Appendix 26B. Public Health Care Organizations

Transcription

1 Appendix 26B Public Health Care Organizations 1

2 2 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS Recall from the chapter that of the four types of not-for-profit organizations (NPOs), only these two types exist to a significant degree as governmental (public) NPOs: 1. Health care organizations (HCOs). 2. Colleges and universities (C&Us). Recall further that these public NPOs must follow the guidance of the Governmental Accounting Standards Board (GASB). Appendices 26B and 26C discuss the GASB guidance for public HCOs and public C&Us, respectively. In general, the differences between the GASB guidance and the FASB guidance for private HCOs and C&Us are not major. The Status of the AICPA s HCO Audit and Accounting Guide The GASB guidance for public HCOs requires these NPOs to follow the HCO audit and accounting guide issued by the American Institute of Certified Public Accountants (AICPA) except to the extent that it conflicts with or contradicts a GASB pronouncement. Recall that we briefly discussed this audit and accounting guide in the chapter (pages 912 and 928). The Focus of Our Discussion The discussion in the first half of this chapter focuses on the requirements of the specific guide that applies to public HCOs. The discussion in the second half focuses on GASB guidance for public C&Us. Public HCOs Recall from the chapter that the revised HCO Audit and Accounting Guide (which for convenience we hereafter refer to as the 2003 HCO Guide) applies to both private HCOs and public HCOs. Accordingly, our discussion of public HCOs centers around the 2003 HCO Guide, which requires that external financial reporting be on an aggregated basis (consistent with FAS 117) rather than on a disaggregated basis (fund-based reporting). The HCO Accounting and Audit Guide Recall also from the chapter that the 1996 HCO Audit and Accounting Guide reflects the requirements of FAS 116, Accounting for Contributions Received and Contributions Made ; FAS 117, Financial Statements of Not-for-Profit Organizations ; and FAS 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. 1 Unique to this updated guide is that FAS 117 (in paragraph 3) specifically allows this AICPA guide to provide more specific reporting guidance than FAS 117 provides. As mentioned in the chapter (pages 912 and 928), the financial reporting 1 FASB Statement No. 93, Recognition of Depreciation by Not-for-Profit Organizations (issued in 1987), was incorporated into both of the revised audit guides. (Previously, it had been incorporated into only the 1990 HCO audit guide.)

3 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS 3 guidance in the 2003 HCO Audit and Accounting Guide differs from the financial reporting guidance in FAS 117 in several respects. This guide requires fairly uniform financial reporting for all types of HCOs. Thus the financial reporting that occurs under the GASB guidance for public HCOs (automatically nonprofit) closely resembles the financial reporting under the FASB guidance for nonprofit private HCOs in virtually all major respects. Accordingly, we discuss only some additional financial reporting issues that do not exist for private HCOs. Public C&Us GAS 35 is an amendment of GASB Statement No. 34 (discussed in detail in Chapters 24 and 25). Public C&Us must use the broad financial reporting model required for state and local governments required by GAS 34. GAS 34 allows two alternative manners of reporting. Most public C&Us, however, will report using the reporting manner required for Enterprise funds (businesstype activities). This manner of reporting is consistent with the reporting used by private C&Us (as specified by FAS 117). Before discussing public HCOs, we briefly discuss (1) health care costs in general and (2) private managed care organizations as a frame of reference. Health care costs are currently spiralling out of control, having increased at a rate of 8% to 13% yearly over the past decade. In 2003, health care costs equaled 14% of the gross national product (GNP), a 27% increase from 11% in Because of these rapidly increasing costs, employers, health insurers, and the government have demanded changes. The health care industry has responded with efforts to reduce medical care costs by using managed care organizations. I. MANAGED CARE ORGANIZATIONS Types of Managed Care Organizations Managed care organizations can be (1) self-insured health maintenance organizations (HMOs), such as Kaiser Permanente and U.S. Healthcare; (2) preferred provider organizations (PPOs), organized networks of physicians who sell their services to insurance companies; and (3) businesses founded solely to manage health care. In the past decade, managed care evolved from a corporate experiment into the dominant form of health care delivery in the United States. Nationwide, 130 million people (including 71% of insured employees) now belong to some kind of managed care plan. Of these 130 million people, nearly 50% belong to HMOs, which wield the tightest control over costs. The Way Managed Care Organizations Operate Managed care organizations are companies that oversee providers (doctors, clinics, and hospitals) in a manner that causes the providers to seriously evaluate the costs of their services. In essence, a physician s practice behavior is manipulated to make the system more profitable for the managed care organizations. Under this system, most medical care must be pre-approved. Patients and their physicians must jump through many administrative hoops to obtain authorization for discounted fee-for-service care from the managed care organization (often referred to as the gatekeeper ). These systems control costs by managing physicians through efficiently utilizing resources and establishing practice guidelines that save money. As a result, fewer tests and treatments are ordered, and fewer services are sought from specialists. Doctors can be on salary, supplemented by bonuses for cost-saving care. These financial incentives cause physicians to restrict their patients access to medical services in exchange for money. With such an emphasis on controlling costs, the term the bottom line has taken on a new meaning in the private health care industry. Accordingly, the need for accounting and financial reporting

