2016 Revenue Recognition Session Parts 1 & 2

Transcription

1 2016 AICPA Healthcare Conference 2016 Revenue Recognition Session Parts 1 & 2 Speaker Biographies 25-1

2 Mike Breen, CPA Mike is an audit partner in KPMG s New York Office. He has experience performing financial statement audits, providing engagement teams with technical accounting support, working in KPMG s national office, and as a practice fellow at the FASB. Mike has extensive experience in providing accounting and auditing services to healthcare providers and managed care organizations, including health systems, community hospitals, governmental hospitals, and health plans. He is also a member of KPMG s revenue recognition network, the AICPA s healthcare revenue recognition task force, and the Healthcare Financial Management Association. Mike has been a training instructor as well as presenter on webcasts and at seminars and conferences. In September 2014, Mike completed a rotation in KPMG s national office where he had a key role on the revenue recognition project team actively monitoring the FASB/IASB revenue recognition standard. Mike was involved in the development of publications and trainings. In July 2012, Mike completed a two-year assignment as a practice fellow at the FASB where he was a member of the joint revenue recognition project team and the EITF coordinator. 2 #AICPAhealth Chuck Heimerdinger, CPA Chuck is a partner at Ernst & Young LLP (EY) and is the firm s Health Sector Technical Leader. Chuck has more than 30 years of experience in public accounting and has specialized in EY s Health Sector Practice since joining the firm. Chuck has extensive experience in providing accounting and auditing services to a variety of healthcare providers and managed care organizations, including both large and small health systems, integrated delivery systems, sole community hospitals and health plans. He also advises clients on key industry issues including business combinations, purchase price allocations, joint ventures, leasing transactions and debt offerings. Chuck has served as a speaker for professional groups on various issues related to the healthcare industry and accounting issues that affect healthcare providers. He also provides periodic technical updates to EY s Health Sector professionals. Chuck is a member of the AICPA Healthcare Expert Panel, the AICPA s Healthcare Revenue Recognition Task Force, the Healthcare Financial Management Association and serves on the Board of the Arizona State Board of Accountancy

3 Mark Ross, CPA Mark is a partner at Baker Tilly Virchow Krause, LLP (Baker Tilly) and is the firm leader of Baker Tilly s Healthcare Practice. He has more than 25 years of experience in public accounting and has concentrated his efforts in Baker Tilly s Healthcare Practice during the last 20 years. Mark has extensive experience in providing accounting and auditing services to healthcare providers, including continuing care retirement communities, skilled nursing and assisted living facilities, rehabilitation hospitals, and affordable housing projects. He is also responsible for a variety of additional services provided to Baker Tilly s healthcare clients, including financial forecasts and feasibility studies. Mark has spoken before several professional and educational groups on various issues related to the healthcare industry and accounting issues that affect healthcare providers. Mark is a member of the AICPA Healthcare Expert Panel, the AICPA s Healthcare Revenue Recognition Task Force, the HFMA Principles and Practices Board, and the CARF Financial Advisory Panel. 4 Agenda Topic Overview: five steps, effective date, transition Self pay Portfolio practical expedient Third party estimates CCRC: performance obligations, transaction price, significant financing component, contract costs, future service obligation Disclosures Implementation considerations/key takeaways/next steps Q&A 5 #AICPAhealth 25-3

4 Disclaimer All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Any similarity between any depiction in this session and any actual event, person or entity is purely coincidental. In addition, the views expressed are those of the presenters and not any specific firm. 6 #AICPAhealth Objectives of the new revenue standard Remove inconsistencies and weaknesses in existing requirements to improve comparability Provide a more robust framework for addressing revenue issues FASB/IASB* converged standard Provide more useful information through improved disclosure requirements Simplify the preparation of financial statements by reducing the number of requirements by having one revenue framework *IASB: International Accounting Standards Board/FASB: Financial Accounting Standards Board 7 #AICPAhealth 25-4

5 FASB/IASB, TRG, and AICPA Task Forces FASB/IASB AICPA SEC TRG Advises the Boards Does not have standard-setting authority AICPA Financial Reporting Executive Committee (FinREC) AICPA Revenue Recognition Working Group Focus on consistent application Focus on accounting questions that may require standard setting AICPA 16 Industry Task Forces Focus on internal controls, systems, and processes 8 #AICPAhealth The core principle and the five-step model Core principle An entity recognizes 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 1 2 Identify the contract(s) with a customer Identify the performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the performance obligations in the contract 5 Recognize revenue when (or as) the entity satisfies a performance obligation 9 #AICPAhealth 25-5

