REVENUE RECOGNITION ASU /8/2016. CPAs & ADVISORS ACCOUNTING AND AUDITING UPDATE FOR ARKANSAS HFMA

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1 CPAs & ADVISORS experience clarity // ACCOUNTING AND AUDITING UPDATE FOR ARKANSAS HFMA Tracy Young, CPA Partner, BKD Health Care Group Little Rock REVENUE RECOGNITION ASU

2 FASB/IASB ORIGINAL REVENUE RECOGNITION TIMELINE EFFECTIVE DATE DELAYED ONE YEAR 2

3 WHO S IMPACTED All entities that enter into contracts with customers Public, private, not-for-profit Regardless of industry Contracts with customers, except Lease contracts Insurance contracts Financial instruments Certain guarantees (other than product warranties) Certain nonmonetary exchanges ASU SUMMARY Principle based approach versus rule based Core principle is to 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 Guidance specifies the accounting for an individual contract with a customer; however, as a practical expedient, an entity may apply guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements would not differ materially from applying guidance to individual contracts 3

4 FIVE-STEP MODEL Step 1 Step 2 Step 3 Step 4 Step 5 Identify contract(s) with customer Identify performance obligations Determine transaction price Allocate transaction price to performance obligations Recognize revenue when (or as) performance obligation is satisfied TRANSITION APPROACHES Transition Approach Date of Cumulative Effect Adjustment Full Retrospective Restate for all contracts Apply to all contracts January 1, 2017 Retrospective Using One or More Practical Expedients Cumulative Effect at Date of Adoption Restate for all contracts except contracts covered by practical expedients No contracts restated; reported based on legacy guidance Apply to all contracts January 1, 2017 Apply to all contracts January 1,

5 AICPA REVENUE RECOGNITION TASK FORCES Aerospace and Defense Airlines Asset Management Broker-Dealers Construction Contractors Depository Institutions Gaming Health Care Hospitality Insurance Not-for-profit Oil and Gas Power and Utility Software Telecommunications Timeshare 10// experience clarity 5

6 AICPA REVENUE RECOGNITION TASK FORCES Develop a new Accounting Guide on Revenue Recognition Guide to provide helpful hints and Illustrative examples on how to apply the standard Guidance will not be prescriptive but instead intended to be a resource Full implementation issues will be posted for comment after review from the overall Revenue Recognition Working Group and FinREC List of issues by industry is posted on the AICPA website HEALTH CARE ISSUES IDENTIFIED Revenue recognition for self-pay patients Application of Steps 1 and 3 Application of the portfolio approach Identifying the performance obligation and recognition of refundable and non-refundable entrance fees for CCRC s Significant Financing Components Disclosure requirements as compared to ASU Contract acquisition costs Determination of the transaction price as it relates to thirdparty estimates 6

7 HEALTH CARE IMPLEMENTATION ISSUES SELF-PAY REVENUE Current practice Gross charges, net of self-pay discounts recorded as contractual adjustments Bad debt expense recorded and presented separately as a reduction to net patient service revenue if an entity does not assess collectability New guidance Record revenue at amount entity expects to be entitled to Bad debt expense presented as operating expense Use of judgment in determining what constitutes bad debt versus implicit price concessions No change in charity care guidance STEP 1 IDENTIFY CONTRACT(S) WITH A CUSTOMER 7

8 COLLECTIBILITY Collectibility will be explicit threshold that must be assessed before applying revenue recognition model to contract. Entity must evaluate customer credit risk & conclude that it is probable that it will collect amount of consideration due in exchange for goods or services Assessment is based on both customer s ability & intent to pay as amounts become due Difficult for health care entities to assess CONSIDERATION RECEIVED BEFORE STEP 1 IS MET 8

