HFMA Great Lakes Chapter Accounting and Auditing Update February 16, 2018

Transcription

1 HFMA Great Lakes Chapter Accounting and Auditing Update February 16, 2018

2 Who We Are CAROLYN BIELAWSKI, CPA ASSOCIATE Education: Bachelor of Arts in Accounting, Master of Science in Accounting, Michigan State University Industry qualifications and experience: Carolyn is a member of Plante Moran s healthcare team and has over eight years of healthcare public accounting experience. She spends her time serving free standing hospitals, multi-facility health systems, and senior living organizations, in both the assurance and reimbursement consulting practices. Carolyn is a member of the Healthcare Financial Management Association (HFMA), and the American Institute of Certified Public Accountants (AICPA). 1

3 Who We Are MICHELE McDERMOTT, CPA ASSOCIATE Education: Bachelor of Science in Accounting, Central Michigan University Industry qualifications and experience: Michele is a member of Plante Moran s healthcare team and has over five years of healthcare public accounting experience. She spends her time serving free standing hospitals, multi-facility health systems, and senior living organizations. She is responsible for the overall planning, budgeting, and supervising of assurance engagement teams. Michele is a member of the Healthcare Financial Management Association (HFMA), and the American Institute of Certified Public Accountants (AICPA) 2

4 Who We Are 3

5 Who We Are 4

6 Topics Not-for-profit Financial Statement Presentation Lease Accounting Revenue Recognition Restricted Cash Definition of Business Goodwill Impairment Pension Costs Other Accounting Standards 5

7 Not-for-Profit Financial Statement Project Overview: Goal of the ASU was to improve the financial statement presentation for not-forprofit entities to provide better information to donors, creditors, and other users of the financial statements Results of Phase I issued in August 2016 impacted the following areas: Net asset classes Liquidity and availability of resources Expenses Reporting of investment return Presentation of operating cash flows Effective for years beginning after December 15,

8 Financial Statement Presentation for Not-for-Profit Entities- Changes to Net Assets Classification Current GAAP Unrestricted Temp. Restricted Perm Restricted ASU Disclosures Without Donor Restrictions Amount and purpose of board designations With Donor Restrictions Nature and amount of donor restrictions 7

9 Financial Statement Presentation for Not-for- Profit Entities- Net Asset Presentation Minimum Presentation Required Net assets: Without donor restrictions 1,275 With donor restrictions 7,705 Total net assets $ 8,980 Net assets: Alternative Disaggregation Allowed Without donor restrictions Unrestricted 525 Designated by Board for capital projects 750 1,275 With donor restrictions Time restrictions 3,550 Purpose restrictions 2,155 Endowment funds 2,000 Total net assets $ 8,980 8

10 Financial Statement Presentation for Not-for-Profit Entities - Increased Disclosures surrounding Liquidity and Availability Quantitative information about the availability of a NFP s financial assets at the balance sheet date to meet the cash needs for general expenditures within one year of the balance sheet date Examples include disclosing: The total amount of financial assets Amounts that are not available to meet cash needs within the time horizon because of (1) external limits and (2) internal actions of a governing board The total amount of financial liabilities that are due within that time horizon Can be accomplished through either: Classified balance sheet Segregation and disclosure of assets whose use is limited Additional disclosures in the footnotes 9

11 Financial Statement Presentation for Not-for-Profit Entities - Increased Disclosures surrounding Liquidity and Availability Qualitative information about how the entity manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date Examples of relevant qualitative information Minimum cash balance goals Use of a line of credit Policy for managing excess cash 10

12 Financial Statement Presentation for Not-for-Profit Entities - Increased Disclosures surrounding Liquidity and Availability Source: AICPA Issue Analysis-Liquidity and Availability (Healthcare Entity Considerations) 11

13 Financial Statement Presentation for Not-for-Profit Entities - Increased Disclosures surrounding Liquidity and Availability Source: AICPA Issue Analysis-Liquidity and Availability (Healthcare Entity Considerations) 12

14 Financial Statement Presentation for Not-for-Profit Entities- Information about Expenses Expenses to be shown by both their function (required by current GAAP) and their nature, as well as analysis of expense by both function and nature Face of the Statement of Activities Separate statement Notes to Financial Statements Enhanced disclosures about the methods used to allocate costs between functions Management and general activities are now more clearly defined as items not identifiable with one or more programs, fundraising or membership development activities. 13