4 4 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS standards of the highest quality is paramount. Controlling health care costs in the public sector is equally important. II. APPLICABILITY OF THE AICPA S 2003 HCO AUDIT AND ACCOUNTING GUIDE As stated earlier, our discussion of the GASB guidance for public HCOs centers on the AICPA s 2003 HCO Guide. This guide applies to the separate financial statements issued by the following categories of health care providers: 1. Private for-profit HCOs. 2. Private nonprofit HCOs. 3. Nonfederal government HCOs (automatically nonprofit), such as state, county, and city hospitals. (The Veterans Administration hospitals are excluded because they are at the federal level.) These three categories include the following types of HCOs: Hospitals (roughly 85% are in categories 2 and 3). Nursing homes (almost all are in category 1). HMOs and other prepaid care providers (almost all are in category 2). Continuing care retirement communities. Home health agencies. Medical group practices. Clinics. Other ambulatory care organizations. Drug and alcohol rehabilitation centers and other rehabilitation facilities. Focus on Public Hospitals In almost all cases, the only nonfederal government HCOs that exist are public hospitals; accordingly, we limit our discussion of public HCOs to public hospitals. A state, county, or city hospital may be (1) part of another organization (called the primary governmental unit) or (2) deemed a component unit of the primary governmental unit. Consequently, the financial statements of a state, county, or city hospital may be presented in one of two manners, depending on whether the HCO is deemed a component unit of the primary governmental unit. The HCO Guide applies to each of these two manners of external reporting of a public HCO s financial statements, which are now described in more detail. As a Part of the Primary Governmental Unit If the public hospital is part of another organization, such as a county hospital of a generalpurpose government or a medical school of a public university, it is (1) accounted for as an Enterprise Fund of the primary governmental unit, and (2) its financial statements are combined with other Enterprise Funds of the primary governmental unit. In addition, many primary governmental units report separately in their annual reports the individual financial statements of their hospitals. As a Component Unit of the Primary Governmental Unit If the public hospital is a component unit of the primary governmental unit, however, its financial statements are either (1) shown in separate columns added to the general-purpose financial statements prepared by the governmental unit (a discrete presentation) or (2) blended in as explained in Chapter 24.