6 AICPA Health Care Task Force Issues Identified Revenue recognition for patients with uninsured balances (self pay) Application of portfolio approach Determine the transaction price as it relates to third-party estimates Identifying the PO and recognition of refundable and non-refundable entrance fees for CCRC s Disclosure requirements Contract acquisition costs 10 #AICPAhealth Effective date One year deferral ASU , Deferral of the Effective Date, defers the original effective date by one year. - Early application would be permitted (but not before original effective date, i.e., in annual periods beginning after December 15, 2016) Public business entities and certain not-for-profit entities Fiscal years, and interim periods within those years, beginning after December 15, 2017 All other entities Fiscal years beginning after December 15, 2018, interim periods in fiscal years beginning after December 15, #AICPAhealth 25-6

7 Transition approaches The following chart summarizes the transition options available to entities (based on a calendar fiscal year for U.S. public business entities) Transition approach 2016/ Date of cumulative effect adjustment Retrospective Restate for all contracts Apply to all contracts January 1, 2016 Retrospective Using Restate for all contracts Apply to all contracts January 1, 2016 One or More Practical Expedients except for contracts or estimates covered by the practical expedients elected by the entity Cumulative Effect at the Date of Adoption No contracts restated; reported on the basis of legacy guidance Apply to all contracts January 1, #AICPAhealth Self Pay #AICPAhealth 25-7

8 Identify the contract(s) with a customer Contract is defined 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 Arrangement must meet these criteria to be a contract within the scope of the standard: Parties have approved the contract and are committed to perform - In writing (patient responsibility/consent form), orally (schedule appointment), or implied based on the entity s customary business practices (emergency room visit) Each party s rights and the contract s payment terms can be identified Contract has commercial substance Collection is probable 14 Identify the contract(s) with a customer Before applying the model in the standard to a contract, it must be probable that the entity will collect substantially all of the consideration to which it is entitled in exchange for the goods and services that will be transferred to the customer If this collectibility threshold is not met, a contract with a patient does not exist within the scope of the standard A health care entity may make this determination based on past experience with that patient or class of similar patients

9 Identify the contract(s) with a customer Example: Patient is admitted through emergency room and is unresponsive Health care entity subsequently determines 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 - Qualify for the entity s charity care policy (these contracts are not within the scope of the standard) - Be uninsured self-pay 16 Identify the contract(s) with a customer Example: (cont.) 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

10 Identify the contract(s) with a customer and determine the transaction price Collectibility involves consideration of the transaction price Transaction price may be less than the stated contract price Transaction price is defined as the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer Transaction price includes the effects of variable consideration (for example, discounts, price concessions) 18 Determine the transaction price Estimating 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

11 Determine the transaction price A health care entity may consider the following factors to determine whether it intends to provide an implicit price concession It has a customary business practice of not performing a credit assessment prior to providing services (for example, because it is required by law or regulation, or has a mission to provide medically-necessary or emergency services prior to assessing a patient s ability or intent to pay) It 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 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. 20 Determine the transaction price Health care entities are required to evaluate whether to constrain amounts of variable consideration in the transaction price Estimate of implicit price concessions should incorporate the entity s expectations of cash collections at a level at which it is probable that the cumulative amount of revenue recognized will not result in a significant revenue reversal There may be circumstances in which the estimate of variable consideration already incorporates the principles on which the guidance for constraining estimates of variable consideration is based

12 Determine the transaction price A health care entity should consider the following factors when evaluating if it is probable that there will not be a significant revenue reversal when the cash is collected: Current economic conditions in the market the entity serves Extent of experience with similar patients or portfolios of similar patients How long it generally takes to collect the consideration from similar patients Historical range of collection history with similar patients and whether the range is broad (significant differences from reporting period to reporting period) or narrow (insignificant differences from reporting period to reporting period) 22 Determine the transaction price Example on implicit price concession: Hospital is required to provide medically necessary services under the Social Security Act and treats a patient with an emergency condition Hospital determines that the patient qualifies for its uninsured discount policy and grants a 75% discount (explicit price concession) Standard charges for services are $40,000 and amount billed is $10,000 Hospital intends to pursue collection of $10,000 amount billed; however, based on experience only expects to collect $1,000 Hospital has a history of providing services to uninsured patients and collecting amounts substantially less than its discounted charges

