got healthcare accounting and financial reporting questions? presentation offers answers

November 7, 2014

Prepared for Georgia HFMA Fall Institute

Healthcare Accounting and

Financial Reporting Update

Georgia HFMA Fall Institute

November 7, 2014

Michael A. Shamblin, CPA – Principal

November 7, 2014


Healthcare Accounting and Financial

Reporting Update Overview

• Recently Issued/Effective Accounting Standards

Updates

• Change is Coming – Lease Accounting

• AICPA Technical Questions and Answers for the

Healthcare Industry (AICPA Technical Q&As)

– Hospital as Collecting Agent for Physicians

– Accounting for Transfer from Not-for-Profit Hospital to For-

Profit Subsidiary

– Transfer of Assets from Subsidiary For-Profit Entity to Not-for-

Profit Stockholder Parent (Hospital)

November 7, 2014




• AICPA Technical Questions and Answers for the

Healthcare Industry - Continued

– Accounting for a Joint Operating Agreement

– Accounting for Computer Systems Costs Incurred in

Connection with the Health Insurance Portability and

Accountability Act of 1996 (HIPAA)

– Presentation of Bad Debts and Disclosure of Patient Service

Revenue

– Accounting of costs incurred during implementation of ICD-10

November 7, 2014




• Recognizing and Measuring Goodwill in an Acquisition

of Less Than a Wholly Owned Subsidiary

• Accounting for Meaningful Use of Electronic Health

Records

November 7, 2014


ASU 2014-09: Revenue from Contracts

with Customers (Topic 606)

• Effective: Public: PBA December 15, 2016

Non-Public: PBA December 15, 2017

[Apply Retrospectively]

• Impact:

– Supersedes the revenue recognition requirements in Topic

605, Revenue Recognition, and most industry-specific

guidance throughout the Industry Topics of the Codification.

– Supersedes most guidance provided in Topic 954-605: Health

Care Entities, Revenue Recognition.

– Topic 954-605 will still provide guidance related to Charity Care and

Related Fundraising Entities.

November 7, 2014




– Exempts ‘non-public’ entities from certain of ASU 2014-09’s

disclosure requirements.

– Provides a principles-based framework for revenue recognition

in an effort to reduce inconsistencies and improve

comparability across entities, industries, jurisdictions and

capital markets.

• Step 1: Identify the contract(s) with a customer.

• Step 2: Identify the performance obligations in the contract.

• Step 3: Determine the transaction price.

• Step 4: Allocate the transaction price to the performance obligations in

the contract.

• Step 5: Recognize revenue when (or as) the entity satisfies a

performance obligation.

November 7, 2014




– This change coupled with potential changes in healthcare

reimbursement methods (i.e. bundled payments, episodic-based

payments, etc.) will likely require significant analysis and may impact

healthcare providers’ revenue recognition and disclosure policies.

– Step 1: Identify the contract(s) with a customer.

• Does a contract exist? (Enforceable and collectible).

November 7, 2014




– Step 3: Determine the transaction price

• To what amount does the healthcare provider expect to be entitled?

1) Self-pay patients and patients with high deductibles or copayments.

2) Collectibility based on consideration of what provider expects to collect after price

concession.

3) Provider may estimate transaction price based on historical data.

• ‘Variable Consideration’ concept will require specific consideration by

healthcare providers related to the recognition of certain transactions (i.e.

self-pay price concessions, collectibility of high deductibles/copayments

and certain third-party reimbursement subject to retroactive adjustments).

November 7, 2014




• Estimation Methods:

1) Expected value – sum of probability-weighted amounts in a range of

possible consideration amounts. (ASU suggests this method may be

appropriate if the entity has a large number of contracts with similar

characteristics.)

2) Most likely amount – the single most likely amount in a range of possible

consideration amounts.

November 7, 2014




• Potential Impact

– Bad debts – Back to the Future. An operating

expense once again!

– Self-pay ER patient admitted. Gross charges of

$15,000. No assessment of ability to pay at time of

service.

• Does a contract exist? Both parties approved the

contract?

November 7, 2014




– Hospital bills entire $15,000 to patient and pursues

collection. However, it only expects to collect $2,500

based on experience with similar patients.

– Is the $12,500 a bad debt or a price concession?

– If arrangement does not meet Step 1 “contract,” then

Hospital must meet either of the following to recognize

any revenue:

• No remaining obligation and all (or substantially all)

consideration received (cash basis?)

• Contract has been terminated and consideration received is

non-refundable.

