounting and
auditing health care clients
• Apply the knowledge gained to your upcoming
engagements
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ACCOUNTING UPDATE
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FASB UPDATERECENT ASU’S
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Final standards recently issued - Revenue
ASU 2014-09, Revenue from Contracts with Customers (Topic
606)
ASU 2016-08, Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)
ASU 2016-10, Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing
ASU 2016-12, Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients
ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives
and Hedging (Topic 815): Rescission of SEC Guidance Because
of Accounting Standards Updates 2014-09 and 2014-16 Pursuant
to Staff Announcements at the March 3, 2016 EITF Meeting (SEC
Update)
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ASU 2014-09: Revenue from contracts with customers
• Principles based approach instead of a rules
based approach
• Align with International Accounting Standards
• Scope
• All Entities that enter into contracts with
customers – Public, private, not for profit
• Excludes –
• Lease contracts
• Insurance contracts
• Contributions
• Guarantees
• Collaborative agreements
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ASU 2014-09: Revenue from contracts with customers
• Much of the information in this presentation was
derived, or came directly, from the 2016 Revenue
Recognition Session (Parts 1 & 2) at the 2016 AICPA
Healthcare Conference held in November 2016
• In addition, the following URL is for the home page
for the AICPA Health Care Revenue Recognition
Task Force which contains the list of implementation
issues and exposure drafts of issue papers
− Copy and paste the following URL into your web browser:
http://www.aicpa.org/InterestAreas/FRC/AccountingFinanci
alReporting/RevenueRecognition/Pages/RRTF-
HealthCare.aspx
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ASU 2014-09: Revenue from contracts with customers
• Issued in May 2014 with intent of providing a principles-based framework for addressing revenue recognition
• Core principle − Recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
• Five-step model:
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ASU 2014-09: Revenue from contracts with customers
Effective date of ASC 606
Calendar year end
entities
September30
year end
entities
Public entities*, quarter and
year beginning…
January 1, 2018 October 1, 2018
Other entities, year ending… December 31, 2019 September 30,
2020
Early adoption of ASC 606
Allowed for both public entities
and other entities…
As early as
January 1, 2017
As early as
July 1, 2017
* Public entities include PBEs, not-for-profit entities that have issued, or are
conduit bond obligors for, securities that are traded, listed or quoted on an
exchange or an over-the-counter market and (c) employee benefit plans that
file or furnish financial statements to the SEC
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ASU 2014-09: Revenue from contracts with customers
FASB/IASB
TRG
- Advises the Boards
- Does not have standard-setting authority
AICPA
AICPA Financial Reporting Executive Committee (FinREC)
AICPA Revenue Recognition
Working Group (RRWG)
AICPA 16 Industry Task Forces (RRTF)
SEC staff
Focus on consistent application
Focus on accounting
questions that may require standard
setting
Focus on internal controls, systems,
and processes
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ASU 2014-09: Revenue from contracts with customers
1. Identified and prepared by industry
RRTF
2. Submitted to AICPA RRWG
3. Specific questions submitted to
FASB TRG (if applicable)
4. Submitted to FinREC
5. Exposed on AICPA website
6. Resubmitted to RRWG
7. Resubmitted to FinREC
8. Finalized for Accounting Guide on
Revenue Recognition
(nonauthoritative)
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ASU 2014-09: Revenue from contracts with customers
# Type Implementation Issue Step
1 General Application of step 1 (determine if there is a contract) and
step 3 (determine the transaction price) for healthcare
services provided to self-pay patients, including uninsured
patient balances and self-pay patient balances arising from
co-payments and deductibles
8 - Final
1a General Implicit price concessions 8 - Final
2 General Application of the portfolio approach to contracts with
patients
8 - Final
3 CCRC Identifying and satisfying the performance obligation(s)
and recognizing the monthly/periodic fees and
nonrefundable entrance fees under Type A or “life care”
contracts for continuing care retirement communities
2 - RRWG
4 CCRC Identifying the performance obligation(s) and recognizing
the performance obligation(s) to provide future services
and use of facilities
2 - RRWG
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ASU 2014-09: Revenue from contracts with customers
# Type Implementation Issue Step
5 General Significant financing component – CCRC contracts, and
patient and third-party payor amounts in arrears
2 - RRWG
6 General Disclosure and presentation requirements of ASU No. 2014-
09
2 - RRWG
7 General Accounting for contract costs 3 - FinREC
8 General Consideration of FASB ASC 606, Revenue from Contracts
with Customers, for third party settlement estimates
2 - RRWG
The following implementation issue was recently added and is in the very early stages of
consideration
9 General Capitation and risk-sharing arrangements 2 - RRWG
10 General Performance Obligations 2 - RRWG
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SELF-PAY AND IMPLICIT PRICE CONCESSIONS
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Step 1 – Identify the contract with a customer
• A contract is defined in ASC 606 as an agreement
between two or more parties that creates enforceable
rights and obligations
− Enforceability of rights and obligations in a contract is a matter of
law
− Contracts can be written, oral or implied by an entity’s customary
business practices
− Practices and processes for establishing contracts may vary
within a health care entity (patient classification, nature of
services, third-party payor)
− Entity has to consider processes and practices when determining
whether an agreement creates enforceable rights and obligations
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Step 1 – Identify the contract with a customer
• Arrangement must meet all these criteria to be a contract
further evaluated for revenue recognition under the overall
model in ASC 606:
− Parties have approved the contract and are committed to perform
− The entity can identify each party’s rights regarding the goods or
services to be transferred
− The entity can identify the contract’s payment terms
− Contract has commercial substance
− It is probable that the entity will collect substantially all of the
consideration to which it will be entitled in exchange for the goods
or services that will be transferred to the customer. In evaluating
whether collectibility is probable, an entity shall consider only the
customer’s ability and intention to pay that amount when it is due
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Step 1 – Identify the contract with a customer
• Parties have approved the contract and are committed to perform:− Has the patient entered into a written contract by signing any
forms, such as patient responsibility form?