9 HEALTH CARE IMPLEMENTATION ISSUES STEP 3 OF THE MODEL Transaction price is the amount of consideration an entity expects to be entitled to Transaction price reflects the effects of the following: Variable consideration Significant financing component Consideration payable to a customer Noncash consideration Consideration is variable if explicitly stated, or if Customer has valid expectation arising from entity s customary business practices that entity will accept an amount that is less than the stated contract price Other facts and circumstances indicate that the entity s intention is to offer a price concession to the customer HEALTH CARE IMPLEMENTATION ISSUES PORTFOLIO APPROACH Entities can apply the standard or aspects of it to a portfolio of contracts or performance obligations with similar characteristics (i.e., portfolio approach) Entities must reasonably expect that the financial statement effect of using the portfolio approach will not differ materially from applying the standard on a contract-by-contract basis Key considerations How to apply a portfolio approach How to establish portfolios How to determine effect would not differ materially 9

10 HEALTH CARE IMPLEMENTATION ISSUES PORTFOLIO APPROACH (CONT.) Portfolio approach may be applied to all aspects of the model or only to certain steps If establishing portfolios, an entity will need to use judgment to determine the size, composition and number of portfolios Health care entities may consider segregating by payor class, type of service and other categories An entity also will need to consider materiality and documentation requirements IDENTIFYING THE CONTRACT EXAMPLE Background Hospital provides services to uninsured (self pay) patient in emergency room Hospital has not previously provided medical services to this patient After providing services to patient, Hospital obtains information about the patient s ability and intention to pay Hospital designates the patient to a customer class The standard rate for the services provided are $10,000 Hospital expects to accept a lower amount of consideration for the services provided as such the promised consideration is variable Based on historical cash collections from this customer class and other relevant information about the patient, Hospital determines that it expects to be entitled to $1,000 10

11 IDENTIFYING THE CONTRACT - EXAMPLE Evaluation On the basis of its collection history from patients in this customer class, Hospital concludes it is probable it will collect $1,000 (estimate of variable consideration) Therefore, the contract with the patient has met the requirements of Step 1 and will be accounted for under the model This example is from ASC to 105 SELF PAY REVENUE RECOGNITION ISSUES HC entities need to consider specific facts and circumstances to determine if an enforceable contract exists Currently, there is no concept of cash basis in the standard Medicaid pending status patients Use of historical information Use of portfolio approach Explicit versus Implicit price concessions Day 1 versus Day 2 accounting Where do subsequent changes to variable consideration get reported? Practical implementation 11

12 CONTINUING CARE RETIREMENT COMMUNITIES CCRC CONSIDERATIONS Type A, or Lifecare Contract Includes housing and healthcare services at little or no increase in the monthly fee; these contracts typically provide for the highest entrance and monthly fees as the CCRC absorbs the healthcare risk Type B, or Modified Lifecare Contract Limits the amount of healthcare services that may be accessed without an increase in the monthly fee, e.g., resident may be allowed to access healthcare services at little or no increase in the monthly fee for 60 days, after which the resident would be required to pay a higher fee for healthcare services Type C, or Fee-for-service Contract Requires resident to pay market rates for healthcare services; these contracts typically provide for the lowest entrance and monthly fees as the resident absorbs the healthcare risk Type D, or Rental Contract No entrance fee requirement 12

13 CCRC SPECIFIC CONSIDERATIONS The AICPA Healthcare Revenue Recognition Task Force is analyzing the following primary issues as they relate to CCRCs Accounting for monthly / periodic fees and nonrefundable entrance fees under the different contract types (A, B, C, D), including portfolio versus individual contract approach to revenue recognition Significant financing component considerations for refundable and nonrefundable entrance fees Obligation to provide future services and use of facilities Contract acquisition costs CCRC SPECIFIC CONSIDERATIONS Entrance Fees Determining the performance obligations Allocating the transaction price to multiple performance obligations Consideration of the variable consideration for maintenance fees Satisfying the performance obligation Amortization over the pattern of transfer of goods and services Consideration of Significant Financing component 13

14 OTHER MATTERS DISCLOSURES Disclosures to enable the users to understand the nature, amount, timing and uncertainty of revenue and cash flows from customers An entity shall disaggregate revenue recognized from contracts with customers depending on the nature of that revenue Aggregated amount of the transaction price allocated to performance obligations that are unsatisfied, including methods, inputs and assumptions Timing and satisfaction of performance obligations Entity to disclose both qualitative and quantitative information 14