5 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS 5 III. THE FINANCIAL REPORTING MODEL FOR PUBLIC HCOS The financial reporting model for nonprofit HCOs (both public and private), as set forth in the HCO Guide, is based on the commercial accounting model that is, the model used by for-profit businesses. Recall from Chapter 24 that under this model, (1) the measurement focus is on the flow of all economic resources (requires recognizing depreciation) and (2) the accrual basis of accounting is used. Nonprofit HCOs are required to use the same financial reporting model as that used by forprofit HCOs because the activities of nonprofit HCOs are characterized as proprietary-type activities that is, activities that are similar to those often found in the private (for-profit) sector. Thus a city, county, or state hospital of a governmental unit is a proprietary-type activity. (A public utility is another example of a governmental proprietary-type activity.) Recall from Chapter 24 that a focus of proprietary-type activities is maintaining capital not maximizing the excess of revenues over expenses relative to the capital employed. Proprietary-Type Activity Accounting and Financial Reporting Under GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, governmental proprietarytype activities are required to follow (1) all applicable GASB pronouncements and (2) all privatesector standards issued on or before November 30, (except to the extent that those pronouncements conflict with or contradict GASB pronouncements). Furthermore, governmental proprietary-type activities are given the option to follow all FASB standards issued after November 30, 1989 (except to the extent that those pronouncements conflict with or contradict GASB pronouncements). If this option is selected, however, it must be on an all-or-none basis selecting only those standards the NPO wishes to follow is not allowed. Furthermore, GASB Statement No. 29, The Use of Not-for-Profit Accounting and Financial Reporting Principles by Governmental Entities, clarifies GAS 20 by stating that this option pertains only to FASB standards that apply to for-profit entities. Consequently, proprietary-type activities are prohibited from applying FAS 116, 117, and 124, unless the GASB allows them to do so (which the GASB has not done). However, the reporting model for public HCOs set forth in the HCO Guide differs from the reporting model mandated by FAS 117 in only one major respect, which we discuss later in the chapter. IV. FINANCIAL STATEMENTS USED FOR EXTERNAL FINANCIAL REPORTING Because the measurement focus for all HCOs is the flow of all economic resources and because the accrual basis is mandated for all HCOs, the financial statements of all HCOs are quite similar. The slight differences that exist pertain to the descriptive terms (labels) used. These differences are as shown on the following page. 2 This is the date of the revised structural agreement between the FASB and the GASB regarding jurisdiction (as discussed in Chapter 24).

6 6 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS Type of HCO Private for-profit HCO Private not-for-profit HCO Public HCO Appropriate Terminology Statement of income Stockholders equity: Common stock Retained earnings Statement of operations Net assets: Unrestricted Temporarily restricted Permanently restricted Statement of operations Fund balance: Unrestricted Temporarily restricted Permanently restricted or Unrestricted Restricted Because of the use of (1) the economic resources measurement focus (requires recognizing depreciation) and (2) the accrual basis of accounting, for each of the three categories of HCOs, the appropriate financial statements for all public HCOs are as follows: > A balance sheet. > A statement of operations (includes depreciation). > A statement of changes in fund balances. > A statement of cash flows. Recall that the guidance set forth in the HCO Guide (for both private and public HCOs) is based on the use of aggregated financial reporting not disaggregated (fund accounting based) financial reporting. The Balance Sheet The balance sheet for a public hospital includes fund balance categories of either (1) unrestricted, temporarily restricted, and permanently restricted or (2) unrestricted and restricted. Illustration 26B-1 shows a balance sheet for a public hospital using the three categories of fund balance. Review Points for Illustration 26B-1. Note the following: 1. The 2003 HCO Guide states that it is more appropriate to classify assets and liabilities as to current and noncurrent than by liquidity (unclassified). 2. A special classification of assets called assets limited as to use shows those assets not available for day-to-day operations. Internally designated amounts result from board actions. Amounts held by a trustee could result from either a malpractice funding arrangement and/or an indenture agreement. The Statement of Operations Historically, hospitals have been viewed more as businesses than as NPOs because they focus on their viability as a going concern and the maintenance of capital (thus the use of Enterprise Funds when they are part of the primary governmental unit). Accordingly, the operating statement format is similar in most respects (no income tax expense is probably the most significant difference) to an income statement for a for-profit entity. Illustration 26B-2 shows a statement of operations for a public hospital. Review Points for Illustration 26B-2. Note the following, which (other than item 4) apply to all HCOs both private and public: 1. Net patient service charges. This account shows the primary source of revenues for public hospitals. It is always shown net of provisions for contractual and other adjustments but not net of the provision for bad debts, which are classified as part of expenses.