− Is there an oral or implied contract based on entity’s customary business terms?
− Has the patient scheduled health care services in advance (e.g. elective surgery) indicating there is an oral or implied contract?
− If a patient is unable to enter into the contract (e.g., an unconscious patient in the ER), do specific facts and circumstances indicate enforceability?
• EMTALA and Medicare require hospitals to provide emergency treatment regardless of ability to pay
• IRC 501(r) imposes certain requirements on hospitals
• Not-for-profit hospitals may provide services because of mission or tax-exempt status without assessing ability to pay
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Step 1 – Identify the contract with a customer
• It is probable that the entity will collect substantially all the consideration to which it will be entitled in exchange for the goods or services that will be transferred− If this collectibility threshold is not met, a contract with a
patient does not exist for purposes of applying the overall revenue recognition model in ASC 606
− A health care entity may make this determination based on past experience with that patient or class of similar patients
− Cannot default to a “cash basis” approach, the assessment must still be made
− If the patient qualifies for charity care, the services provided do not quality for revenue recognition (no change in accounting and reporting for charity care)
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Step 1 – Identify the contract with a customer
• Example 3, “Implicit Price Concession” (paras. 102–105 of ASC 606-10-55), illustrates that the health care entity may be unable to evaluate an uninsured patient’s commitment to perform his or her obligations until it obtains certain information about the patient
• In Example 3, a hospital provides medical services to an uninsured patient in the emergency room: − The entity has not previously provided medical services to this
patient but is required by law to provide medical services to all emergency room patients.
− Because of the patient’s condition upon arrival at the hospital, the entity provides the services immediately and, therefore, before the entity can determine whether the patient is committed to perform its obligations under the contract in exchange for the medical services provided
− Consequently, the contract does not meet the contract existence criteria in ASC 606
− Accordingly the entity will continue to reassess its conclusion based on updated facts and circumstances
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Step 1 – Identify the contract with a customer
• Example 3 (continued)− After providing services, the entity obtains additional
information about the patient, including a review of the services provided, standard rates for such services and the patient’s ability and intention to pay the entity for the services provided
− Based on the entity’s review of the additional information:
• The entity notes the standard rate for the services provided to the patient in the ER is $10,000
• Consistent with its policies, the entity designates the patient to a customer class based on the entity’s assessment of the patient’s ability and intention to pay
• The entity determines that the services do not qualify for charity care based on its internal policy and the patient’s income level
• The entity determines that the patient does not qualify for governmental subsidies
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Step 1 – Identify the contract with a customer
• Example 3 (continued)− Based on the patient’s designated customer class, the
entity expects to accept a lower amount of consideration in exchange for the services provided• As a result, the transaction price is not $10,000 and is
variable
− Based on the collection history for other patients in the patient’s customer class, the entity concludes it is probable that it will collect $1,000 of consideration
− In addition, on the basis of an assessment of the contract terms and other facts and circumstances, the entity:• Concludes the other criteria in ASC 606-10-25-1 also are met
• Accounts for the contract with the patient under ASC 606
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Step 1 – Identify the contract with a customer
• Example:
− Patient is admitted through ER and is unresponsive
− It’s subsequently determined the patient is uninsured and
attempts to qualify the patient for Medicaid coverage
(pending Medicaid)
− Health care entity has sufficient historical information for
pending Medicaid patients to determine the transaction
price based on the percentage of those contracts it
estimates will:
• Qualify for Medicaid
• Be uninsured self-pay
• Qualify for charity care
− The approach of using historical experience may provide a
basis for the entity to conclude there is a contract
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Step 1 – Identify the contract with a customer
• Example (continued):
− Based on the historical information, the contract with
the patient is within the scope of the standard
− Entity estimates the transaction price for the contract
with the patient considering the likelihood of each
outcome for the contract (for example, Medicaid, self
pay and charity care) and the expected
reimbursement rate for each
