AUDIT AND ACCOUNTING UPDATE

Transcription

1 AUDIT AND ACCOUNTING UPDATE HFMA FL Regional Education Session - Clearwater November 11, 2016

2 Presenter Carlos Hernandez Southeast Assurance Leader 2

3 Agenda Topic Recent accounting developments Presentation of financial statements for not-for-profit entities Minutes Revenue recognition 20 Other recent developments 10 20

4 RECENT ACCOUNTING DEVELOPMENTS

5 PRESENTATION OF FINANCIAL STATEMENTS FOR NOT-FOR-PROFIT ENTITIES

6 ASU Presentation of Financial Statements of Not-for-Profit Entities Final issued on August 19, First technical correction issued October 27, 2016 (comments due November 11, 2016)

7 ASU Presentation of Financial Statements of Not-for-Profit Entities Overarching outcomes: Simplify presentation on face of financial statements Increase disclosures

8 ASU: Presentation of Financial Statements of Not-for-Profit Entities Current GAAP Unrestricted Temp. Restricted Perm. Restricted Revised GAAP Without Donor Restrictions With Donor Restrictions Disclosures Amount, purpose, and type of board designations (new) Nature and amount of donor restrictions

9 ASU Presentation of Financial Statements of Not-for-Profit Entities Net assets Classification with and without donor restrictions Disclosures or board designations Underwater endowments: Revised net asset classification Enhanced disclosures Placed in service option and elimination of over-time option for expirations of capital restrictions

10 ASU Presentation of Financial Statements of Not-for-Profit Entities Expense reporting Report expenses, either on the face of the financial statements or in the noted, by: Function Natural classification Required to provide qualitative disclosures about methods used to allocate costs amount program and support functions

11 ASU Presentation of Financial Statements of Not-for-Profit Entities Investment Returns Net presentation of investment expenses against investment return on the face of the statement of activities (limited to external and direct expenses) Disclosures of investment expenses no longer required

12 ASU Presentation of Financial Statements of Not-for-Profit Entities Liquidity qualitative disclosures Liquid available resources and how manage liquidity risk to meet general expenditures Ability of current financial assets at the balance sheet date to meet cash needs for general expenditures Classified balance sheet presentation may assist with accomplishing some of these disclosures

13 ASU Presentation of Financial Statements of Not-for-Profit Entities Statement of Cash Flows: Free choice between the direct method and the indirect method Indirect reconciliation no longer required for direct method

14 ASU Presentation of Financial Statements of Not-for-Profit Entities Effective date for calendar year-ends Permitted (Apply regular transition provisions) Required (Apply comparatively, except expense analysis and liquidity disclosures) 2018 (Fiscal years beginning after 12/15/17)

15 Technical Correction to Update No , Endowment Reporting

16 STATUS OF ONGOING MAJOR PROJECTS REVENUE RECOGNITION

17 Final standards recently issued - Revenue ASU , Revenue from Contracts with Customers (Topic 606) ASU , Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ASU , Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ASU , Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ASU , Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates and Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update)

18 ASU : 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 Identify the contract with a customer (Step 1) Identify the separate performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to the separate performance obligations (Step 4) Recognize revenue when (or as) each performance obligation is satisfied (Step 5)

19 ASU : New effective dates Effective date for calendar year-ends Permitted Required (Public companies and certain NFP) Required (Private companies)

20 ASU : Revenue from contracts with customers FASB and IASB established Joint Transition Resource Group (TRG) to address implementation issues identified and determine if additional standard setting is required AICPA has formed sixteen revenue recognition industry task forces (RRTFs) (including health care) to develop non-authoritative industry-specific implementation guidance Guidance developed will be incorporated in an Accounting Guide on Revenue Recognition, with a chapter for each industry Issues identified by the RRTFs are reviewed by AICPA s Revenue Recognition Working Group (RRWG) and Financial Reporting Executive Committee (FinREC)

21 Revenue recognition health care implementation issues # Type Implementation Issue 1a -b General Application to self-pay patient accounts 1c General Consideration of implicit price concessions 2 General Application of portfolio approach 3 CCRC Performance obligations and revenue recognition under Type A or life care contracts 4 CCRC Performance obligations for future services / use of facilities 5 General Consideration of significant financing component 6 General Disclosure requirements 7 General Accounting for contract costs 8 General Estimation of variable consideration for third-party reimbursement

22 Revenue recognition health care implementation issues Implementation Issue 1 - Application to self-pay patient accounts Considerations Step 1 of the five-step model: Does an enforceable contract exist? Is patient committed to perform? Is collection probable? Identify the contract with a customer (Step 1)

23 ASU : Revenue from contracts with customers Implementation Issue 1a - Consideration of implicit price concessions Considerations Step 3 of the five-step model: Do uncollectible amounts (including copays and deductibles for insured patients) constitute implicit price concessions? How to account for subsequent changes in estimate of transaction price? What constitutes an impairment loss/bad debt? Identify the contract with a customer (Step 1) Identify the separate performance obligations in the contract (Step 2) Determine the transaction price (Step 3)

24 Draft health care revenue recognition implementation issue 8-1: application to self-pay patient accounts Implementation topics addressed: Determining if an enforceable contract between a health care entity and a patient exists Determining if a patient is committed to perform his or her obligations and if it is probable that the entity will collect substantially all of the consideration to which it expects to be entitled Determining if amounts that are not probable of collection from patients with self-pay balances constitute implicit price concessions Determining how to account for subsequent changes in the estimate of the transaction price Determining what constitutes an impairment loss or bad debt