7 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS 7 ILLUSTRATION 26B-1 PUBLIC HCO: BALANCE SHEET Hope City Hospital Balance Sheets As of December 31, 2006 and Assets Current Assets: Cash and cash equivalents $ 3,700,000 $ 3,850,000 Short-term investments ,250,000 4,100,000 Assets limited as to use ,120, ,000 Patient accounts receivable, net of estimated uncollectibles of $2,150,000 in 2006 and $2,050,000 in ,110,000 18,775,000 Supplies and other current assets ,515,000 1,250,000 Total Current Assets $29,695,000 $28,955,000 Assets Limited as to Use: Internally designated $ 3,400,000 $ 2,500,000 Held by trustees ,655,000 2,175,000 $ 6,055,000 $ 4,675,000 Less amount required to meet current obligations (222,000) (230,000) Total Assets Limited as to Use $ 5,833,000 $ 4,445,000 Properties and Other: Property and equipment, net $ 54,482,000 $ 48,350,000 Other assets ,520, ,000 Total Assets $91,530,000 $82,720,000 Total Liabilities and Fund Balance Current Liabilities: Current maturities of long-term debt $ 1,100,000 $ 875,000 Accounts payable and accrued expenses ,050,000 4,605,000 Estimated third-party payor settlements ,750,000 1,225,000 Other current liabilities ,468,000 1,297,000 Total Current Liabilities $10,368,000 $ 8,002,000 Noncurrent Liabilities: Long-term debt, net of current maturities $ 19,750,000 $ 20,850,000 Other liabilities ,202,000 3,568,000 Total Liabilities $34,320,000 $32,420,000 Fund Balance: Unrestricted $ 52,540,000 $ 47,270,000 Temporarily restricted ,310,000 1,220,000 Permanently restricted ,360,000 1,810,000 Total Fund Balance $57,210,000 $50,300,000 Total Liabilities and Fund Balance $91,530,000 $82,720, Other revenues. The illustrated financial statements in the AICPA s HCO guide show a single amount for all types of other revenues. We present revenues in detail, however, to convey the nature of the many types of items that this category includes. 3. Charity care. Charity care represents health care services that are provided but are never expected to result in cash inflows. For this reason, charity care does not qualify for recognition as a receivable or a revenue. Thus patient service revenues do not include any imputed amounts for charity care. The level of charity care provided (based on the HCO s rates, costs, units of service, or other statistical measure) must be disclosed in the notes, along with the HCO s policy for providing charity care. 4. Restriction expirations. The expiration of restrictions (other than those relating to the fixed assets) is reported in the Revenues category using natural account descriptions (such as grant revenue or contributions) they are not reported as a separate line item called net assets released from restrictions which is the reporting manner under FAS 117 for private HCOs. In this illustration, we assumed that all restriction expirations that are reportable as revenues for 2005 and 2006 resulted solely from fulfilling conditions on grants received. Accordingly, the

8 8 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS ILLUSTRATION 26B-2 PUBLIC HCO: STATEMENT OF OPERATIONS Hope City Hospital Statement of Operations for the Years Ended December 31, 2006 and 2005 (excludes amounts pertaining to restricted items) Revenues: Net patient service charges $ 62,576,000 $ 60,755,000 Other revenues: Gift shop, snack bar, cafeteria, and vending machine sales ,770,000 4,390,000 Fees charged for educational programs, lab services, and X-ray technology ,660,000 1,580,000 Fees charged to lawyers, insurance companies, and others for incidental services , ,000 Rental income from the use of the facilities by others , ,000 Parking lot revenues , ,000 Scrap (X-ray film) sales , ,000 Ad valorem (property) taxes ,844,000 18,185,000 Grants from release of restrictions ,000 1,020,000 Contributions (other than of fixed assets) , ,000 Total Revenues $90,600,000 $87,720,000 Expenses: Salaries and benefits $ 43,195,000 $ 42,605,000 Medical supplies and drugs ,072,000 11,685,000 Insurance ,650,000 8,025,000 Other supplies ,114,000 12,430,000 Provision for bad debts ,466,000 4,233,000 Depreciation and amortization ,280,000 3,966,000 Interest ,493,000 1,566,000 Total Expenses $88,270,000 $84,510,000 OPERATING INCOME $ 2,330,000 $ 3,210,000 Nonoperating Income a : Investment income (interest and dividends) , ,000 Net increase (decrease) in the fair value of investments (realized and unrealized changes) (90,000) 170,000 EXCESS OF REVENUES AND NONOPERATING INCOME OVER EXPENSES $ 2,870,000 $ 3,950,000 Contributions fixed assets ,000 Amounts released from restrictions building expansion ,000 Transfers from (to) county ,000,000 (3,000,000) INCREASE IN UNRESTRICTED FUND BALANCE $ 5,270,000 $ 1,050,000 a Public NPOs usually do not have investment trading activities. amounts shown for grant revenues tie directly to the statement of changes in fund balances, which is shown later in Illustration 26B-3. Such a tie-in usually is not possible when either (1) expirations pertain to more than one type of inflow (such as the expiration of both grants and temporary endowments) or (2) unrestricted inflows also occur in the reporting year. 5. Contributions. Public HCOs usually do not receive or rely on significant annual contributions (as do many C&Us and most VHWOs) to sustain their operations. Contributions are recognized when received and are discussed further using the following two categories: a. Contributions of fixed assets. These contributions are reported in the statement of operations but not as either a revenue or a nonoperating income type item because they are nonoperational in character. Instead, they are reported below the excess of revenues and nonoperating income over expenses line in the manner of being a direct credit to the Unrestricted Fund Balance account or one of the Restricted Fund Balance accounts, as appropriate. b. Contributions other than fixed assets. Unrestricted contributions are reported as contribution revenues in the operating statement when received. Restricted contributions are reported