November 7, 2014


Change is Coming - Lease Accounting

November 7, 2014


• Overview of Key Points

– Why are FASB and IASB concerned with changing the accounting

for leases?

– What were the concerns with the first exposure draft on new lease

accounting rules?

– What were the significant changes in the second exposure draft?

– What can we do to prepare for the change that is coming?

Change is Coming -

Lease Accounting

November 7, 2014


• Why are FASB and IASB concerned with changing

the accounting for leases?

“If it ain’t broke, don’t fix it.”

• So, is the accounting for leases broken?

Change is Coming -

Lease Accounting

November 7, 2014


• Currently we have two lease model – Capital and

Operating

• Capital lease is on-balance sheet

• Operating lease is off-balance sheet

Change is Coming -

Lease Accounting

November 7, 2014


• What were the concerns with the first exposure draft

on new lease accounting rules?

• Approximately 800 comment letters were received

in response to first exposure draft.

Change is Coming -

Lease Accounting

November 7, 2014


• Most comment letters did not say…

“Great job FASB, keep up the good work!”

Change is Coming -

Lease Accounting

November 7, 2014


• What the comment letters did say…

“Not so fast my friend!”

Change is Coming -

Lease Accounting

November 7, 2014


• Original exposure draft (August 2010)

– Established concept of “right-of-use” asset

– Essentially, capitalize operating leases (including real estate

and equipment)

– Replaces rent expense with amortization expense and interest

expense (expense may not equal cash outflow on lease)

Change is Coming -

Lease Accounting

November 7, 2014


• Original exposure draft (August 2010) - Continued

– Lessee must estimate the renewal period that is more likely than not

(greater than 50% chance) to become reality. Determination is

reassessed annually.

– Liability is recorded based on the estimated lease term (including

projected renewals to occur).

– Liability must be adjusted based on changes in projected renewal

period as of each financial reporting date.

Change is Coming -

Lease Accounting

November 7, 2014


• Numerous concerns expressed in comment letters

– Complexity and cost of implementing new rules, specifically the

initial and subsequent measurement of lease assets and

liabilities

– Introduces more subjectivity (i.e. determination of lease term)

on balance sheet

Change is Coming -

Lease Accounting

November 7, 2014


• Numerous concerns expressed in comment letters -Continued

– Less comparability for financial decision making because

of subjectivity

– Definition of lease (what’s in and what’s out???)

Change is Coming -

Lease Accounting

November 7, 2014


• Numerous concerns expressed in comment letters –

Continued

– Concerns that new rules would result in higher lease expenses

in earlier periods compared to later periods.

– Banks and other lenders may need to be educated on how

lease expense will be impacted for debt covenants.

Change is Coming -

Lease Accounting

November 7, 2014


• What were the significant changes in the second

exposure draft?

Change is Coming -

Lease Accounting

November 7, 2014


• FASB and IASB Redeliberations – Lessee Model

Change is Coming -

Lease Accounting

Balance sheet Income statement

1 Measured at present value of lease payments 2 Initially measured at same amount as liability, plus initial direct costs

DR ROU asset 2

CR Lease liability1

Lessee consumes more

than insignificant

portion of leased asset

Amortization expense

Interest expense

Lease expenseLessee does not

consume more than

insignificant portion of

leased asset

November 7, 2014


• FASB and IASB Redeliberations – Lessor Model

Change is Coming -

Lease Accounting

Lessor accounting approach

November 7, 2014


• FASB and IASB Redeliberations – Classification

of Leases*

Change is Coming -

Lease Accounting

*Both lessee and lessor

November 7, 2014


• FASB and IASB have not issued an estimated date

for a final rule

Change is Coming -

Lease Accounting

November 7, 2014


• What can we do to prepare for the change that is

coming?

Change is Coming -

Lease Accounting

November 7, 2014


• Be Prepared…– Look for updates in industry publications and

websites (i.e. Journal of Accountancy and

www.pyapc.com)

– Prepare an “inventory” of all operating leases

under contract. Determine how many “right-to-

use” assets would be added to balance sheet.

– Read debt covenants to determine whether they

have the potential to be impacted by a change

from rent expense to amortization and interest

expense.

Change is Coming -

Lease Accounting

November 7, 2014


AICPA Technical Questions and

Answers for the Healthcare

Industry (AICPA Technical Q&As)

November 7, 2014


AICPA Technical Q&As on a Hospital

as a Collecting Agent for Physicians

• Question

– When a hospital acts as collecting agent for the

physicians' fees (non-employed physicians), should

the amounts collected as physicians' fees be

included in the income and expenses of the provider

hospital?