FinREC believes this approach may be applied to an
individual contract or a portfolio of similar contracts
although in practice will generally be applied to a
portfolio of similar contracts
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Step 3 – Determine the transaction price
• Defined as the amount of consideration to which
an entity expects to be entitled
• For health care entities, the transaction price will
often be less than the stated price in the contract
• Transaction price includes the effects of variable
consideration due to:
− Discounts
− Price concessions
− Other similar items
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Step 3 – Determine the transaction price
• Entity should consider the historical cash collections from
the customer class identified (for example, self-pay) to
estimate the transaction price
• Entity should consider all information that is reasonably
available, including historical, current, and forecasted
information
• In accordance with the discussion at the July 2015 TRG
meeting, a health care entity is required to consider all
information that is reasonably available to the entity to
estimate variable consideration whether the guidance is
applied on a portfolio or contract by contract basis
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Step 3 – Determine the transaction price
• Variable consideration may be explicitly stated
− Contractual allowances
− Self-pay discounts
• Variable consideration may also be an implicit
price concession
− Patient has a valid expectation from the entity’s
customary business practices, published policies or
specific statements that they will accept less
− Facts and circumstances indicate the entity’s intention
to accept less
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Step 3 – Determine the transaction price
• A health care entity may consider the following factors to determine if
it intends to provide an implicit price concession:
− The health care entity has a customary business practice of not
performing a credit assessment before providing services (required by
law or regulation or by its mission to provide medically necessary or
emergency services prior to assessing the patient’s ability to pay)
− The health care entity continues to provide services to a patient, or
patient class, even when historical experience indicates that it is not
probable that the entity will collect substantially all of the discounted
charges (gross or standard charges less any contractual adjustments or
discounts) in the contract (explicit concession)
If one of those factors are present, FinREC believes that the health
care entity has implicitly provided a price concession to the patient (or
patients in the patient class), even if it will continue to attempt to
collect the full amount of discounted charges.
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Example
Example 2 – Implicit price concession – Uninsured patient with
uninsured discount
• Self-pay patient charges: $40,000
• Provider has a self-pay discount policy that provides a 75% discount
off charges to uninsured patients
• Expected collections based on historical experience: 10% ($1,000)
Charges $ 40,000
Discount (30,000)
NPSR before
bad debt 10,000
Bad debt (9,000)
NPSR $ 1,000
Current Accounting Accounting Under Issue 8-1
No change in reporting of charity care – Does not qualify as revenue
Gross Patient Revenue 40,000$
Discount (30,000)
NPR Before Bad Debt 10,000
Bad Debt (9,000)
Net Patient Revenue 1,000$
Gross Patient Revenue 40,000$
Explicit Price Concession (30,000)
Implicit Price Concession (9,000)
Net Patient Revenue 1,000$
Bad Debt Expense $0
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Step 3 – Determine the transaction price
• Reassessment of variable consideration -
subsequent changes in the estimate of the
transaction price
− Health care entities are required to update the
estimated transaction price, including the assessment
of whether the estimate of variable consideration is
constrained, at the end of each reporting period
When a health care entity determines it has provided an implicit price
concession, FinREC believes that subsequent changes to the estimate of
variable consideration should generally be accounted for as increases or
decreases in the implicit price concession (adjustments to patient service
revenue).
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Step 3 – Determine the transaction price
• Reassessment of variable consideration - subsequent
changes in the estimate of the transaction price
− If an entity experiences frequent subsequent adjustments that
result in decreases to patient revenue, the entity should re-
assess whether its estimation process, including the constraint,
is appropriate
Because the assessment of the implicit price concession inherently
considers the amount the entity expects to collect from the patient (or
patient class), FinREC believes that changes in the entity’s expectation of
the amount it will receive from the patient (or patient class) will be
recorded in revenue unless there is a patient-specific event that is known
to the entity that suggests that the patient no longer has the ability and
intent to pay the amount due and therefore the changes in its estimate of
variable consideration better represent an impairment (bad debt).