9 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS 9 as a direct credit to one of the Restricted Fund Balance accounts, as appropriate. If and when the restriction expires, the contributed amount is reported as contributions revenues in the operating statement (requires an offsetting debit to the appropriate Restricted Fund Balance account). 6. Operating income or loss. A measure of operations must be reported. The meaning of the term operations must be either (a) apparent from the details reported on the face of the statement or (b) described in the notes. 7. Nonoperating items. The following items are reported separately and below the measure of operations. a. Extraordinary items, the cumulative effect of accounting changes, and discontinued operations. b. Contributions of unrestricted long-lived assets. c. Equity transfers to or from entities that (1) control the HCO, (2) are controlled by the HCO, or (3) are under common control with the HCO. d. Investment income and changes in the fair value of investments. 8. The limited scope of the statement of operations. Items that increase or decrease the Temporarily Restricted Fund Balance account and the Permanently Restricted Fund Balance account are not reported in the statement of operations they are reported in the statement of changes in fund balance. This manner of reporting is the major difference between the guidance set forth in FAS 117 and the AICPA HCO guide. (This different manner of reporting is also required for private HCOs as was shown in the chapter.) Statement of Changes in Fund Balances All changes in the HCO s fund balance are reported in this statement, which serves the same purpose as a statement of changes in stockholders equity for a for-profit corporation. Illustration 26B-3 shows such a statement. ILLUSTRATION 26B-3 PUBLIC HCO: STATEMENT OF CHANGES IN FUND BALANCES Hope City Hospital Statement of Changes in Fund Balances For the Years Ended December 31, 2006 and 2005 TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL Fund Balance, 1/1/ $46,220,000 $ 540,000 $1,000,000 $47,760,000 + Excess of revenues and nonoperating income over expenses ,950,000 3,950,000 + Unexpended research grants received ,300,000 1,300,000 Amounts released from restrictions grants (1,020,000) (1,020,000) + Contribution of equipment , ,000 + Contributions of cash restricted for building expansion , ,000 + Endowment funds received , ,000 Transfers to county (3,000,000) (3,000,000) Fund Balance, 12/31/ $47,270,000 $1,220,000 $1,810,000 $50,300,000 Excess of revenues and nonoperating income over expenses ,870,000 2,870,000 + Unexpended research grants received ,400,000 1,400,000 Amounts released from restrictions grants (510,000) (510,000) + Endowment funds received , ,000 1,150,000 Amounts released from restrictions building expansion ,000 (400,000) 0 + Transfers from county ,000,000 2,000,000 Fund Balance, 12/31/ $52,540,000 $2,310,000 $2,360,000 $57,210,000