November 7, 2014


AICPA Technical Q&As on a Hospital

as a Collecting Agent for Physicians

• Answer

– No. GAAP says that health care entities may receive and hold

assets owned by others under agency relationships; for

example, they may perform billing and collection services for

physicians. In accepting responsibility for those assets, an

entity (Hospital) incurs a liability to the principal (Physician)

under the agency relationship to return the assets in the future.

In the preceding example, the hospital is functioning as a

conduit with respect to the physicians' fees. As a result, the

fees should be reported as a liability to the physicians and not

recognized in the statement of revenues and expenses of the

Hospital.

November 7, 2014


AICPA Technical Q&As on Accounting for Transfer of Assets

from Not-for-Profit Hospital to For-Profit Subsidiary

• Question

– How should subsequent transfers of assets,

evidenced as additional investment, from a not-for-

profit hospital to a for-profit subsidiary be accounted

for by the transferee and transferor?

November 7, 2014


AICPA Technical Q&As on Accounting for Transfer of Assets

from Not-for-Profit Hospital to For-Profit Subsidiary

• Answer

– Additional investments in for-profit subsidiaries

(subsequent to the original transfer of assets) should

be reflected by the transferee (Subsidiary) as an

increase in capital stock or paid-in capital, or both.

The transferor (Hospital) would record a

corresponding increase in its investment account in

the for-profit subsidiary.

November 7, 2014


AICPA Technical Q&As on Transfer of Assets from Subsidiary For-

Profit Entity to Not-for-Profit Stockholder Parent (Hospital)

• Question

– How should transfers of assets from a Subsidiary for-

profit entity to a not-for-profit entity parent (Hospital)

that is a minority stockholder of the Subsidiary be

recorded?

November 7, 2014


AICPA Technical Q&As on Transfer of Assets from Subsidiary For-

Profit Entity to Not-for-Profit Stockholder Parent (Hospital)

• Answer

– This transaction would generally be recorded as a dividend, which

would be reported as a reduction in the Subsidiary's retained

earnings. Any dividend in excess of retained earnings is a

"liquidating" dividend; as such, it would be reported as a reduction

in the Subsidiary's paid-in capital account. If the Hospital accounts

for its investment in the Subsidiary using the equity method, then

the Hospital would report all dividends received as a reduction of

its investment account. If the Hospital's investment in the

Subsidiary is accounted for using the cost method, because the

conditions for applying the equity method are not met, the

dividends would be reported as income.

November 7, 2014


AICPA Technical Q&As on Accounting

for a Joint Operating Agreement

• Question

– Two not-for-profit health care systems enter into a

Joint Operating Agreement whereby both (the

Venturers) agree to jointly operate and control certain

of their hospitals while sharing in the operating

results and residual interest upon dissolution based

upon an agreed-upon ratio. Neither of the Venturers

receives cash or other monetary assets as part of

entering into the Agreement. How should the

Venturers account for the Agreement?

November 7, 2014


AICPA Technical Q&As on Accounting

for a Joint Operating Agreement

• Answer

– Even though the Agreement does not provide for a separate

legal entity (such as a corporation or partnership), the same

principles apply. For example, because there is joint control

(that is, neither party controls the venture), consolidation would

not be appropriate. Instead, such agreements should be

accounted for similar to a corporate joint venture using the

equity method of accounting. Because the transaction did not

reflect the culmination of the earnings process, the Venturers'

basis in the investment would be recorded at net book value.

November 7, 2014


AICPA Technical Q&As on Accounting for Computer

Systems Costs Incurred in Connection with HIPAA

• Question

– How should health care entities account for computer

systems costs incurred in connection with HIPAA?

November 7, 2014




• Answer

– The accounting for specific compliance costs

depends on whether the costs relate to "upgrades

and enhancements" or maintenance. The following

summarizes the financial reporting requirements for

each type of cost:

November 7, 2014




– Upgrades are defined in GAAP as, "an improvement to an existing

product that is intended to extend the life or improve significantly the

marketability of the original product through added functionality,

enhanced performance, or both. If the changes increase the security

of the data from tampering or alteration or reduce the ability of

unauthorized persons to gain access to the data, those changes

would be tasks that the software previously could not perform and the

associated qualifying costs of application development stage

activities should be capitalized. Conversely, if the changes merely

reconfigure existing data to conform to the HIPAA standard or

regulatory requirements, such changes would not result in the

capability to perform additional tasks and the associated costs should

be expensed as incurred.