15 Financial Statement Presentation for Not-for-Profit Entities- Expense by nature and function one place in the F/S (statements of activities, separate statement, or schedule in notes) *By function is across the columns and by nature is down the left rows Source: AICPA Issue Analysis-Natural and Functional Class Presentation (Healthcare Entity Considerations) 14

16 Financial Statement Presentation for Not-for-Profit Entities- Expense by nature and function one place in the F/S (statements of activities, separate statement, or schedule in notes) *By function is across the columns and by nature is down the left rows Source: AICPA Issue Analysis-Natural and Functional Class Presentation (Healthcare Entity Considerations) 15

17 Financial Statement Presentation for Not-for-Profit Entities - Other Changes Presentation of operating cash flows: Option to present operating cash flows using either direct method or indirect method Removes requirement to present or disclose the indirect method reconciliation when using the direct method of reporting cash flows Investment income: Requires reporting of investment return net of external and direct internal investment expenses No longer requires disclosures of netted expenses Long-lived assets: Requirement to release donor restrictions that are for the acquisition or construction of long-lived assets when the asset is placed-in-service Eliminates the option to release the restriction over time as the asset is depreciated 16

18 Financial Statement Presentation for Not-for-Profit Entities Issues Left for Phase II of the Financial Statements Project Whether or not to require an operating measure Definition of an operating measure Statement of cash flows (realignment of certain items) 17

19 Lease Accounting Overview: Objective of the lease accounting standard was to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet Operating lease vs. financing lease Accounting applied by a lessor will largely be unchanged from current GAAP Effective Dates: Public entities and NFP entities that are conduit debt obligors- periods beginning after December 15, 2018 Other others- periods beginning after December 15, 2019 Transition provisions would apply at beginning of earliest comparative period presented in the year of adoption (modified retrospective application) 18

20 Lease Accounting Scope: Leases less than 12 months will be scoped out Does the contract convey the right to control use of a specified asset? Must be applied to all leases in place upon implementation (nothing is grandfathered ) Related party leases Lease and non-lease components in a contract will need to be separately identified 19

21 Lease Accounting That is explicitly or implicitly specified Lease contracts in scope of ASC 842 An identified asset Supplier has no practical ability to substitute and would not economically benefit from substituting the asset The right to control the use during the lease term Decision-making authority over the use of the asset The ability to obtain substantially all economic benefits from the use of the asset 20

22 Lease Accounting If a lease meets any of the following 5 conditions, it is a financing lease: Transfer of ownership Option to purchase is reasonably certain Lease term is a major part of the economic life Present value of lease payments is substantially all of the fair value Specialized nature 21

23 Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Financing Lease Right-of-use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Operating Lease Right-of-use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments 22

24 Lessee Accounting Overview Recognize for all leases (except short-term leases: or if the lease transfers ownership which should be reported as a financed purchase of that asset): Lease Asset- equal to lease liability Lease Liability present value of payments to be made As payments are made Finance Lease: Reduce lease liability and recognize interest expense Amortize the lease asset over useful life of the asset (depreciation expense) As payments are made Operating Lease: Reduce lease liability by payment Straight-line amortize the lease asset over the life of the lease as lease expense 23

25 Transition: Practical Expedients Organizations may be able to elect practical expedients to ease the burden of adoption No need to reassess whether expired or existing contracts are or contain leases No need to reassess lease classification for any expired or existing leases No need to reassess initial direct cost for existing leases May use hindsight in determining lease terms 24

26 Lease Disclosures and Presentation Matters Lessee Disclosures Description of lease arrangements Amount of lease assets recognized Amount of each finance, operating, shorter-term lease costs Schedule of future lease payments to be made (separately for finance and operating lease liabilities) Lessee Presentation - In the balance sheet or the disclosed in the notes: Finance lease right of use assets and operating lease right of use assets separately from each other and from other assets Finance lease liabilities and operating lease liabilities separately from each other and from other liabilities Lessor Disclosures Description of lease arrangements Amount of revenue recognized from leases 25

27 Lease Accounting What you might be thinking about. How do you start creating an inventory of leases? What would be considered an appropriate capitalization threshold for leases? How granular do you need to get on identifying embedded leases? Will you opt to elect some of the practical expedients available to you under the standard? Will your debt covenants be impacted? Will you need a new lease accounting system? May affect lease vs. buy decisions 26