10 10 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS Statements of Cash Flow Public HCOs must follow the requirements of GASB Statement No. 9, Reporting Cash Flows of Proprietary Funds and Governmental Entities That Use Proprietary Fund Accounting. Recall from Chapter 25 that this statement s format under GAS 9 differs from the format under FASB Statement No. 95, Statement of Cash Flows (illustrated in Chapter 30) because GAS 9 requires the presentation of two categories of cash flows from financing activities not one category. Furthermore, GAS 9 encourages use of the direct method. A statement of cash flows for a public HCO using the direct method is shown in Illustration 26B-4. Other Required Disclosures A public HCO must not only follow the specific guidance in the AICPA HCO guide but also must comply with all applicable GASB statements, interpretations, and technical bulletins. Examples of additional probable disclosures for public HCOs to comply with GASB pronouncements are as follows: 1. GASB Statement No. 3 (on investments) requires certain disclosures about credit risk and market risks of investments. 2. GASB Statement No. 12 (on postemployment benefits) requires certain disclosures about postemployment benefits provided to employees. 3. GASB Statement No. 27 on pensions requires certain disclosures about pension benefits. A public HCO that elects to follow FASB standards issued after November 30, 1989, that pertain to for-profit entities also must comply with standards such as the following if the HCO had financial instruments and derivative financial instruments: 1. FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments. 2. FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Accounting for Investments GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, requires public HCOs (as well as public C&Us) to: 1. Value substantially all investments at their fair value. (The major investments that are excluded from the scope of GAS 31 are (a) investments in physical plant, (b) investments not having a readily determinable fair value, (c) short-term highly liquid debt instruments, and (d) investments in equity securities accounted for under the equity method.) 2. Report all investment income including changes in the fair value of investments in the current operating statement (or other statement of activities). This means that: a. Interest and dividends on investments are recognized as revenue in the period in which they are earned. b. Gains and losses both realized and unrealized on investments are recognized as gains and losses in the period in which they occur. 3. Make no distinction on the face of the financial statements between realized and unrealized amounts (although such disclosures may be made in the notes to the financial statements). SUMMARY OF KEY POINTS FOR APPENDIX 26B 1. Financial statements for public HCOs are prepared using the GASB guidance that encompasses both (a) the AICPA s HCO Accounting and Audit Guide and (b) GASB pronouncements. 2. FAS 117 allows the AICPA s HCO Guide to provide more specific accounting guidance than that set forth in FAS 117. Thus allowable differences exist between the two documents.

11 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS 11 ILLUSTRATION 26B-4 PUBLIC HCO: STATEMENT OF CASH FLOW Hope City Hospital Statement of Cash Flows (Direct Method) Unrestricted and Restricted Funds For the Years Ended December 31, 2006 and Cash Flows Relating to Operating Activities: Cash received from patients and insurers $ 54,470,000 $ 52,030,000 Cash paid to employees for services (40,890,000) (41,490,000) Cash paid to suppliers for goods and services (32,810,000) (32,570,000) Other cash receipts ,523,000 8,705,000 Net Cash Flows Used in Operating Activities $(10,707,000) $(13,325,000) Cash Flows Relating to Noncapital Assets Financing Activities: Cash received from county relating to ad valorem (property) taxes $ 18,844,000 $ 18,185,000 Cash transfers from (to) county ,000,000 (3,000,000) Cash received from short-term borrowings ,000 Cash repayment of short-term borrowings and interest (of $30,000) (730,000) Cash received from endowment contributions restricted for investment ,150, ,000 Cash received for research grants ,400,000 1,300,000 Cash received from contributors (unrestricted) , ,000 Net Cash Flows Provided by Noncapital Assets Financing Activities $ 23,714,000 $ 17,515,000 Cash Flows Relating to Capital Assets (Property and Equipment) and Related Financing Activities: Cash paid for purchase of property and equipment $ (6,585,000) $ (4,200,000) Cash paid on principal on long-term (mortgage) debt (875,000) (950,000) Cash paid for interest on long-term (mortgage) debt (1,980,000) (1,540,000) Cash received from contributors restricted for building expansion ,000 Cash proceeds from sale of equipment ,000 Net Cash Flows Used in Capital Assets and Related Financing Activities..... $ (9,407,000) $ (6,290,000) Cash Flows Relating to Investing Activities: Cash receipts of interest and dividends on investments $ 670,000 $ 550,000 Cash proceeds from sale of securities ,000 1,690,000 Cash invested in securities (5,860,000) (430,000) Increase in other assets , ,000 Net Cash Flows Provided by (Used in) Investing Activities $ (3,780,000) $ 1,930,000 Net Decrease in Cash and Cash Equivalents $ (180,000) $ (170,000) Cash and Cash Equivalents Beginning of Year ,060,000 4,230,000 Cash and Cash Equivalents End of Year $ 3,880,000 $ 4,060,000 Reconciliation of Cash and Cash Equivalent to the Balance Sheets: Cash and cash equivalents in current assets $ 3,700,000 $ 3,850,000 Cash and cash equivalents in assets limited as to use , ,000 Total Cash and Cash Equivalents $ 3,880,000 $ 4,060,000 Required Supplemental Data for Noncash Investing and Financing Activities: Equipment received from contributor $ 100,000 Schedule to Statement of Cash Flows Reconciliation of Operating Income to Net Cash Flow from Operating Activities Operating Income $ 2,330,000 $ 3,210,000 Ad valorem (property) taxes (18,844,000) (18,185,000) Amounts released from restrictions (510,000) (1,020,000) Contributions (other than fixed assets) (350,000) (220,000) + Depreciation and amortization expense ,280,000 3,966,000 Increase in accounts receivable (335,000) (388,000) Increase in supplies and other current assets , ,000 + Increase in current liabilities ,370, ,000 + Increase in noncurrent other liabilities ,000 23,000 Other (84,000) (961,000) Net Cash Flow from Operating Activities $(10,707,000) $(13,325,000)