25 Draft health care revenue recognition implementation issue 8-1: application to self-pay patient accounts Key take-aways: Medicaid pending accounts health care provider may use its historical experience to estimate which pending accounts will ultimately become Medicaid, charity and bad debt Health care provider may consider the following to determine if it intends to provide an implicit price concession Entity has a customary business practice of not performing a credit assessment prior to providing services Entity continues to provide services to a patient (or patient class) even when historical experience indicates collection of substantially all of the billed amount is not probable Changes in estimate of transaction price account for as adjustments to revenue, unless there is a patient-specific event known to the entity that suggests that patient no longer has intent and ability to pay

26 Draft health care revenue recognition implementation issue 8-1: application to self-pay patient accounts Illustration of application to a hospital - assumptions: Self-pay patient charges: $10,000 Expected collections based on historical experience: 10% ($1,000) Provider has a self-pay discount policy that provides a 30% discount off charges to uninsured patients Current Accounting Accounting under Issue 8-1 Charges $10,000 Discount (3,000) NPSR before bad debt 7,000 Bad debt (6,000) NPSR $1,000 Charges $10,000 Explicit price concession (3,000) Implicit price concession (6,000) NPSR $1,000 Bad debt $ 0 No change in reporting of charity care

27 ASU : Revenue from contracts with customers Implementation Issue 2- Application of portfolio approach Considerations How could a portfolio approach be applied (e.g., type of service, payor, patient responsibility)? Implications of not using portfolio approach Use of historical experience to estimate contractual adjustments, self-pay discounts and implicit price concessions Identify the contract with a customer (Step 1) Identify the separate performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to the separate performance obligations (Step 4) Recognize revenue when (or as) each performance obligation is satisfied (Step 5)

28 Draft health care revenue recognition implementation issue 8-2: application of portfolio approach Implementation topics addressed: Application of the portfolio approach to contracts with patients Impact of electing not to apply the portfolio approach Use of historical experience to estimate contractual adjustments from third-party payors, governmental programs, self-pay discounts and implicit price concessions

29 Draft health care revenue recognition implementation issue 8-2: application of portfolio approach Key take-aways: Contracts must have similar characteristics in order to be grouped together. Potential considerations in grouping contracts include: Type of service (inpatient, outpatient, skilled nursing, elective, non-elective, etc.) Type of payor (insurance/managed care, governmental payors, uninsured Type of patient responsibility (uninsured self-pay, co-pay/deductible after insurance, high deductible/coinsurance Whether contracts are entered into at or near the same time Portfolio data must be sufficient and homogeneous Portfolio approach may be appropriate for some, but not all, of a health care provider s patient population If portfolio approach is not applied, new revenue model would be applied on a contract-by-contract basis

30 ASU : Revenue from contracts with customers Implementation Issue 3- Performance obligations and revenue recognition under Type A or life care contracts 4 - Performance obligations for future services / use of facilities Considerations How could performance obligations under life care contracts be identified and satisfied? How could monthly/period fees and nonrefundable entrance fees be considered in establishing transaction price? How could transaction price be allocated to performance obligations? How could the calculation of the obligation to provide future services / use of facilities be affected by the new revenue recognition model?

31 Revenue recognition health care implementation issues Implementation Issue 5 - Consideration of significant financing component 6 - Disclosure requirements Considerations How do health care organizations assess whether a significant financing component exists in determining transaction price? What disclosures would be required for revenue for health care entities? Determination of whether there are one or multiple categories of revenue to report and if there are operating segments or service lines Recommended additional disclosures relating to third-party settlement balances and activity

32 Revenue recognition health care implementation issues Implementation Issue 7 - Accounting for contract costs 8 - Estimation of variable consideration for third-party reimbursement Considerations How could health care entities account for costs of acquiring and fulfilling contracts? How could variable consideration be estimated using either the expected value or most likely methods described in the ASU? How to apply constraint on variable consideration to third-party reimbursement?

33 Revenue recognition issue review process 1. Identified by industry RRTF 2. Submitted to AICPA RRWG 3. Submitted to FinREC 4. Submitted to FASB TRG (if applicable) 5. Technical corrections submitted to FASB TRG 6. Exposed on AICPA website 7. Resubmitted to RRWG 8. Resubmitted to FinREC 9. Finalized for Accounting Guide on Revenue Recognition

34 Revenue Recognition Task Force C/AccountingFinancialReporting/Reven uerecognition/pages/rrtf- HealthCare.aspx

35 Revenue Recognition Task Force

36 Revenue Recognition Task Force

37 Revenue Recognition Task Force

38 RECENT DEVELOPMENTS OTHER RECENT DEVELOPMENTS

39 ASU : Lease (Topic 842) Final ASU issued in February of 2016 Effective for fiscal years beginning after Public business entities: fiscal years beginning after 12/15/18 and interim periods within those years A NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or over-the-counter market is considered a public entity under the proposed ASU All other entities: fiscal years beginning after 12/15/19 and interim periods in fiscal years beginning after 12/15/20 Early adoption is permitted

40 ASU : Leases (Topic 842) Current* U.S. GAAP (IFRS) IASB FASB Capital (Finance) Leases Lessee Model Approaches All leases (more than 12 months) are recognized on the lessee s balance sheet Type A Type A Operating Leases Type A Type B All leases are the same. * Current is prior to adoption of ASU Not all leases are the same. Classification is based on existing U.S. GAAP/IFRS.

41 ASU : Leases (Topic 842) Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Lease asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Type B Right-of-use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments

42 ASU : Leases (Topic 842) 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 Conversations with lenders to negotiate covenants Discussions with your board and other key stakeholders

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