13 Determine the transaction price Example on implicit price concession continued: Facts and circumstances indicate the Hospital s intention when entering into the contract was to provide an implicit price concession After consideration of the constraint, the Hospital determines that $1,000 is the transaction price Hospital concludes it is probable it will collect the $1,000 and that other criteria in ASC are met Hospital records patient revenue and accounts receivable of $1, 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)

14 Reassessment of variable consideration Subsequent changes in the estimate of the transaction price (cont.) 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). 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 26 Consideration of impairment There may be facts and circumstances that indicate there has been an adverse change in the patient s credit worthiness (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

15 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 28 Contracts with self-pay balances Audit Considerations Are the processes for capturing patient charges, price concessions and collection history designed to provide the information necessary to identify the contracts and determine the transaction price? Assessing collectibility Estimating variable consideration Considering the constraint Establishing portfolios of similar contracts Evaluating impairment Do the controls over processing patient account information require revision for changes in how information is captured and evaluated?

16 Portfolio approach Portfolio approach The standard is generally applied to an individual contract with a customer. As a practical expedient, an entity may apply the revenue guidance to a portfolio of contracts with similar characteristics if the entity reasonably expects that the financial statement effects of applying the standard to the portfolio or to individual contracts within that portfolio would not differ materially. 31 #AICPAhealth 25-16

17 Application of the portfolio approach to contracts with patients Considerations for a health care entity to determine in grouping contracts with similar characteristics for inclusion in a portfolio: Type of service i.e. inpatient, outpatient, skilled nursing, home health Type of payors i.e. insurance contract, governmental program, uninsured self-pay Whether contracts are entered into at or near the same time A health care entity may include some or a combination of the above considerations in its determination of a portfolio An entity is not required to apply the portfolio practical expedient when considering evidence from other, similar contracts to develop an estimate of variable consideration 32 #AICPAhealth Historical experience or a portfolio of contracts In some circumstances, an entity will develop estimates using a portfolio of data to account for a specific contract with a customer. For example, to account for a specific contract with a customer, an entity might consider historical experience with similar contracts to make estimates and judgments about variable consideration and the constraint on variable consideration for that specific contract. On question 1, TRG members agreed with the staff s view that the use of a portfolio of data is not the same as applying the portfolio practical expedient TRG Agenda ref 44 par. 25 An entity considers all information (historical, current, and forecast) to estimate variable consideration on either a contract or a portfolio of contracts Using historical experience to make estimates is not the same as applying the portfolio practical expedient Generally, an entity will apply historical experience on a portfolio of contracts to calculate the transaction price 33 #AICPAhealth 25-17

18 Portfolio approach Example Scenario Health care entity provides services to patients covered by insurance carrier B and does not perform a credit assessment prior to providing services Each patient has a patient responsibility (co-payment) The entity identifies these patients as a portfolio of contracts and applies a portfolio approach based on qualitative and quantitative factors Standard charges amount to $1,000,000 for these patients and consists of both the insurance and co-payment amounts Entity has a contractual agreement with insurance carrier B that results in 50% contractual allowance Remaining charges include $475,000 in amounts due from insurance carrier B and $25,000 in co-payment amounts Entity expects to collect 100% of insurance carrier B and 40% of the co-payment amounts based on historical experience 34 #AICPAhealth Portfolio approach Example Evaluation The contractual adjustment of $500,000 is a reduction of the transaction price The $15,000 ($25,000 x 60%) the entity does not expect to collect of patient copayments represents an implicit price concession and is recorded as a reduction of the transaction price Total transaction price for this portfolio is $485,000 ($475,000 from insurance carrier B and $10,000 from co-payment amounts) The entity would only include the estimate of variable consideration ($485,000) in the transaction price after consideration of the constraint The health care entity recognizes patient revenue and accounts receivable of $485,000 after going through the 5 step model 35 #AICPAhealth 25-18

19 Third Party Estimates #AICPAhealth 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

20 Third-party settlements Variable consideration is estimated using an expected value or most likely amount approach Method selected should be applied consistently to contracts with similar characteristics and in similar circumstances 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. The following factors should be considered regardless of the method used: Historical and current reimbursement information including third-party settlements Historical and current experience with the fiscal intermediary Current charges, allowable costs, and relevant patient statistics 38 Third-party settlements In evaluating whether it is probable that a significant revenue reversal will not occur when the cash is collected or paid based on final settlement with the third-party payor, health care entities should consider the following factors: Historical experience in estimating third-party settlements Third-party payor determines the amount of the settlement based on specific rules and regulations Third-party payor has control over settlement process Several years may elapse before third-party settlements are known with certainty