12 12 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS 3. Under the AICPA s 1996 HCO guide, all HCOs (public and private) (a) use the economic resources measurements focus, (b) use the accrual basis, and (c) recognize depreciation. 4. All HCOs (public and private) must disclose information concerning their fund balance (or net assets) as to the unrestricted and restricted portions thereof. 5. A major difference between FAS 117 and the AICPA s HCO Guide is that inflows and outflows pertaining to temporarily restricted net assets and permanently restricted net assets are not reported in the operating statement under the AICPA s 1996 HCO guide. 6. The four required financial statements for HCOs are a balance sheet, a statement of operations, a statement of changes in fund balances, and a statement of cash flows (with two categories of cash flows from financing activities [capital and related financing activities and noncapital financing activities]). 7. Investments are reported at fair value. All investment income including changes in the fair value of investments is reported currently in the operating statement below the measure of operations. SELF-STUDY QUESTIONS FOR APPENDIX 26B (Answers are at the end of these questions.) 1. A public HCO Recognizes May Classify Its Net Unrestricted Nonfixed Asset Assets as to Unrestricted, Uses the Accrual Basis Contributions as Revenues Temporarily Restricted, and of Accounting Upon Receipt Permanently Restricted a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No Yes Yes e. No No Yes f. No Yes No g. Yes No No h. No No No 2. A public HCO reports the following items in its operating statement: Repayment of Capital Asset Depreciation Principal on Debt Acquisitions Expense Use the a h choices provided in Question A public HCO reports the following items in its operating statement: Fair Value of Contractual Adjustments for Charitable Care Provided Adjustments Uncollectible Accounts Use the same a h choices provided in Question A public HCO s statement of cash flows includes which of the following classifications? Cash Flows Relating to Capital and Noncapital Capital and Investing Financing Related Financing Activities Activities Activities Use the same a h choices provided in Question 1.

13 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS For nonprofit HCOs, which statement is presented? Statement of Operations Statement of Income Public HCO Private HCO Public HCO Private HCO a. Yes Yes No No b. No No Yes Yes c. Yes No Yes No d. No Yes Yes No e. No Yes No Yes f. No No No Yes g. Yes Yes Yes No h. Yes No No No Answers: 1. a 2. e 3. d 4. d 5. a REVIEW QUESTIONS FOR APPENDIX 26B 1. What special status does FAS 117 give to the AICPA s HCO Audit and Accounting Guide? What are the financial reporting ramifications of this special status? 2. Into what three categories can health care providers be classified? 3. What are the two possible manners of financial reporting for use by public HCOs? 4. How are the financial statements of a public HCO presented when it is not a component unit of the primary governmental unit? 5. How are the financial statements of a public HCO presented when it is a component unit of the primary governmental unit? 6. What are the measurement focus and basis of accounting for public HCOs? 7. What does the term proprietary-type activities mean? 8. What is the focus of accounting for proprietary-type activities? 9. Are proprietary-type activities required to follow the pronouncements of the FASB that apply to for-profit entities? Explain. 10. Are proprietary-type activities required to follow FASB pronouncements that apply to not-forprofit organizations? 11. What financial statements are required for public HCOs? 12. How are amounts pertaining to uncollectible accounts reported in the operating statement of a public HCO? 13. How are amounts pertaining to contractual adjustments reported in the operating statement of a public HCO? 14. How are amounts pertaining to charity care reported in the operating statement of a public HCO? 15. What items must be reported as a line item separate from operations in the operating statement of a public HCO? 16. What is the major format difference between a statement of cash flows for a public HCO and a private HCO?