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Consideration of impairment
• There may be facts and circumstances that indicate there has been an adverse change in the patient’s creditworthiness (for example, the patient filed for bankruptcy or lost their job), and the difference may be better classified as an impairment loss (bad debt) rather than a change in the transaction price
• In estimating the transaction price, a health care entity may determine that it has not provided an implicit price concession but rather that it has chosen to accept the risk of default by the patient, and that uncollectible amounts better represent impairment losses
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Consideration of impairment
• A health care entity may assess the patient’s intent and ability to pay prior to providing services− Determination could be made that it’s probable it will
collect substantially all of the consideration to which it is entitled
− May then determine that it has not provided an implicit price concession
− After collection is considered probable (and the other contract existence criteria are met):
• Amounts not collected would be deemed an impairment loss (bad debts)
• In determining what is an impairment loss, the entity would consider the effects of customer credit risk
• Collection experience could still be used to estimate the provision for bad debts for a patient class
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Consideration of impairment
• Example:
− A health care entity has a business practice of
assessing patients’ ability to pay prior to providing
services
− Entity has collection experience with a customer class
that indicates it collects 98% (substantially all) of the
amount it bills to that customer class
− The contracts with those patients meet the criteria of a
contract within the scope of the standard
− Entity should recognize revenue and receivables for
the amount it bills (100%) and a provision for bad
debts (2%) based on valuation of the receivables
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Charity care
• No change in charity care guidance
− Does not qualify as revenue
− Same disclosures of cost
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PORTFOLIO APPROACH
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Application of the portfolio approach to contracts with patients
• The core principles and 5 step approach are generally to be applied to an individual contract with a customer− Criteria are provided to determine whether individual
contracts with the same customer (or parties related to the customer) should be combined for accounting purposes
• As a practical expedient an entity may apply the revenue guidance to a portfolio of contracts
• Entity must reasonably expect that the effects of applying the standard to the portfolio of contracts would not differ materially from the application to individual contracts
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Portfolio approach
• Contracts must have “similar characteristics” in
order to be grouped together:
− Type of service – e.g., inpatient, outpatient, skilled
nursing, elective, non-elective
− Type of payor – e.g., insurance/managed care,
governmental program, self-pay
− Type of patient responsibility – e.g., uninsured self-
pay, co-pay/deductible after insurance, high
deductible/coinsurance
− Whether contracts are entered into at or near the
same time – e.g., the same quarter
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Portfolio approach
• Other considerations− Entity should consider both the sufficiency of the data and the
homogeneity of the data
− Consider whether contracts from different billing systems can be included in the same portfolio
− Portfolio approach may be appropriate for some, but not all, of a health care provider’s patient population
− An entity is not required to apply the portfolio practical expedient to all of its contracts
− A contract can be added to a portfolio when the health care entity determines that the contract has similar characteristics with the other contracts in the portfolio
− A contract should be removed from a portfolio if the health care entity subsequently identifies that the contract no longer has similar characteristics• Medicaid pending/Medicaid/Self-pay/Charity care
• Portion that patient is responsible for after payment by insurance
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Portfolio approach - example
• Scenario:− Health care entity provides services to patients covered by insurance
carrier B
− Each patient has a patient responsibility portion (co-pay)
− No credit assessment of patients is made prior to providing services
− The entity identifies these patients as a portfolio of contracts based on qualitative and quantitative factors and applies the portfolio approach
• Includes an analysis that shows the portfolio shares similar collection patterns based on historical information (i.e., variances from reporting period to reporting period in the percentage of collections have been insignificant in the aggregate)
− Gross charges for the period for these patients, including insurance and co-pay amounts = $1,000,000
− Entity has a contract with insurance carrier B that results in a 50% contractual allowance
− After applying the contractual allowance, remaining charges include $475,000 due from insurance and $25,000 due from patients (co-pay)
− Entity expects, based on historical experience, to collect 100% of the insurance balances and 40% of the co-pay balances
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Portfolio approach - example
• Evaluation:− The contractual adjustment of $500,000 is a reduction of
the transaction price – explicit price concession
− The $15,000 ($25,000 x 60%) of patient co-pays the entity does not expect to collect is recorded as a reduction of the transaction price – implicit price concession
− Total transaction price for this portfolio is $485,000 ($475,000 insurance payments and $10,000 from patient co-pays)
− The entity would include the estimate of variable consideration for services provided of $485,000 after consideration of the variable consideration constraint
− The health care entity would make sure it has gone through the 5 steps of the model and assuming it has, would recognize $485,000 of net patient revenue and accounts receivable when the underlying performance obligation has been satisfied
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Tentative conclusions
• The remaining slides in this presentation include tentative conclusions reached by the AICPA’s Health Care Entities Revenue Recognition Task Force
• None of these conclusions have been exposed for comment
• Many of these conclusions have not yet been reviewed and approved by the AICPA’s Revenue Recognition Working Group and (or) the AICPA’s Financial Reporting Executive Committee (FinREC), both of which must happen before the conclusions are exposed for comment
• As such, these slides are subject to change
Subject to
change!!!
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THIRD-PARTY SETTLEMENTS
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Third-party settlements
• Arrangements with third-party payors should be
considered in determining the transaction price
for services provided to a patient
• The Revenue Recognition Task Force is
considering a view that the “contract with the
customer” refers to the arrangement between the
health care provider and the patient
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Third-party settlements
The Revenue Recognition Task Force is considering a view that a health care
entity may apply the most likely amount approach to estimate third-party
settlements as long as the entity believes that approach will better predict the
amount of consideration to which it is entitled
• Determination (estimation) of transaction price (expected value vs.
most likely) as it relates to third-party estimates
• The standard indicates, “An entity shall estimate an amount of
variable consideration by using either of the following methods,
depending on which method the entity expects to better predict
the amount of consideration to which it will be entitled.”