21 Third-party settlements The Revenue Recognition Task Force is considering a view that the amount evaluated for revenue reversal is the reimbursement subject to settlement to or from the third-party payor as compared to the total reimbursement from the third-party payor for services rendered related to the contracts that are included in the settlement determination. When a health care entity does not have significant historical experience or that experience has limited predictive value, it should constrain its estimate of variable consideration 40 Third-party settlements To determine if a significant financing component exists, a health care entity should consider the following factors: Contracts with patients generally include a substantial amount of variable consideration because third-party payors do not pay standard charges Amount and timing of the consideration may vary on the basis of the occurrence or nonoccurrence of a future event that is not substantially with the control of the entity or patient (e.g., settlement of a cost report) Amounts of the third-party settlement may arise due to the normal course of business and not as a result of a financing arrangement A health care entity should evaluate all relevant facts and circumstances in evaluating whether a significant financing component exists The Revenue Recognition Task Force is considering a view that a significant financing component does not exist for third party settlements because the timing of the payment is at the discretion of the third party payor and does not involve the patient (i.e., the customer)

22 Third-party settlements A health care entity applying the modified retrospective method should evaluate its contracts to determine if all or substantially all of the revenue was recognized under legacy GAAP prior to the date of initial application of the standard If all or substantially all of the revenue was not recognized for patient contracts subject to third-party settlements, the related patient contracts for that open cost report year would be considered open contracts and the entity would need to determine the cumulative effect adjustment at the date of initial application of the standard 42 Third-party settlements Example Hospital determines that the expected value method (probability-weighted approach) is the best predictor of the variable consideration Medicare transaction price before third-party settlements is $50 million Possible settlement amounts Probability Probabilityweighted amounts $ - 20% $ - 1,000,000 55% 550,000 3,000,000 15% 450,000 5,000,000 10% 500,000 $ 1,500,

23 Third-party settlements Example (cont.) Amounts associated with each outcome are aggregated to arrive at the estimated third-party settlement of $1.5 million, which decreases the transaction price from $50 to $48.5 million Because there is only a 25% chance of the third-party settlement being greater than the probability weighted adjustment of $1.5 million, entity determines that it is probable that a significant revenue reversal will not occur upon settlement 44 Third-party settlements Audit Considerations Are the processes for estimating third party settlements based on either the expected value or most likely amount methods? Do the controls over processing third party settlement information require revision for changes in how information is captured and evaluated?

24 CCRCs CCRC specific considerations The AICPA Healthcare Revenue Recognition Task Force continues to analyze the following primary issues related to CCRCs Accounting for monthly / periodic fees and nonrefundable entrance fees under the different contract types (focus has been primarily on Type A Contracts) Significant financing component considerations for refundable and nonrefundable entrance fees Obligation to provide future services and use of facilities Contract acquisition costs

25 CCRC Current Guidance - Superseded ASC Subtopic (revenue recognition ) is superseded ASC Subtopic (costs of acquiring initial continuing-care contracts) is superseded ASC Subtopic (entrance fees) is superseded ASC Sections , and (obligation to provide future services and use of facilities) have basically remained intact 48 Identifying the performance obligation(s) in the contract One position The following distinct performance obligations could potentially be identified in a Type A CCRC contract: An obligation to provide the use of facilities in an independent living (IL) setting An obligation to provide services and use of facilities in an assisted living (AL) setting An obligation to provide services and use of facilities in a skilled nursing (SN) setting

26 Identifying the performance obligation(s) in the contract Second position Under a Type A, or life care, contract, in exchange for an advance fee and a monthly fee which is locked in for the duration of the contract (other than potential inflationary increases), the resident has the right to continue reside at the CCRC and access health care services. However, the resident also has the right to leave the facility at any time, but may forfeit part (or all) of the advance fee, as well as part of the monthly fees paid in advance for future health care. The resident is, in substance, exercising an option each month to continue to reside at CCRC. 50 Identifying the performance obligation(s) in the contract Second position Under FASB ASC , if in the contract an entity grants a customer the option to acquire additional goods or services, that option is a performance obligation if the option provides a material right that the customer would not receive without entering into that contract. If the option provides a material right to the customer, the customer in effect pays the entity in advance for future goods or services and the entity recognizes revenue when those goods and services are transferred, or when the option expires