15 DISCLOSURES Per ASC entities to disclose: Revenue from contracts with customers, including the disaggregation of revenue into appropriate categories Contract balances, including the opening and closing balances of receivables, contract assets and contract liabilities Revenue recognized in the reporting period that was included in the contract liability at the beginning of the period Revenue recognized in the reporting period from performance obligations satisfied Significant judgments and changes in judgments, made in applying the requirements to those contracts FINANCIAL REPORTING 15

16 CONTRACT ACQUISITION COSTS Incremental costs of obtaining a contract Costs the entity incurs that would have not been incurred if the contract was not obtained - Recognize as an asset if the entity to expects to recover those costs Costs that would have been incurred regardless of whether the contract was obtained Expense as incurred Costs to fulfill a contract Costs related directly to a contract (i.e. costs of renewal of an existing contract) Recognize as an asset if costs are expected to be recovered Direct labor, Direct materials, costs charged under a contract CONTRACT ACQUISITION COSTS Costs to fulfill a contract Costs to be expensed as incurred Administrative and General costs unless explicitly chargeable to the customer under the contract Costs of wasted materials, labor or other resources to fulfill the contract Costs related to past performance Costs for which an entity cannot distinguish whether it relates to a performance obligation Practical Expedient recognize as an expense when incurred if the amortization period of the asset is one year or less 16

17 CONTRACT ACQUISITION COSTS Amortization and Impairment Asset should be amortized consistent with the pattern of transfer of the customer services Entity shall update the amortization for significant changes in the pattern of transfer Asset should be evaluated for impairment THIRD PARTY SETTLEMENTS Determination of the transaction price for third party settlements Medicare/Medicaid cost report settlements RAC accruals Risk adjustments for Prepaid Health plans Other Use method which entity expects to better predict the amount of consideration to which it will be entitled Use of Expected Value (probability-weighted amount) Use of Most Likely Amount (single most likely amount in a range of possible considerations) 17

18 STEP 3 OF THE MODEL (CONTINUED) Expected value Sum of the probability-weighted amounts in a range of possible outcomes Most predictive when the transaction has a large number of possible outcomes Most likely amount The single most likely amount in a range of possible outcomes Most predictive when the transaction has two possible outcomes Required to evaluate whether to constrain amounts of variable consideration included in transaction price Objective of the constraint include variable consideration in the transaction price only to the extent it is probable that a significant revenue reversal will not occur Estimates must be updated each reporting period (Proposed ASU with comment date of October 4) 36// experience clarity 18

19 37// experience clarity PRINCIPAL VS. AGENT (ASU ) When another entity is involved in providing goods or services to a customer, an entity that is a principalobtains control of: (a) a good or another asset from the other party that it then transfers to the customer; (b) a right to a service that will be performed by another party, which gives the entity the ability to direct that party to provide the service to the customer on the entity s behalf; or (c) a good or service from the other party that it combines with other goods or services to provide the specified good or service to the customer. 38// experience clarity 19

20 PRINCIPAL VS. AGENT EXAMPLE Entity sells discount vouchers allowing customers discounts at various restaurants. Entity gets 30% of voucher price when sold to a customer and is not obligated to purchase vouchers in advance. Entity assists in resolving customer complaints, but restaurants are responsible for fulfilling obligations Entity concludes that it is an agent Entity records revenue for 30% commission only and not the amount paid by the customer for the voucher. 39// experience clarity PERFORMANCE OBLIGATIONS/LICENSING -ASU An entity s promise to grant a customer a license to intellectual property that has significant standalone functionality (e.g., the ability to process a transaction, perform a function or task, or be played or aired) does not include supporting or maintaining that intellectual property during the license period. REVENUE RECOGNIZED AT POINT IN TIME 2. An entity s promise to grant a customer a license to symbolic intellectual property (that is, intellectual property that does not have significant standalone functionality) includes supporting or maintaining that intellectual property during the license period. REVENUE RECOGNIZED OVER TIME. 40// experience clarity 20