– Expected value method – sum of probability weighted
amounts in a range of possible consideration amounts
– Most likely amount method – single most likely amount in a
range of possible consideration amounts (the single most
likely outcome of the contract)
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Third-party settlements - Example
Expected value
• Illustration of a Medicare cost report settlement liability
• Total Medicare transaction price is $50 million before any adjustment
for third-party settlements
Possible
settlement
amounts
Probability
Probability-
weighted
amounts
$ - 20% $ -
1,000,000 60% 600,000
3,000,000 15% 450,000
5,000,000 5% 250,000
$1,300,000
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Third-party settlements – Example (continued)
• Amounts associated with the likelihood of each outcome are aggregated to arrive at the estimated third-party settlement of $1.3 million− Decreases the transaction price from $50 million to $48.7
million
• Because there is an 80% likelihood that the transaction price will be $49 million or more, it is probable that there will not be a significant reversal of cumulative revenue recognized when the transaction price (including the variable consideration estimated using the expected value method) is $48.7 million
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DISCLOSURES
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Disclosures
• Understand nature, amount, timing and uncertainty of
revenue and cash flows
− Disaggregation of revenue
− Contract balances
− Performance obligations
− Significant judgments
− Costs to obtain or fulfill a contract
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Disclosures
• Potential categories for disaggregation of revenue
Net
Patient
Revenue
Type of service
(I/P, O/P, SNF,
Clinic)
Geographical
location
Payor
(T-18, T-19, Mgd.
care, self-pay)
Type of contract
(fixed, cost,
capitation, risk
share)
Timing of
transfer of goods
or services
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Disclosures
201X
Medicare $ 16,000
Medicaid 6,000
Managed care 11,000
Other insurance 4,000
Self-pay deductibles and co-pays 1,800
Uninsured 1,000
$39,800
• Revenue disaggregated by payor:
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Disclosures
Southeast Central Total
Hospital:
Inpatient $7,000 $2,000 $9,000
Outpatient 6,000 2,000 8,000
Physician clinics 8,000 4,000 12,000
Skilled nursing facility 4,000 2,000 6,000
Other 3,800 1,000 4,800
$28,800 $11,000 $39,800
Timing of revenue recognition:
At time services are provided $15,000 $7,500 $22,500
Service provided over time 13,800 3,500 17,300
$28,800 $11,000 $39,800
• Revenue disaggregated by location, type of service and timing:
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TRANSITION
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Transition options
Transition Approach Implications
Full retrospective with the
option to elect one or more
of four practical expedients
Restate all contracts;
cumulative effect presented as
of beginning of earliest period
presented
Modified retrospective with
the option to elect one
practical expedient
Do not restate contracts;
cumulative effect presented as
of date of initial application;
disclosure of effects on current
reporting period, which
essentially requires double-
bookkeeping in the year of
adoption
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Transition considerations
• In-house patients and discharged not final billed
− Contract assets vs. accounts receivable
• Treatment of changes in implicit price
concessions (bad debt write-offs/recoveries) for
patients with dates of service prior to adoption
• Availability of data for disclosures
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ASU 2016-14:
Not-For-Profit Entities (Topic 958):
Presentation of Financial Statements of Not-For-
Profit Entities
Effective Date: For fiscal years beginning after
12/15/2017, early adoption allowed
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ASU 2016-14: Not for Profit Entities (TOPIC 958)
• Summary Of Decisions Reached to
Date
− Net asset classification
− Expenses
− Investment return
− Statement of cash flows
− Liquidity disclosures
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NFP Financials
Net asset classification
Liquidity: improving
disclosuresReporting of expenses / Investment
return
Operating measure: improving
disclosures when
reported
Cash flow statement: methods of presenting operating cash flow
Phase I – ASU 2016-14 Phase II
Cash flow statement:
realignment of certain
items
Operating measure: all
other elements, including
intermediate measures
Pending decision whether to wait to
deliberate at same time as Financial
Performance Reporting project for
business entities
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ASU 2016-14: NFP Financials – Net Assets
Current
GAAP Unrestricted
Amount, purpose,
and type of board
designations (new)
Without Donor
Restrictions
Temp.
Restricted
Perm.
Restricted
With Donor Restrictions
Nature and amount
of donor restrictions
Revised
GAAP
Disclosures
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ASU 2016-14: NFP Financials – Expenses
• Requires all NFP’s to present information about its expenses by their
nature and function either:
– In the statement of activities
– As a separate statement or
– In the notes to the financial statements
• NFPs required to provide qualitative disclosures about methods used
to allocate costs among program and support functions
• As part of Phase II, the FASB may explore whether to require
business-oriented health care NFP’s to provide this information by
segment instead
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Expenses Disclosure Example 1
The financial statements report certain expense categories that are attributable to more
than one health care service or support function. Therefore, these expenses require an
allocation on a reasonable basis that is consistently applied. Costs not directly
attributable to a function, including depreciation, amortization, interest and other
occupancy costs, are allocated to a function based on a square footage or units of service
basis. Allocated health care services cost not allocated on a units of service basis are
otherwise allocated based on revenue.
