FASB Emerging Issues Task Force

Transcription

1 The views in this summary are not Generally Accepted Accounting Principles until a consensus is reached and it is ratified by the Board FASB Emerging Issues Task Force Issue No. 10-F Title: Health Care Entities: Accounting for Legal Costs Associated with Medical Malpractice and Similar Claims Document: Issue Summary No. 1, Supplement No. 2 Date prepared: October 26, 2010 FASB Staff: Hildebrand (ext. 453)/Gonzales (ext. 478) EITF Liaison: Jay Hanson Dates previously discussed: March 18, 2010; July 29, 2010 Previously distributed EITF materials: Issue Summary No. 1 (distributed under Issue 09-H), dated February 22, 2010), Issue Summary No. 1, Supplement No. 1 (distributed under Issue 09-K) Background 1. At the July 29, 2010 EITF meeting, the Task Force reached a consensus-for-exposure that health care entities should be allowed to make a policy election to either expense legal costs related to litigating medical malpractice and similar claims as incurred or accrue an estimate of those costs when the associated claim is incurred. 2. A proposed Update was posted to the FASB website on August 24, 2010, with a comment period that ended October 8, Three comment letters were received on the proposed Update and have previously been distributed to Task Force members and are analyzed below. At the The alternative views presented in this Issue Summary Supplement are for purposes of discussion by the EITF. No individual views are to be presumed to be acceptable or unacceptable applications of Generally Accepted Accounting Principles until the Task Force makes such a determination, exposes it for public comment, and it is ratified by the Board. EITF Issue No. 10-F Issue Summary No. 1, Supplement No. 2, p. 1

2 November 19, 2010 EITF meeting, the Task Force will have the opportunity to consider the comment letters as it redeliberates the consensus-for-exposure. 3. Constituents were specifically requested to provide comments on the following questions: 1. Do you agree that health care entities should be permitted to make an accounting policy election to determine whether to accrue or expense as incurred legal fees associated with malpractice claims? Are there factors unique to the defense of malpractice claims that warrant accrual of legal fees before those fees are incurred? 2. Do you believe the requirements should be different for the treatment of internal and external legal costs? If yes, how should they be different and why? 3. Do you agree that the amendments in this proposed Update should be applied retrospectively? 4. Do you anticipate the need for significant changes in accounting systems or information gathering to implement the provisions of this proposed Update? 5. How much time do you believe would be necessary for you to efficiently implement the provisions of this proposed Update? Summary of Comment Letters 4. In the following paragraphs, the staff has identified and analyzed the more significant comments from the comment letters received. While the staff believes that the Task Force considered a majority of these comments during its initial deliberation of this Issue, the staff recommends that the Task Force consider all of the comments as it redeliberates this Issue. The three comment letters received were submitted by an accounting organization, an individual, and an actuarial organization. 5. The accounting organization (CL#1) was supportive of the policy election because it would eliminate an industry-specific exemption in U.S. GAAP for health care entities. The individual respondent (CL#2) did not object to a policy election, and indicated support for different policies for different types of claims, for example, class action and individual claims. The actuarial organization (CL#3) did not support providing health care entities with a policy election because EITF Issue No. 10-F Issue Summary No. 1, Supplement No. 2, p. 2

3 they believe that the requirement to accrue should be continued because it enhances comparability and provides users with a more complete view of the total cost of medical malpractice liability claims. Summary of User Outreach 6. In addition to the feedback received from the comment letters, the staff reached out to four sell-side analysts that cover health care entities to obtain their views on whether allowing a policy election would be preferable. Those users indicated that they did not support the policy election mainly because it would negatively impact the comparability between entities they were following. Staff Analysis and Recommendation 7. The staff believes that, in light of the feedback received from users, the Task Force should not continue with this Issue at this time. The staff believes that this question should be answered by considering the appropriateness of the policy election for all entities rather than by considering the guidance for health care entities. The staff believes that broadening this question to include all industries is beyond the scope of this Issue and believes that it would require a separate agenda decision. Question 1 Does the Task Force agree with the staff recommendation to remove this Issue from its agenda? 8. If the Task Force decides to continue to deliberate this Issue, then the remaining issues in this Issue Summary Supplement will be addressed. Other Comments 9. Respondents who addressed the question about whether there should be different requirements for internal and external legal costs indicated that they believe that there should not be different requirements. Additionally, users included in the outreach described above who expressed an opinion about this question also did not believe there should be different requirements for internal and external legal costs. If the Task Force decides to continue to EITF Issue No. 10-F Issue Summary No. 1, Supplement No. 2, p. 3

4 deliberate this Issue, the staff recommends that internal and external legal costs be treated the same. 10. Paragraph , as amended by Accounting Standards Update No , Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries, indicates that "The ultimate costs of malpractice claims, which include costs associated with litigating or settling claims, shall be accrued when the incidents that give rise to the claims occur." If the Task Force decides to continue to deliberate this Issue, the staff received an informal comment questioning whether legal costs (as that term is used in the proposed Update) would include all costs to litigate the claims, such as costs associated with expert witnesses. 11. The staff does not believe that it was the Task Force s intention to change existing practices with respect to the types of legal costs a health care entity considers, but, rather, was to provide the same policy election available to other entities with regard to those costs. Therefore, the staff believes that if the Task Force continues with this Issue and affirms its consensus-for-exposure as a consensus, the basis for conclusions in the final Update should clarify that the application of the guidance should not change the nature of the costs that a health care entity considers associated with litigating malpractice and similar claims. Question 2 Does the Task Force agree with the staff recommendation to clarify in the basis for conclusions of the final Update that a health care entity should not change the nature of the costs it considers associated with litigating malpractice and similar claims when applying the guidance in the final Update? Transition 12. The Task Force reached a consensus-for-exposure that the guidance in the proposed Update should be applied retrospectively. One comment letter respondent commented on the transition approach and agreed that the guidance in the proposed Update should be applied retrospectively. EITF Issue No. 10-F Issue Summary No. 1, Supplement No. 2, p. 4

5 Question 3 Does the Task Force wish to affirm its consensus for exposure that the guidance in the proposed Update be applied retrospectively? Effective Date 13. In order to allow entities time to adopt the new guidance, the staff recommends that the new standard be effective for fiscal years beginning after December 15, 2010, and interim periods within those fiscal years. 14. The staff recommends that early adoption be permitted, but only if the entity also early adopts Update thereby avoiding two changes in the measurement of the liability for medical malpractice claims in a relatively short period of time, once as a result of this Issue and then later to gross up the receivable from the insurance entities and the liability to the injured. Question 4 Does the Task Force agree with the staff recommendations for the effective date and to allow early adoption? EITF Issue No. 10-F Issue Summary No. 1, Supplement No. 2, p. 5