28 Objectives of New Revenue Recognition Standard 27

29 Effective Date and Implementation Public business entities, certain NFPs, and certain EBPs Effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period All other entities Effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019 Earlier application is permitted as of an annual reporting period beginning after December 15, 2016, and for interim reporting periods either within that reporting period or within the annual reporting period beginning one year after the annual reporting period of application Implementation options Full retrospective Cumulative effect adjustment The cumulative effect of adoption is adjusted to opening retained earnings in the beginning balance sheet of the earliest period presented All periods presented reflect the new accounting standard The cumulative effect of adoption is adjusted to opening retained earnings in the balance sheet covering the date of initial application Only the period covering the date of initial application reflects the new accounting standard 28

30 Five Step Model 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 Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognize revenue when (or as) each performance obligation is satisfied 29

31 What Can You Expect to Change? Where changes will be expected (at a minimum): Presentation of revenue on the statement of operations What will qualify as bad debt expense & how it is presented Disclosures Accounting policies Models/templates used to estimate net accounts receivables What is not impacted by new standard: Information to be filed on cost reports How the Organization will be reimbursed by third-party payors How charity care is recognized or recorded 30

32 Key Concepts under ASC Contract defined as an agreement between two or more parties that creates enforceable rights and obligations Arrangement must meet certain criteria, including that collection is probable, to be within the scope of the standard: Both parties have approved the contract and are committed to perform the respective obligations Each party s rights regarding the goods or services can be identified Payment terms can be identified Contract has commercial substance It is probable that the entity will collect 31

33 Key Concepts under ASC A performance obligation is a promise (explicit or implicit) to transfer to a customer either: A distinct good or service A series of distinct goods or services that are substantially the same and have the same pattern of transfer Performance obligations are identified at contract inception and are determined based on: Contractual terms and customary business practice 32

34 Key Concepts under ASC Distinct Customer can benefit from the good or service on its own or with other readily available resources Promise is separately identifiable from other promises in the contract Factors that indicate promises are separately identifiable No significant service of integrating No significant modification or customization Not highly dependent on or interrelated with other goods or services 33

35 Key Concepts under ASC Portfolio Approach This guidance specifies the accounting for an individual contract with a customer. However, as a practical expedient, an entity may apply this guidance to a portfolio of contracts (or performance obligations) with similar characteristics Not Differ Materially A potential portfolio would be disqualified for this practical expedient if the resulting revenue recognized would differ materially if the guidance were applied to the individual contracts If a portfolio yields materially different results, a provider could consider narrowing the portfolio further to capture more homogeneous contracts Estimates and Assumptions Challenges will arise when a contract doesn t fit perfectly into one portfolio (i.e. Medicaid pending could be SP, Caid, or Charity) More attention must be given when limited information is available (i.e. new service line, new facility, bundled payments, etc.) 34

36 Key Concepts under ASC Transaction price is 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 the following: Consideration paid or payable to a customer Variable consideration (including application of the constraint) Significant financing component 35

37 Key Concepts under ASC Price Concessions Entering into a contract expecting to collect less than the full transaction price may indicate a price concession Price concessions (including implied price concessions) cause consideration to be variable and should not be included in the estimated transaction price If an entity determines it is not probable of collecting the estimated transaction price, a valid contract does not exist (as discussed in Step 1 of the model) When assessing Step 1 (identify the contract), an entity also must consider Step 3 of the model (determine the transaction price) Distinguishing between customer credit risk (i.e., bad debt) and implied price concessions (i.e., reductions of revenue) will require significant judgment 36

38 Key Concepts under ASC Variable Consideration The transaction price is estimated using the method that better predicts the amount to which the company is entitled based on its facts and circumstances (i.e., not a free choice ) The method should be applied consistently throughout the contract and for similar types of contracts Expected value Sum of the probability-weighted Sum of the probability-weighted amounts in range of possible amounts in a range of possible outcomes outcomes Most predictive when the transaction Most predictive when the transaction has large number of possible has a large number of possible outcomes outcomes Can be based on limited number of Can be based on a limited number of discrete outcomes and probabilities discrete outcomes and probabilities Most likely amount The single most likely amount in a range of possible outcomes May The single be appropriate most likely when amount the in a transaction range of possible will produce outcomes only two outcomes May be appropriate when the transaction will produce only two outcomes 37

39 Key Concepts under ASC Revenue is recognized upon satisfaction of a performance obligation by transferring control of a promised good or service to a customer Over time Point in time Control transfers over time if one of three criteria is met; otherwise control transfers at a point in time Customer simultaneously receives and consumes the benefits provided by the entity s performance The entity s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced (think house building) The entity s performance does not create an asset with an alternative use to the entity (see paragraph ), and the entity has an enforceable right to payment for performance completed to date (see paragraph ). 38