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Expenses Disclosure Example 2
The financial statements report certain expense categories that are attributable to
more than one health care service or support function. Therefore, these expenses
require an allocation on a reasonable basis that is consistently applied. Costs not
directly attributable to a function, including depreciation, amortization, interest and
other occupancy costs, are allocated to a function based on a square footage or units
of service basis. Allocated health care services cost not allocated on a units of service
basis are otherwise allocated based on revenue.
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ASU 2016-14: NFP Financials – Investment Returns
Investment Returns
• Presented net of external and direct internal investment expenses
• Permitted but not required to disclose investment expenses that are
netted against returns
• Permitted to present net investment return managed differently or
from different services on multiple line items
• No longer required to display the investment return components in
the endowment net asset rollforward
• Precluded from including investment expenses that have been netted
against returns in the functional expenses
• FASB staff is working on implementation guidance for the reporting of
net investment return for entities that present a performance indicator
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ASU 2016-14 NFP Financials – Liquidity
Information Useful in Assessing Liquidity
• Qualitative information (in the notes) on how the entity
manages its liquid resources to meet cash needs for
general expenditures within one year of the balance
sheet date
• Quantitative information that communicates the
availability of current financial assets at the balance sheet
date to meet cash needs
• Availability affected by:
− Nature of financial asset
− External limits imposed (donors, laws, contracts)
− Internal limits imposed by governing board
• Example illustrations are included in the ASU
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Liquidity Disclosure Example
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ASU 2016-14: NFP Financials – Cash Flows
Cash Flow Statement
• Allowed to use either the direct or indirect
method of presenting operating cash flows
• If using the direct method, no longer required to
provide the indirect reconciliation of operating
cash flows
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ASU 2016-14: NFP Financials
• Phase II (What will be coming)
− Whether to require a measure of operations; how to
define a measure of operations
− Potential realignment within the statement of cash
flows
− Segment reporting as an alternative for NFP
healthcare entities
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ASU 2016-14: NFP Financials
• Effective date: Years beginning after 12/15/2017
• Early adoption: Permitted, but subject to
transition provisions
• Transition:
• For year of adoption, apply all provisions
• For comparative years, apply all provisions on a
retrospective basis, except:
− Analysis of expenses by nature and function
− Disclosures around liquidity and availability of
resources
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ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities
• Under current investment accounting guidance, investments may be
classified as:
− For-profit: held-to-maturity, available-for-sale, or trading
− Not-for-profit: other-than-trading or trading
• For investments classified as something other than trading,
unrealized gains and losses are excluded from the performance
indicator of a health care entity, unless an unrealized loss is
considered other-than-temporary (OTT)
• ASU 2016-01 requires all investments in equity securities (other than
those that qualify for equity method accounting or that are
consolidated), to be reported at fair value, with changes in fair value
reported through income
− Concept of OTT impairment goes away for equity securities
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ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities
• ASU 2016-01 also removes, for entities other than public business
entities, required disclosures of fair value of financial instruments
measured at amortized cost (e.g., debt)
• Effective for fiscal years beginning after
− Public business entities: fiscal years beginning after 12/15/17 and
interim periods within those years
− Other than public business entities: fiscal years beginning after 12/15/18
and interim periods within fiscal years beginning after 12/15/19
• Early adoption is not permitted, except for:
− Elimination of disclosure requirement of fair value of financial
instruments measured at amortized cost
− Certain changes in presentation within OCI the change in the fair value
of certain liabilities resulting from a change in credit risk
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ASU 2016-02: Leases
• Effective date:
• Fiscal years beginning after 12/15/2018
− Public business entity
− Not-for-profit entities with conduit bonds that are traded
− An employee benefit plan that files financial statements with the
SEC
• Fiscal years beginning after 12/15/2019 for all other organizations
• A lease contract conveys the right to use an asset (the underlying
asset) for a period of time in exchange for consideration
• Short-term leases with a term of less than 12 months are exempt and
no longer based on maximum possible term, now aligned with
definition of lease term
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Lessee Accounting Model – Comparison to Existing GAAP
Capital lease ─ reflected as an
asset and a liability in the
balance sheet Operating
lease ─ no balance sheet
recognition
Exception for short-term leases,
which are treated as “rentals”
Classification as “capital” or
“operating” determines whether
lease is capitalized on balance
sheet or expensed
Recognize an asset and
obligation for all leases
Similar provision
Short-term = 12 months or less
Classification as “financing”
or “operating” determines
pattern of expense
recognition to be used in the
income statement, and
financial statement
classifications
FAS 13/ASC 840 ASC 842
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ASU 2016-02: Leases
Current* U.S. GAAP (IFRS) IASB FASB
Capital (Finance)
LeasesType A Type A
Operating Leases Type A Type B
All leases are the
same.
Not all leases are the
same. Classification is
based on existing U.S.
GAAP/IFRS.