27 Identifying the performance obligation(s) in the contract Second position A CCRC contract implicitly grants a resident a series of renewal options which require the CCRC to provide additional goods or services and which give the resident a material right that the resident would not get without entering into the CCRC contract, as contemplated by BC 391 of ASU The material right to acquire these additional goods and services is the performance obligation in the CCRC contract. The advance fee and a portion of the monthly fees are in effect payments for future goods and services and the revenue should be recognized when those goods and services are provided or when the option expires. Remainder of presentation is based on second position. 52 Transaction price Under FASB ASC , an entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, it may be important for CCRCs to consider both the nonrefundable entrance fees and the future monthly fees

28 Transaction price As described in BC 393 of ASU , there is a practical alternative to estimating a standalone selling price for each of the renewal options. The practical alternative requires an entity to include the optional goods and services that it expects to provide, along with the expected consideration, in the initial measurement of the transaction price. This allows an entity to view a contract with renewal options as a contract for its expected term rather than a contract with a series of options. 54 Transaction price Under this approach, a hypothetical estimated transaction price of the potential future performance obligations (including the goods and services covered by the option) is calculated, taking into consideration both the value of the promised good or service and the likelihood that the option is exercised. Therefore, it is important that a CCRC consider the likelihood that a resident will utilize health care services (i.e., what is the relative portion of a resident s life expectancy that is expected to be spent in each level of care)

29 Transaction price The hypothetical estimate of the total transaction price under CCRC contracts may be made by using the monthly fees expected to be received, as adjusted for inflation, over the actuarially determined life expectancies of residents. CCRCs may use available internal historical or industry data to estimate the amount of time a resident is expected to live in each level of care given the resident s age and other factors at the time of admission. In summary, at CCRC contract inception, the transaction price may be the sum of the nonrefundable entrance fee plus the estimated amount of monthly fees expected to be received over the estimated life expectancy of the resident. 56 Allocating the transaction price Under FASB ASC , an entity can use a practical alternative of looking through an option and including the future goods or services to which the option relates in the relative selling price allocation, if certain criteria are met. The entity allocates the transaction price by reference to the goods or services it expects to provide in exchange for the consideration it expects to receive. FASB ASC states. To meet the allocation objective, an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis

30 Allocating the transaction price A CCRC may apply the guidance in FASB ASC and determine standalone selling prices associated with the goods or services it expects to provide based on observable prices to the extent they exist. A standalone selling price for IL services might be observed based on monthly rental fees (with no health care benefit) of the CCRC. Similarly, beds in AL or SN are generally marketed to the general public and, therefore, the standalone monthly or per diem rate for those services would be available. In the absence of observable selling prices for individual levels of care, CCRCs should apply the guidance in FASB ASC and and estimate the standalone selling price. 58 Allocating the transaction price Standalone selling prices are generally expected to be highest for SN, followed by AL, and then IL. In summary, the standalone selling prices for each level of care, combined with the estimated amount of time (that is, months or years) that a resident is expected to spend in each level of care, would need to be used to allocate the transaction price amounts (monthly fees and nonrefundable entrance fees) received from a resident each year

31 Recognizing revenue Progress toward satisfying the performance obligation for each level of care that has been allocated a portion of the transaction price may be measured with the passage of time, with revenue recognized ratably over the estimated time period for which the resident is expected to be in that level of care. CCRCs likely will apply the revenue recognition criteria to their resident contracts on a contract by contract basis; that is, to account for each resident individually. As a practical expedient and as described in FASB ASC , a CCRC may also apply FASB ASC 606 to a portfolio of contracts with similar characteristics if a CCRC reasonably expects that the effects on the financial statements of applying FASB ASC 606 to the portfolio would not differ materially from applying FASB ASC 606 to the individual contracts. 60 Recognizing revenue In accordance with FASB ASC , subsequent changes in the transaction price should be allocated to the identified performance obligations on the same basis as the allocation performed at contract inception. An entity shall not reallocate the transaction price to reflect any changes in the standalone selling prices after contract inception. In accordance with FASB ASC , as circumstances change over time, the CCRC should also update its measure of progress to reflect any changes in the outcome of the performance obligation satisfied over time. These changes should be accounted for as a change in accounting estimate such that the change in the transaction price would be accounted for prospectively