November 7, 2014




– Maintenance costs should be expensed as incurred.

Training costs and data conversion costs, except for

costs to develop or obtain software that allows for

access or conversion of old data by new systems,

should also be expensed as incurred.

November 7, 2014


AICPA Technical Q&As on Presentation of Bad Debts

and Disclosure of Patient Service Revenue

• Question

– Health System consists of a parent holding company and two

operating subsidiaries. Subsidiary A is an acute care hospital that has

a policy of providing services to patients regardless of their ability to

pay. Subsidiary A records patient service revenue at the time services

are rendered and, thus, typically recognizes significant amounts of

patient service revenue associated with uninsured self-pay patients

prior to assessing its collectability. Subsidiary B is an ambulatory

surgery center that does not have a policy of providing services to

patients regardless of their ability to pay; thus, its provision for bad

debts is a reflection of its credit risk. Health System issues

consolidated financial statements. In addition, each subsidiary issues

standalone financial statements.

November 7, 2014




• Question - Continued

– GAAP requires that a health care entity present all bad

debts associated with patient service revenue as a

deduction from revenue if a significant amount of patient

service revenue is recognized at the time services are

rendered and the entity does not assess the patient’s ability

to pay. Thus, in the separate subsidiary statements,

Subsidiary A’s statement of operations presents bad debts

associated with patient service revenue as a deduction from

patient service revenue, while Subsidiary B’s statement of

operations displays bad debts related to patient service

revenue as an operating expense.

November 7, 2014




• Question - Continued

– In determining how to present bad debts in Health System’s

consolidated statement of operations, should the assessment

of significance be made at the consolidated reporting entity

level (regardless of the presentation in the separate subsidiary

financial statements), or should the determinations made at the

separate subsidiary reporting level be retained in

consolidation?

November 7, 2014




• Answer

– The determination of whether the presentation of bad debts at the

consolidated reporting entity level should be based on an entity-

wide assessment of significance or on significance determined at

the level of each individual subsidiary is an accounting policy

election. If Health System decides to retain the presentations

determined based on assessments made at the individual

subsidiary reporting level, the consolidated statement of

operations would reflect bad debts related to Subsidiary A’s patient

service revenue as a deduction from patient service revenue and

the bad debts related to Subsidiary B’s patient service revenue as

an operating expense.

November 7, 2014




• Answer - Continued

– Alternatively, Health System may elect to assess “significance” at the

consolidated reporting entity level regardless of the presentations used in

the separate subsidiary financial statements. In that case, if consolidated

patient service revenues are deemed to include a significant amount of

revenue recognized under a policy in which services are provided to

patients regardless of their ability to pay, then the entire provision for bad

debts related to consolidated patient service revenues (that is, the

combined bad debts of Subsidiaries A and B) would be presented as a

deduction from the consolidated net patient service revenues. If such

revenues are not deemed to be significant at the consolidated reporting

entity level, the entire provision for bad debts related to consolidated

patient service revenues should be presented as an operating expense.

November 7, 2014


AICPA Technical Q&As on Accounting for Costs

Incurred During Implementation of ICD-10

• Question

– How should a health care entity account for costs

incurred in connection with the implementation of

ICD-10?

November 7, 2014




• Answer

– The costs associated with process reengineering (for example,

assessing the current state of business processes, process

redesign or reengineering, or work force restructuring) are

expensed as incurred. Costs associated with acquisition of

fixed assets are accounted for in accordance with an entity's

policy for capitalizing long-lived productive assets. If an outside

consultant is engaged to conduct the project, the total

consulting contract price should be allocated among these

activities based on the relative fair values of each component

(which are not necessarily the separate prices stated within the

contract for each element).

November 7, 2014





– Significant expenses also are likely to be incurred in

connection with training coders and clinicians to

comply with the ICD-10 requirements. All training

costs should be expensed as incurred, even those

that are incurred during the application development

stage.

November 7, 2014





– Modifications of software that do not result in

additional functionality are expensed as maintenance

costs. Modifications that result in additional

functionality are considered upgrades or

enhancements of the existing system and are

expensed or capitalized in accordance with GAAP.