21 NOT-FOR-PROFIT FINANCIAL REPORTING PROJECT (ASU ) 41// experience clarity PERCEIVED WEAKNESSES IN NFP REPORTING Complexity with three net asset classes Confusion regarding statement of cash flows Donors, creditors & other users Difficulty in assessing an entity s liquidity Inconsistent reporting of expenses No clear operating measure defined 21

22 43 44// experience clarity 22

23 45// experience clarity 46// experience clarity 23

24 CURRENT STATEMENT OF FINANCIAL POSITION Not-for-Profit Entity A Statements of Financial Position Years Ended June 30, 20X5 and 20X4 (in thousands) 20X5 20X4 Net Assets Unrestricted $ 115,000 $ 104,000 Temporarily Restricted (Note B) 24,000 25,000 Permanently Restricted (Note C) 142, ,000 Total net assets 282, , PROPOSED STATEMENT OF FINANCIAL POSITION Not-for-Profit Entity A Statements of Financial Position Years Ended June 30, 20X5 and 20X4 (in thousands) 20X5 20X4 Net Assets Without donor restrictions (Note DDD) $ 93,000 $ 74,000 With donor restrictions (Note B) 193, ,000 Total net assets 286, ,

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26 51 REPORTING OF EXPENSES All NFPs required to report operating expenses by nature & function Options: include in SOA, separate statement or notes Require investment expenses to be netted with investment return Netting limited to external & direct internal expenses 26

27 REPORTING OF EXPENSES Example: F U N C T I O N N A T U R E * Example obtained from FASB EFFECTIVE DATE/TRANSITION-PRIVATE CO. New Lease Accounting Standard 54 27

28 55 NEW VS. EXISTING GUIDANCE: LEASE CLASSIFICATION The lack of explicit bright lines will increase the level of judgment required when classifying a lease particularly for certain highly structured transactions. However, the basis for conclusions acknowledges that one reasonable approach would be to use the bright-line tests Transition reliefs permit an entity to avoid reassessment of lease classification for existing leases at the day of adoption & avoid reassessment of initial direct costs previously capitalized (some of which may no longer qualify for capitalization) 56 28

29 COMPARISON OF LESSEE ACCOUNTING MODELS 57 EFFECT ON BALANCE SHEET 58 29

30 EFFECT ON BALANCE SHEET 59 EFFECT ON INCOME STATEMENT 60 30

31 NEW VS. EXISTING GUIDANCE: SALE-LEASEBACK TRANSACTIONS 61 SALE & LEASEBACK - IMPLICATIONS 62 31

32 63 64// experience clarity 32

33 OVERVIEW OF ASU // experience clarity OVERVIEW OF ASU (CONTINUED) 66// experience clarity 33

34 OVERVIEW OF ASU (CONTINUED) 67// experience clarity 68// experience clarity 34

35 ASU HEALTHCARE IMPACT 69// experience clarity ASU HEALTHCARE IMPACT 70// experience clarity 35

36 OVERVIEW OF ASU (CONTINUED) Effective Date & Transition For public business entities for fiscal years, including interim periods within, beginning after December 15, 2017 For all other entities (including NFPs & EBPs) for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019 Early adoption of certain amendments is permitted, including within an interim period Cumulative-effect adjustment to the BS as of the beginning of the fiscal year of adoption 71// experience clarity 72// experience clarity 36

37 OVERVIEW OF ASU // experience clarity AUDIT STANDARD/GAAP DIFFERENCES 74// experience clarity 37

38 ASU EFFECTIVE DATE 75// experience clarity 76// experience clarity 38

39 ASU // experience clarity ASU // experience clarity 39

40 79// experience clarity ASU FAIR VALUE MEASUREMENT (TOPIC 820): DISCLOSURES FOR INVESTMENTS IN CERTAIN ENTITIES THAT CALCULATE NET ASSET VALUE PER SHARE (OR ITS EQUIVALENT) Issued- April 2015 Summary Remove requirement to categorize within fair value hierarchy all investments for which fair value is measured using net asset value per share practical expedient Remove requirement to make certain disclosures for all investments eligible to be measured at fair value using net asset value per share practical expedient (those disclosures are limited to investments for which entity has elected to measure fair value) 80// experience clarity 40