32 Revenue Recognition Illustrations of Potential Revenue Recognition Model for a Type A CCRC Note that the illustrations are for discussion purposes only and are not intended to represent authoritative guidance. The revenue recognition model under FASB ASC 606 for Type A CCRCs continues to be deliberated. 62 Revenue Recognition Model for a Single Resident Type A or Life Care Contract Assumptions Non-refundable entrance fee $ 200,000 Monthly fee at contract inception $ 3,000 Inflation factor 3.00% Expected years in IL 10 Expected years in AL 2 Expected years in SN 2 "Stand-alone" selling prices at contract inception: IL - Monthly Fee $ 2,500 AL - Daily Rate $ 200 SN - Daily Rate $

33 Type A or Life Care Contract Estimated Transaction Price Year Monthly Fees Nonrefundable Entrance Fee Totals 1 $ 36,000 $ 200,000 $ 236, ,100 37, ,200 38, ,300 39, ,500 40, ,700 41, ,000 43, ,300 44, ,600 45, ,000 47, ,400 48, ,900 49, ,400 51, ,900 52,900 Totals $ 615,300 $ 200,000 $815, Type A or Life Care Contract Projected Standalone Selling Prices Year IL (1) AL(2) SN (3) Totals 1 $ 30,000 $ - $ - $ 30, , , , , , , , , , , , , , , , , , , ,200-98, , , , , , ,700 Totals $ 343,900 $ 199,300 $ 369,900 $ 913,100 Relative values 37.67% 21.83% 40.50% %

34 Type A or Life Care Contract Projected Standalone Selling Prices Notes for Example (1) Monthly fee for IL times 12 months (2) Daily rate for AL times 365 days (3) Daily rate for SN times 365 days Note: Inflation factor of 3% applied to fees in all levels of care 66 Type A or Life Care Contract Allocation of Transaction Price to Series of Deliverables IL AL SN Totals Transaction Price $ 815,300 $ 815,300 $ 815,300 $ 815,300 Relative value 37.67% 21.83% 40.50% % Allocation $ 307,100 $ 178,000 $ 330,200 $ 815,

35 Type A or Life Care Contract Revenue Recognition over Pattern of Transfer IL Year Revenue Recognized (1) Monthly Fees Contract Liability (2) 1 $ 26,800 $ 36, , ,600 37, , ,400 38, , ,300 39, , ,200 40, , ,100 41, , ,000 43, , ,900 44, , ,900 45, , ,900 47, ,600 Total IL 307, Type A or Life Care Contract Revenue Recognition over Pattern of Transfer AL Year Revenue Recognized (1) Monthly Fees Contract Liability (2) 11 $87,700 $48,400 $266, ,300 49, ,900 Total AL 178,000 SN ,600 51, , ,600 52,900 - Total SN 330,200 Total all levels of care $ 815,

36 Type A or Life Care Contract Revenue Recognition over Pattern of Transfer Notes for Example (1) Transaction price allocated to deliverable using the standalone selling price. (2) Contract liability is equal to the nonrefundable entrance fee plus monthly fees less revenue recognized. 70 Revenue Recognition Change in Circumstances Resident is Permanently Transferred to AL at the Beginning of Year

37 Revenue Recognition Model for a Single Resident Type A or Life Care Contract Revised Assumptions Contract liability at end of year 6 $ 259,400 Monthly fee in year 6 $ 3,475 Inflation factor 3.00% Expected years in AL 2 Expected years in SN 2 "Stand-alone" selling prices at contract inception: AL - Daily Rate $ 200 SN - Daily Rate $ Type A or Life Care Contract Revised Estimated Transaction Price Year Monthly Fees Contract Liability Totals 7 $ 43,000 $ 259,400 $ 302, ,300 44, ,600 45, ,000 47,000 Totals $ 179,900 $ 259,400 $ 439,

38 Type A or Life Care Contract Projected Standalone Selling Prices Year IL AL SN Totals 7 $ - $ 87,200 $ - $ 87, ,800-89, , , , ,700 Totals $ - $ 177,000 $ 328,500 $ 505,500 Relative values 0.00% 35.00% 65.00% % 74 Type A or Life Care Contract Allocation of Transaction Price to Series of Deliverables IL AL SN Totals Transaction Price $ 439,300 $ 439,300 $ 439,300 $ 439,300 Relative value 0.00% 35,00% 65.00% % Allocation $ - $ 153,800 $ 285,500 $ 439,

39 Type A or Life Care Contract Revised Revenue Recognition over Pattern of Transfer Year Revenue Recognized Monthly Fees Contract Liability End of Year 6 $259,400 AL 7 $75,800 $43,000 $226, ,000 44, ,900 Total AL 153,800 SN 9 140,600 45,600 97, ,900 47,000 - Total SN 285,500 Total $ 439, CCRC Revenue Recognition What about.. Couples? Type B and C Contracts? CCaH Contracts?