14 14 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS EXERCISES FOR APPENDIX 26B E 26B-1 Required E 26B-2 Public HCO: Manner of Reporting Transactions Needles County Hospital, a public HCO, had the following transactions: 1. The board of directors designated $1,000,000 to purchase investments whose income will be used for capital improvements. 2. Income from investments in item 1, which was not previously accrued, is received. 3. A benefactor provided funds for building expansion. 4. The funds in item 3 were used to purchase a building in the fiscal period following the period in which the funds were received. 5. An accounting firm prepared the HCO s financial statements free of charge. 6. Investments received were subject to the donor s requirement that the investment income be used to pay for outpatient services. 1. Indicate the manner in which the transactions affect the hospital s financial statements use the following choices: a. Increase in unrestricted revenues. b. Decrease in expenses. c. Increase in temporarily restricted fund balance. d. Increase in permanently restricted fund balance. e. No required reportable event. 2. Would your answers change if the HCO were a private HCO? Public HCO: Classification of Items in the Operating Statement Carbo County s general hospital billed patients $9,500,000 in Information concerning this amount follows: Amount deemed charity care at the time of treatment for which no payment was expected (bills were sent only to inform patients of the value of the services rendered) $2,400,000 Discounts granted to third-party payors pursuant to contracts ,000 Noncharity basis accounts written off because the patients were unable to pay ,000 Cash collections ,600,000 Allowance for uncollectibles deemed needed at 12/31/06 for noncharity basis accounts ,000 Billing waived on Patient 133 who had the wrong leg amputated (this patient was also given a $500,000 cash settlement on the related malpractice claim, which the hospital did not litigate) ,000 Required E 26B-3 Required What amounts should be reported in the specific revenue and expense accounts of the operating statement for 2006 for these items? Public HCO: Reporting Donated Supplies In May 2006, Lemon County s general hospital purchased medicines from Delta Drug Inc. for $3,000. Before payment was made, however, Delta notified the HCO that the invoice was being canceled and the medicines (which had cost Delta $1,000) were being donated. How should the HCO record this donation of medicine? 1. Credit Other Revenues for $3, Credit Other Revenues for $1, Credit Operating Expenses for $3, Credit Operating Expenses for $1, Credit Nonoperating Gains for $3, Credit Nonoperating Gains for $1, Credit Unrestricted Fund Balance. 8. Make a memorandum entry.

15 APPENDIX 26B PUBLIC HEALTH CARE ORGANIZATIONS 15 E 26B-4 Required Public HCO: Reporting Donated Gifts and Bequests In 2006, York City s general hospital had the following transactions: 1. Unrestricted cash gifts of $100, Unrestricted cash bequests of $200, A kidney dialysis machine that cost the manufacturer $600,000 and sells for $900, A $400,000 cash gift that can be used only to operate the kidney dialysis unit. 5. A $500,000 cash gift that cannot be spent but for which the investment income can be used only to operate the kidney dialysis unit. 6. The HCO incurred $166,000 of costs to operate the kidney dialysis unit. 7. The HCO earned $7,000 of interest on the investment in item 5. How should these amounts be reported in the 2006 financial statements? PROBLEM FOR APPENDIX 26B P 26B-1 Public HCO: Preparing a Statement of Operations Candu County s hospital had the following items for the fiscal year ended 6/30/06: Patient revenues, gross $26,600,000 Contractual adjustments granted on amounts billed to patients ,200,000 Charity care provided, valued using standard rates for services provided ,600,000 Provision for uncollectible accounts ,000 Property tax revenues (all deemed collectible) ,800,000 Gift shop and cafeteria sales ,400,000 Interest income earned on investments for which the use of the income is: Unrestricted ,000 Temporarily restricted (100% spent in 2006 in accordance with donor stipulations) ,000 Permanently restricted ,000 Fund balance released from restrictions (includes the preceding $220,000 interest income item and $700,000 from grants) ,000 Expenses, excluding depreciation ,100,000 Depreciation expense ,500,000 Term endowment received in ,000,000 Annual subsidy received from the Candu County General Fund ,000,000 Interest expense on hospital bonds ,000 Change (favorable) in net unrealized gains (losses) on available-for-sale securities (none of these securities involve specific assets that must be held in perpetuity) ,000 Required Prepare the operating statement for 2006.