November 7, 2014


Recognizing and Measuring

Goodwill in an Acquisition of

Less Than a Wholly Owned

Subsidiary

November 7, 2014


Recognizing and Measuring Goodwill in an Acquisition


• GAAP requires that goodwill be allocated between

controlling and noncontrolling interests

• Goodwill allocated to the controlling interest is

measured as the excess of: (a) the fair value of the

controlling interest’s portion of the business

acquired over (b) the controlling interest’s

percentage of the amounts for the identifiable asset

acquired less liabilities assumed from the acquired

November 7, 2014




• Goodwill allocated to the noncontrolling interest is

measured as the difference between goodwill of the

acquired business less the goodwill allocated to the

controlling interest

• The allocation of goodwill between controlling and

noncontrolling interests will not always be

proportional to the percentages owned

• The situation could occur when the acquirer pays a

premium for a controlling interest in the acquired

November 7, 2014




• Example 1 – Assume the following (in thousands)

– Parent acquires 65% of Subsidiary Entity for $750

– The total fair value of the Subsidiary Entity is $1,100

– The fair value of the Subsidiary Entity’s net

identifiable assets and assumed liabilities is $800

November 7, 2014




• The calculation and presentation of goodwill are as

follows:

Fair value of 100% of Subsidiary Entity 1,100$

Fair value of 100% of identifiable net assets (800)

Total goodwill as if 100% acquisition 300$

Consideration for 65 of Subsidiary Entity 750$

Fair value of 65% of identifiable net assets (65% x 800) (520)

Goodwill allocated to controlling interest 230$

Goodwill allocated to noncontrolling interest 70$

November 7, 2014




• From this example, the following observations could

be drawn:

– Goodwill allocated to the controlling interest is not

65% of the total goodwill – rather 77% ($230 ÷ $300)

– The calculation implies a control premium of $35 was

paid by the controlling acquiring company calculated

as $750 – ($1,100 x .65) = $35.

– The control premium is included in the allocation of

goodwill to the controlling interest ($300 x .65) + $35

= $230

November 7, 2014


Accounting for Meaningful Use

of Electronic Health Records

November 7, 2014


Accounting for the Meaningful Use


• Contingency Accounting Model – SEC registrants

must use this model

• Grant Accounting Model – An option for non-SEC

registrants

November 7, 2014




• Contingency Model

– Appropriately identify contingencies that must be

satisfied prior to recognizing the revenue

– Likely contingency – receipt of an incentive payment

occurs only if the hospital is successful in complying

with the meaningful use criteria during the entire

EHR reporting period (90 consecutive days in the

first payment year and 365 consecutive days during

each of the second through fourth years)

November 7, 2014




• Contingency Model - Continued

– The contingency model would not permit income

from incentive payments to be recognized until the

hospital has actually complied with the meaningful

use criteria for the full EHR reporting period in a

given year

– It would not be appropriate under a contingency

model to consider the probability of complying with

the requirements when considering when to

recognize income from the incentive program

November 7, 2014





– Because another contingency relates to the

discharges upon which the final incentive payment is

based, it is expected that hospitals using the

contingency model would typically not meet the

contingency for discharge and other final payment

calculation data until the last day of the cost report

year (which may be after the EHR reporting period

ends – EHR reporting period is based on a Federal

fiscal year ending September 30)

November 7, 2014





– Submission of the cost report and its subsequent

desk review or audit by CMS would not likely be

viewed as contingent events that must occur prior to

the recognition of income

– Healthcare entities applying a contingency model

should give careful consideration to all potential

contingencies and document how such contingencies

were considered and/or resolved

November 7, 2014




• Grant Accounting Method

– Incentive payments are considered grants related to

income and not grants related to assets

– Income from grants shall not be recognized until

there is reasonable assurance that (a) the entity will

comply with the grant conditions; and (b) the grants

will be received

November 7, 2014




• Grant Accounting Method - Continued

– Cliff Recognition - A hospital may not be able to determine

with reasonable assurance that it will comply with the

conditions associated with the grant until after the Federal

Fiscal EHR reporting period has ended, and the income would

be recognized all at once at that time.

– Ratable Recognition – A hospital may be reasonably assured

at the outset of the Federal Fiscal EHR reporting period that it

will successfully demonstrate compliance with the meaningful

use objectives. If so, grant income would be recognized

ratably over the passage of time.

November 7, 2014




• Grant Accounting Method - Continued

– Cumulative Catch-Up Adjustment – If compliance with the

meaningful use objectives is not reasonably assured at the

outset of the Federal Fiscal EHR reporting period, but instead

is attained at some interim point during the period, then a

favorable cumulative catch-up adjustment would be reported at

that point. Income should be recognized ratably for the

remainder of the period.

November 7, 2014


Questions?

Contact information for Mike Shamblin

(800) 270-9629

[email protected]

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