40 Costs of acquiring CCRC contracts The accounting for contract costs under ASU differs from existing acquisition cost guidance as described in ASC 954 below. Under the new guidance, certain costs of acquiring and fulfilling contracts are capitalized and amortized over a period based on the terms of the contract. EXISTING GUIDANCE - ASC 954 allows for the capitalization of certain costs of acquiring continuing care contracts when a facility is being initially occupied. Costs of acquiring contracts once a CCRC is substantially occupied or one year following completion should be expensed. 78 Costs of acquiring CCRC contracts NEW GUIDANCE - The accounting for contract costs under ASU states that certain incremental costs for acquiring all contracts can be capitalized. These costs are not limited to those incurred during the initial occupancy of the building. These would include costs incurred in second generation contracts. The incremental costs of obtaining a contract that can be capitalized are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained shall be recognized as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained

41 Future service obligation ASU does not change the guidance related to the calculation of the obligation to provide future services and use of facilities; however, the determination of deferred revenue and deferred marketing costs components of calculation may change 80 Refundable entrance fees Current thought process is that refundable entrance fees will no longer be allowed to be amortized into revenue An entity shall recognize a refund liability if the entity receives consideration from a customer and expects to refund some or all of that consideration to the customer

42 Significant financing component CCRCs often have advance (entrance) fee arrangements with residents as part of their contracts. FASB ASC 606 requires CCRCs to evaluate whether each of their contractual arrangements with residents provide a significant benefit of financing to either party of the contract. The financing component may be explicitly identified in the contract or, as frequently occurs in this industry, may be implied by payment terms of the contract. The assessment of significance requires the CCRC to apply judgment. BC234 of ASU states that for many contracts, an entity will not need to adjust the promised amount of customer consideration because the effects of the financing component will not materially change the amount of revenue that should be recognized in relation to a contract with a customer. If a CCRC determines that a significant financing component is present and adjusts the promised consideration accordingly, the entity would continue to use the same assumed discount rate at contract inception unless there is a contract modification. 82 Significant financing component Applicable???? BC233c states, in part, that The primary purpose of those payment terms may be to provide the customer with assurance that the entity will complete its obligations satisfactorily under the contract, rather than to provide financing to the customer or the entity, respectively. FASB ASC states that, Notwithstanding the assessment in paragraph , a contract with a customer would not have a significant financing component if the customer paid for the goods or services in advance, and the timing of the transfer of those goods or services is at the discretion of the customer

43 Revenue Recognition Significant Financing Component Analysis - Refundable Entrance Fees (Nonrefundable Entrance Fees would also need to be considered in the significant financing component analysis) Note that this analysis is for discussion purposes only and is not intended to represent authoritative guidance. The revenue recognition model under FASB ASC 606, including the existence of a significant financing component as it relates to entrance fees, for CCRCs continues to be deliberated. 84 Existence of Significant Financing Component - Refundable entrance fee example Assumptions Refundable entrance fee $ 100,000 Nonrefundable portion of entrance fee $ 100,000 Life expectancy 5 years Discount rate 5% Amortization method Straight-line Accounting for Refundable Portion of Entrance Fee Debit Credit Receipt of Entrance Fee Cash $100,000 Refundable Entrance fee (at net present value) 78,350 Deferred Revenue (financing component) 21,650 Interest Recognized in Years 1 to 5 Deferred revenue (financing component) ** Revenues ** Interest expense **** 4,330 Refundable entrance fee 4,

44 Existence of Significant Financing Component - Refundable entrance fee example ** Revenue related amounts recorded each year in connection with the $21,650 of deferred revenue will follow the same pattern of revenue recognition used for the nonrefundable entrance fee and monthly fee. The revenue related amounts recorded each year will not be materially different from the interest expense amount recorded each year during the term of the contract. **** During the 5 years subsequent to contract inception, the entity accretes the refundable entrance fee (contract liability) using an assumed discount rate of 5%, which is assumed to be the entity s incremental borrowing rate. For purposes of this example, the accretion has been recorded on a straight-line basis. 86 CCRCs Audit Considerations What are the terms of the CCRC contract (i.e., what services are included, what is the fee charged for those services, etc.) What are the processes used by a CCRC to determine the inputs used to estimate the transaction price at contract inception and allocate the transaction price to the series of deliverables included in the CCRC contract? Life expectancies by level of care Stand-alone selling prices Inflation factor Is the CCRC using a specialist to assist with the determination of amounts to be recognized as revenue under the terms of its contracts? Do the controls over CCRC contracts and the accounting for entrance fees and monthly fees require revision for changes in how information is captured and evaluated?