41 ASU FAIR VALUE MEASUREMENT (TOPIC 820): DISCLOSURES FOR INVESTMENTS IN CERTAIN ENTITIES THAT CALCULATE NET ASSET VALUE PER SHARE (OR ITS EQUIVALENT) Effective Date & Transition Effective for public business entities for fiscal years beginning after December 15, 2015, & interim periods within those fiscal years For all other entities, effective for fiscal years beginning after December 15, 2016, & interim periods within those years Earlier application is permitted Amendments should be applied retrospectively Resources A&A Memo: Not available (remove for external presentations) BKD Thoughtware : FASB Simplifies Fair Value Disclosures 81// experience clarity ASU DEFINED BENEFIT PENSION PLANS (TOPIC 960), DEFINED CONTRIBUTION PENSION PLANS (TOPIC 962), HEALTH AND WELFARE BENEFIT PLANS (TOPIC 965): (PART I) FULLY BENEFIT-RESPONSIVE INVESTMENT CONTRACTS, (PART II) PLAN INVESTMENT DISCLOSURES, (PART III) MEASUREMENT DATE PRACTICAL EXPEDIENT Issued-July 2015 Summary Part I -Fully benefit-responsive Investment Contracts: FBICs would be measured, presented & disclosed only at contract value Part II -Investment Plan Disclosures: (a) Eliminates requirements to disclose (i) individual investments that represent 5 percent or more of net assets available for benefits and (ii) net appreciation or depreciation for investments by general type for both participant-directed investments & nonparticipant-directed investments 82// experience clarity 41

42 ASU DEFINED BENEFIT PENSION PLANS (TOPIC 960), DEFINED CONTRIBUTION PENSION PLANS (TOPIC 962), HEALTH AND WELFARE BENEFIT PLANS (TOPIC 965): (PART I) FULLY BENEFIT-RESPONSIVE INVESTMENT CONTRACTS, (PART II) PLAN INVESTMENT DISCLOSURES, (PART III) MEASUREMENT DATE PRACTICAL EXPEDIENT Effective Date & Transition All amendments are effective for fiscal years beginning after December 15, 2015 Earlier application is permitted Part I & II amendments should be applied retrospectively; Part III amendments should be applied prospectively Resources A&A Memo: Not available (remove for external presentations) BKD Thoughtware : Pending 83// experience clarity 84// experience clarity 42

43 ASU // experience clarity ASU // experience clarity 43

44 ASU // experience clarity 88// experience clarity 44

45 ASU // experience clarity 90// experience clarity 45

46 DONATED PERSONNEL SERVICES (ASU ) Requires recording of all services received from personnel of an affiliate. Services are to be recorded at the cost recorded by the affiliate providing the services (or at fair value of the services if recording at cost overstates the value of the services. Does not apply where recipient entity is charged for the services (at least the direct costs or fair value) HCEs should report expense of services received and an equity transfer below the line for the contribution of the services Effective for years beginning after 6/15/14. 91// experience clarity DISCONTINUED OPERATIONS ASU Reduces the number of disposals that will qualify for discontinued operations treatment New guidance: disposal of a component or group of components that represents a strategic shift that has a major effect on an entity s operations New disclosures for individually material disposals that do NOT qualify for DO treatment. Effective for // experience clarity 46

47 FEDERAL SINGLE AUDIT REQUIREMENT CHANGES Several OMB Circulars replaced with Uniform Guidance in Title 2 CFR Part 200 Single audit threshold increased to $750,000 Major program threshold increased to $750,000 Hospital cost principles not superseded by Uniform Guidance Effective for years beginning after December 31, // experience clarity THANK YOU FOR MORE INFORMATION// For a complete list of our offices and subsidiaries, visit bkd.com or contact: Tracy Young, CPA Partner BKD Health Care Group pyoung@bkd.com 47