40 Key Concepts under ASC A receivable is: An entity s right to consideration that is unconditional, i.e., only the passage of time is required before payment of that consideration is due; this should include amounts that an entity has the right to bill for (even if not yet invoiced) A contract liability is: An entity s obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer 39

41 Consider Statement of Operation Impacts Unrestricted revenues, gains, and other support: Patient service revenue $ 85,156 Premium revenue 11,150 Other revenue 2,601 Net assets released from restrictions for operations 300 Total revenues, gains, and other support 99,207 Operating Expenses: Salary and wages $ 48,521 Supplies and other operating expenses 42,000 Depreciation 4,782 Interest 1,752 Bad debt expense 1,000 Net operating expenses 98,055 40

42 Overview of Disclosure Requirements To disclose sufficient information for users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers Requirements are extensive, both qualitatively & quantitatively Disaggregation of revenue Contract balances Performance obligations Significant judgments and practical expedients Consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. 41

43 ASU Restricted Cash Overview: Requires cash flow statement include changes in restricted cash and cash equivalents Restricted cash and cash equivalents to be included when reconciling beginning of period and end of period cash and equivalents; includes restricted cash that may be included in assets whose is limited Effective dates: Effective for years beginning after December 15, 2017 for public business entities Effective for years beginning after December 15, 2018 for all other entities Early adoption is permitted Retrospective application 42

44 ASU Restricted Cash Balance Sheet Current assets Cash and cash equivalents $ 5,000 $ 8,000 Noncurrent asset Assets whose use is limited: Held by bond trustee 22,000 2,000 Board-designated for PPE 15,000 10,000 Total $42,000 $20,000 Liabilities and Net Assets Bonds payable $22,000 Net assets 20,000 20,000 Total $42,000 $20,000 43

45 ASU Restricted Cash Operating Activities Statement of Cash Flows Investing Activities Financing Activities Proceeds from issuance of bonds 22,000 Net cash provided by financing 22,000 Net increase in cash, cash equivalents and restricted cash Cash, cash equivalents, and restricted cash, beginning Cash, cash equivalents, and restricted cash, ending $22,000 $20,000 42,

46 ASU Restricted Cash-Reconciliation and Nature of Restrictions The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet that sums to amounts shown in the statement of cash flows Cash and cash equivalents $ 5,000 $ 8,000 Restricted cash include in assets whose use is limited 37,000 $12,000 Total cash, cash equivalents & restricted cash sown in the cash flows $42,000 $20,000 Amounts included in restricted cash represent $22,000 in tax-exempt bond proceeds deposited with a trustee that will be used to pay for construction along with $15,000 of other funds that have been board-designated for future property and equipment purchases. 45

47 ASU Clarifying the Definition of a Business Overview: Clarify the definition of a business in ASC 805 in response that the definition of a business is being applied too broadly Provides a framework that gives entities a basis for making reasonable judgements about whether a transaction involves an asset acquisition or business combination Provides a screen for determining when a set is not a business If the screen threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process Effective dates: Effective for years beginning after December 15, 2017 for public business entities and for years beginning after December 15, 2018 for all other entities Early adoption is permitted 46

48 ASU Clarifying the Definition of a Business Significance of the Standard- Asset Acquisition vs. Business Combination Acquirer s transaction costs Purchase of assets Potential for goodwill be recognized Asset Acquisition Capitalized Assets acquired are recognized at price price No Business Combination Expensed Assets acquired are recognized at fair value Yes 47

49 ASU Goodwill Impairment Overview: Simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment test If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting until Effective dates: Effective for years beginning after December 15, 2020 for public business entities and for years beginning after December 15, 2021 for all other entities Early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,

50 ASU Presenting Impact of Pension Costs Overview: Requires employers to report the service cost component of net benefit cost in the same financial statement line item as the salary costs The other components of net benefit cost must be separated from the service cost component and excluded from the income from operations total Effective dates: Effective for years beginning after December 15, 2017 for public business entities and for years beginning after December 15, 2018 for all other entities Early adoption permitted 49

51 Other Accounting Standards Finalized: Clarifying Certain Cash Receipts and Cash Payments (2019) Classification and Measurement of Financial Instruments (2019) Simplifying the Transition to the Equity Method of Accounting (2017) Pending: Revenue Recognition of Grants and Contracts for Not-for-Profit Entities (2018) Simplifying the Balance Sheet Classification of Debt 50