45 CCRCs Audit Considerations What are the processes used by a CCRC to determine whether a significant financing component is present under the terms of the CCRC contract, specifically the terms related to the payment of refundable and nonrefundable entrance fees? What are the processes used by a CCRC to properly capture the incremental costs incurred related to the acquisition of new CCRC contracts? 88 Disclosures 25-45

46 Disclosure Requirements Performance obligations Contract balances Significant judgments Disaggregation of revenue Understand nature, amount, timing, and uncertainty of revenue and cash flows Costs to obtain or fulfill a contract 90 #AICPAhealth Disaggregation of revenue for healthcare Type of customer (e.g., Medicare, Medicaid, Self-Pay) Timing of transfer of goods or service Example categories Type of service (e.g., hospital, nursing home) Type of contract (e.g., percent of charges, cost, fixed, capitated) Geographical location 91 #AICPAhealth 25-46

47 Disclosure requirements Disaggregated Revenue Revenue Disaggregation by Payor, Region, Line of Business, and Timing 20x2 Medicare $ 16,000 Medicaid 6,000 Managed care 11,000 Other insurers 4,000 Self-pay deductibles and coinsurance 1,000 Uninsured 800 Other 1,000 $ 39,800 Disaggregation by Payor Northeast Central Southeast Total ServiceLines: $ 6,000 $ 4,000 $ 7,000 $ 17,000 Hospital Nursinghomeandseniorcare 4,000-2,000 6,000 Physician services 3,000 4,000 5,000 12,000 Homehealthandhospice 1, ,000 3,800 Other ,000 $ 14,400 $ 9,000 $ 16,400 $ 39,800 Timing ofrevenuerecognition: Attimeservicesarerendered 5,400 3,500 8,400 17,300 Servicestransferredovertime 9,000 5,500 8,000 22,500 $ 14,400 $ 9,000 $ 16,400 $ 39,800 Disaggregation by Region, Line of Business, and Timing 92 #AICPAhealth Disclosure requirements Audit considerations Will processes and controls change because of the disclosure requirements of the new standard? Are systems in place to capture the required information to provide to your auditor? 93 #AICPAhealth 25-47

48 Next Steps Broad impact to organizations For many companies, implementation of the new revenue recognition standard is not just an accounting exercise, as many different groups across the organization need to be involved New revenue recognition standards & corresponding accounting changes Impact of new revenue recognition standard and mapping to new accounting rules New accounting policies historical results and transition Reporting differences and disclosures Tax reporting/planning Financial and operational process changes Revenue process allocation and management Budget and management reporting Communication with financial markets Covenant compliance Opportunity to rethink business practices Coordination with other strategic initiatives Revenue Recognition Revenue recognition automation and ERP upgrades Automation and customization of ERP environment Impact on ERP systems General ledger, sub-ledgers and reporting packages Peripheral revenue systems and interfaces Governance and change Governance organization and changes Impact on internal resources Project management Training (accounting, sales, etc.) Revenue change management team 95 #AICPAhealth 25-48

49 Next steps Assessing the impact to your organization is a critical first step. The following activities may help position you to plan an effective implementation: 1 Establish project team and governance 2 Identify other parties beyond accounting and tax that need to be involved 3 Begin communicating with those charged with governance and internal stakeholders 4 Build a project plan and timeline 5 Determine the resources needed 6 Determine impacts to your accounting policies and disclosures 96 #AICPAhealth Next steps (cont d) Assessing the impact to your organization is a critical first step. The following activities may help position you to plan an effective implementation: 7 Involve tax resources 8 Identify new information requirements 9 Identify system and process gaps 10 Consider impact to internal controls 11 Develop initial thoughts on transition approach 12 Involve your external auditor throughout the process 97 #AICPAhealth 25-49

50 Key Takeaways Continue educating yourself on the new standard Keep an eye out for AICPA white papers Potential decrease or elimination of provision for bad debts Consider level of disaggregation for patient accounts under portfolio approach Potential impact on third party estimates Significant potential impact on Type A or Life Care CCRCs Consider impact on disclosures 98 #AICPAhealth Thank You Copyright 2016 American Institute of CPAs. All rights reserved. #AICPAhealth 25-50