All leases (more than 12 months) are recognized on the lessee’s
balance sheet
Lessee Model Approaches
* Current is prior to adoption of ASU 2016-02
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ASU 2016-02: Leases
• Impacts to Health Care Entities:
− Debt covenants (debt to equity covenant ratios)
− Bonus calculations
− Perception by potential lenders, partners, or others
• Start thinking about
− Inventory of leases
− Pro-forma effects of adoption of ASU 2016-02
− Conversations with lenders to negotiate covenants
− Discussions with your board and other key
stakeholders
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ASU 2016-15: Statement of Cash Flows
• Classification of Certain Cash Receipts and Cash
Payments
• Effective date:
− Public entities – Years beginning after 12/15/17
− All other entities – Years beginning after 12/15/18 (no
carve out for conduit bond obligors to be early
adopters)
• Early adoption:
− Permitted
− Must then adopt all amendments in same period
• Retrospective transition method
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ASU 2016-15: Statement of cash flows
Cash Flow Issue Summary of Amendments
Debt Prepayment or Debt
Extinguishment Costs
Cash payments for debt prepayment or debt
extinguishment costs should be classified as
cash outflows for financing activities
Settlement of Zero-Coupon
Debt Instruments or Other
Debt Instruments with
Coupon Interest Rates That
Are Insignificant in Relation
to the Effective Interest Rate
of the Borrowing
The issuer should classify the portion of the
cash payment attributable to the accreted
interest related to the debt discount as cash
outflows for operating activities, and the portion
of the cash payment attributable to the
principal as cash outflows for financing
activities
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ASU 2016-15: Statement of cash flows
Cash Flow Issue Summary of Amendments
Contingent Consideration
Payments Made after a
Business Combination
Cash payments not made soon after the acquisition
date of a business combination by an acquirer to settle
a contingent consideration liability should be separated
and classified as cash outflows for financing activities
and operating activities.
Cash payments up to the amount of the contingent
consideration liability recognized at the acquisition date
(including measurement-period adjustments) should
be classified as financing activities; any excess should
be classified as operating activities.
Cash payments made soon after the acquisition date
of a business combination by an acquirer to settle a
contingent consideration liability should be classified
as cash outflows for investing activities.
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ASU 2016-15: Statement of cash flows
Cash Flow Issue Summary of Amendments
Proceeds from the
Settlement of Insurance
Claims
Cash proceeds received from the settlement of
insurance claims should be classified on the basis of
the related insurance coverage (that is, the nature of
the loss). For insurance proceeds that are received in
a lump sum settlement, an entity should determine the
classification on the basis of the nature of each loss
included in the settlement.
Proceeds from the
Settlement of Corporate-
Owned Life Insurance
Policies, including Bank-
Owned Life Insurance
Policies
Cash proceeds received from the settlement of
corporate-owned life insurance policies should be
classified as cash inflows from investing
activities
The cash payments for premiums on corporate-owned
policies may be classified as cash outflows for
investing activities, operating activities, or a
combination of investing and operating activities
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ASU 2016-15: Statement of cash flows
Cash Flow Issue Summary of Amendments
Distributions Received from
Equity Method Investees
When a reporting entity applies the equity method, it should
make an accounting policy election to classify distributions
received from equity method investees using either of the
following approaches:
Cumulative earnings approach: Distributions received are
considered returns on investment and classified as cash
inflows from operating activities, unless the investor’s
cumulative distributions received less distributions received in
prior periods that were determined to be returns of investment
exceed cumulative equity in earnings recognized by the
investor. When such an excess occurs, the current-period
distribution up to this excess should be considered a return of
investment and classified as cash inflows from investing
activities.
Nature of the distribution approach: Distributions received
should be classified on the basis of the nature of the activity or
activities of the investee that generated the distribution as
either a return on investment (classified as cash inflows from
operating activities) or a return of investment (classified as
cash inflows from investing activities) when such information is
available to the investor.
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ASU 2016-15: Statement of cash flows
Cash Flow Issue Summary of Amendments
Beneficial Interests in
Securitization Transactions
A transferor’s beneficial interest obtained in a
securitization of financial assets should be disclosed
as a noncash activity, and cash receipts from
payments on a transferor’s beneficial interests in
securitized trade receivables should be classified as
cash inflows from investing activities.
Separately Identifiable Cash
Flows and Application of the
Predominance Principle
The classification of cash receipts and payments that
have aspects of more than one class of cash flows
should be determined first by applying specific
guidance in GAAP. In the absence of specific
guidance, an entity should determine each separately
identifiable source or use within the cash receipts and
cash payments on the basis of the nature of the
underlying cash flows. An entity should then classify
each separately identifiable source or use within the
cash receipts and payments on the basis of their
nature in financing, investing, or operating activities.
