FASB ASU NO REVENUE FROM CONTRACTS WITH CUSTOMERS (TOPIC 606)

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1 CPAs & ADVISORS experience clarity // REVENUE RECOGNITION FOR HEALTH CARE PROVIDERS Kimberly McKay, CPA Managing Partner BKD. LLP - Houston FASB ASU NO REVENUE FROM CONTRACTS WITH CUSTOMERS (TOPIC 606) Objective: To develop a single, principle-based revenue standard for U.S. GAAP & IFRS 2 1

2 OVERVIEW A new, principle-based revenue standard Affects all FASB reporting entities Joint project with IASB to clarify principles for revenue recognition & create a common revenue standard Better comparability of revenue recognition across industries Improved disclosure requirements 3 FASB/IASB REVENUE RECOGNITION TIMELINE December Discussion Paper November Revised Exposure Draft May 2014 Final Standard September Beginning of Revenue Project June Initial Exposure Draft January 1st Effective Date for Public Entities 2

3 EFFECTIVE DATE 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,

4 SCOPE All Entities that enter into contracts with customers Public, private, not for profit Regardless of industry All contracts with customers except Lease contracts Insurance contracts Financial instruments Guarantees Non-monetary exchanges in the same line of business to facilitate sales to customers Excludes Contributions Collaborative agreements 7 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 8 4

5 PRACTICAL EXPEDIENTS Guidance specifies the accounting is for an individual contract with a customer, however, as a practical expedient, an entity may apply guidance to a portfolio of contracts if it does not differ materially from applying the guidance on an individual basis 9 REVENUE RECOGNITION PROCESS Identify Contract with a Customer Identify Performance Obligations Determine the Transaction Price Allocate the Transaction Price Recognize Revenue When/As a Performance Obligation is Satisfied 10 5

6 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 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 6

7 REVENUE RECOGNITION GUIDE IMPLEMENTATION PROCESS AICPA RRTF TRG RRWG FASB Staff Fin REC 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 Bundled payments and risk sharing arrangements 7

8 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 8

9 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 No such thing as cash basis in the model CONSIDERATION RECEIVED BEFORE STEP 1 IS MET 9

10 STEP 3 IDENTIFYING THE TRANSACTION PRICE 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 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 10

11 PORTFOLIO APPROACH 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 11

12 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 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 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 series guidance Allocating the transaction price to the single 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 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 i.e major payor type, geographical considerations, timing of goods and services 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 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 14

15 DISCLOSURES OPEN QUESTION Does ASC 606 require a health care entity to disclose the amount of the implicit and explicit price concessions granted to customers? 29 FINANCIAL REPORTING 15

16 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) THIRD PARTY SETTLEMENTS 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 16

17 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 17

18 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 OTHER FACTORS TO CONSIDER New standard s effect on revenue and trends in key performance indicators Effect on internal control over financial reporting Effect on tax filings Approach taken by industry and other peers Cost of implementation Business effect Magnitude of required changes 18

19 OTHER FACTORS TO CONSIDER Availability of personnel with necessary skills Ability of systems and processes to provide comparative historical results Access to data and underlying support for new accounting estimates Timely conclusion of unresolved interpretations Entity s overall ability to manage potentially significant change across the organization WHAT TO DO NOW Read the standard & related resources Identify a champion or task force to study the new standard Identify revenue streams Document processes, analysis & conclusion for each revenue stream & collaborate with others in your industry Determine changes needed Educate audit committees & boards 38 19

20 THANK YOU FOR MORE INFORMATION // For a complete list of our offices and subsidiaries, visit bkd.com or contact: Kimberly McKay Managing Partner Houston, Texas kmckay@bkd.com 20