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ASU 2016-18: Restricted Cash
• ASU 2016-18 eliminates diversity in practice in classification and
presentation of restricted cash in statement of cash flows
• Requires amounts generally described as restricted cash and cash
equivalents to be included with cash and cash equivalents when
reconciling beginning and ending cash and cash equivalents in the
statement of cash flows
• Requires disclosure of information about nature of restrictions on
cash, cash equivalents and amounts generally described as
restricted cash and cash equivalents
• When cash, cash equivalents and amounts generally described as
restricted cash and cash equivalents are presented in more than one
line in the statement of financial position, requires presentation on
face of statement of cash flows (or footnote disclosure) where such
amounts are reported in the statement of financial position
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ASU 2016-18: Restricted Cash
• Effective for fiscal years beginning after
− Public business entities: fiscal years beginning after
12/15/17 and interim periods within those years
− Other than public business entities: fiscal years
beginning after 12/15/18 and interim periods within
fiscal years beginning after 12/15/19
• Retrospective application required
• Early adoption is permitted. If early adopted in an
interim period, adjustments should be reflected
as of the beginning of the fiscal year that
includes the interim period
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ASU 2015-05: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
• Provides guidance to customers about whether a
cloud computing arrangement includes a
software license
Account for the software license element
of the arrangement consistent with the
acquisition of other software licenses (ASC
350-40)
Account for the arrangement as a
service contract (other GAAP)
Includes
software
license?
No
Yes
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ASU 2015-07: Fair Value Hierarchy Disclosures for Investments Measured at NAV
• ASC 820 provides a practical expedient to measure the
fair value of certain investments using net asset value
(NAV) per share
• Under existing guidance:
− Investments are either categorized as Level 2 or Level 3
− All entities eligible to elect the practical expedient are required to
provide certain disclosures (regardless of whether they actually
make the election)
• ASU 2015-07 removes requirement to categorize within
the fair value hierarchy all investments for which fair
value is measured using the net asset value per share
practical expedient
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ASU 2015-07: Fair Value Hierarchy Disclosures for Investments Measured at NAV
• ASU 2015-07 also removes requirement to make certain disclosures
for all investments that are eligible to be measured at fair value using
the net asset value per share practical expedient
− Required disclosures are limited to investments for which the entity has
elected to measure the fair value using that practical expedient
• Requires disclosure of amounts of excluded investments so that
financial statement user can reconcile amounts in the fair value table
to the balance sheet
• Effective retrospectively for fiscal years beginning after
− Public business entities: fiscal years beginning after 12/15/15 and
interim periods within those years
− Other than public business entities: fiscal years beginning after 12/15/16
and interim periods within those years
• Early adoption is permitted
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ASU 2015-07: Fair Value Hierarchy Disclosures for Investments Measured at NAV
Description Level 1 Level 2 Level 3 Total
Money market fund 7,135,423 $ -$ -$ 7,135,423 $
Fixed income securities
U.S. Treasuries 29,387,239 - - 29,387,239
Corporate bonds 13,164,205 - - 13,164,205
Developing markets 13,220,167 - - 13,220,167
Equities
U.S. large cap 74,011,034 - - 74,011,034
U.S. small cap 13,094,930 - - 13,094,930
International 72,285,211 - - 72,285,211
Emerging markets 52,407,323 - - 52,407,323
Energy - 29,984,285 - 29,984,285
Global REIT 17,761,881 - - 17,761,881
Alternative investments
Private (Opportunistic) - - 17,542,917 17,542,917
Absolute return - 2,766,399 49,618,087 52,384,486
Long short - - 34,141,225 34,141,225
Commodities - - 18,203,124 18,203,124
292,467,413 $ 32,750,684 $ 119,505,353 $ 444,723,450 $
2014
Before After
Description Level 1 Level 2 Level 3 Total
Money market fund 7,135,423 $ -$ -$ 7,135,423 $
Fixed income securities
U.S. Treasuries 29,387,239 - - 29,387,239
Corporate bonds 13,164,205 - - 13,164,205
Developing markets 13,220,167 - - 13,220,167
Equities
U.S. large cap 74,011,034 - - 74,011,034
U.S. small cap 6,369,670 - - 6,369,670
International 62,285,211 - - 62,285,211
Emerging markets 43,838,384 - - 43,838,384
249,411,333 $ -$ -$ 249,411,333
Investments measured at NAV:
Equity funds:
U.S. small cap 6,725,260
International 10,000,000
Emerging markets 8,568,939
Energy 29,984,285
Global REIT 17,761,881
Alternative investments:
Private (Opportunistic) 17,542,917
Absolute return 52,384,486
Long short 34,141,225
Commodities 18,203,124
195,312,117
Total Investments 444,723,450 $
2014
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ASU 2015-11: Inventory
• Intended to simplify the measurement of inventory
• Currently, under FIFO and Average Cost methods, valued at the lower of
cost or market
Problem: Market could be replacement cost, net realizable value, or net
realizable value less an approximately normal profit margin
• Entity should measure inventory at the lower of cost or net realizable value
• Net realizable value is the estimated selling price in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and
transportation
• Does not apply to inventory that is measured at last-in, first-out (LIFO) or the
retail inventory method
• In reality, this conforms GAAP to actual practice
• Effective for periods beginning after 12/15/16
• Applied prospectively
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