COMPLEXITIES FOR LONG-TERM CARE

Transcription

1 The New World of Revenue Recognition, ASC 606 COMPLEXITIES FOR LONG-TERM CARE June 27, 2018 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

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3 With You Today JOANN DOYLE, CPA Senior Manager, Assurance BDO USA, LLP JEAN LLOYD, CPA Senior Manager, Assurance BDO USA, LLP

4 COMPLEXITIES FOR LONG-TERM CARE Agenda ASC 606 refresher Accounting for Revenue Under the 5-Step Model Inpatient Other Revenue Streams Rehabilitation Services Other Presentation and Disclosure 4

5 ASC 606 Refresher 5

6 OVERVIEW OF THE 5 STEP MODEL Core principle: Recognize revenue to depict the transfer of 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 6

7 OVERVIEW OF ASC 606 The new revenue standard aims to improve accounting for contracts with customers by: Providing a more robust framework for addressing revenue issues as they arise Increasing comparability across industries and markets Requiring better disclosure Applies to: Contracts with customers Gain/loss recognition of some nonfinancial assets (intangibles and PP&E) All industries, with certain specific transactions excluded: leases, insurance contracts, financial instruments, guarantees, certain nonmonetary exchanges 7

8 OVERVIEW OF ASC 606 Effective Dates: Public entities - First interim period within annual reporting periods beginning after December 15, 2017 (January 1, 2018 for December 31 yearend) Nonpublic entities - Annual reporting periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019 (Year ended December 31, 2019 for December 31 year-end) ASC 606 is required to be applied retrospectively by one of the following methods: Retrospective application to each reporting period presented in accordance with ASC through (i.e., full restatement of comparative figures) Modified retrospective with one or more practical expedients (i.e., completed contracts, use of hindsight for variable consideration, etc.) Cumulative effect of change at adoption date (disclose effect of applying new standard) 8

9 Accounting for Revenue Under the 5-Step Model Long Term Care Facilities 9

10 Long-Term Care Facilities Inpatient Services Step 1 Identify the Contract WHO IS THE CUSTOMER? Patient vs. Payor 10

11 Long-Term Care Facilities Inpatient Services Step 1 Identify the Contract Patient enters into contract with Facility to obtain a bundle of services Admission agreement approved by both parties Rights of both parties identified Payment terms identified Commercial substance Probable that consideration will be collected 11

12 Long-Term Care Facilities Inpatient Services Step 1 Identify the Contract Application of the Portfolio Approach ASC 606 allows for a portfolio approach as a practical expedient to account for patient contracts as a collective group rather than individually Similar characteristics among contracts (or performance obligations) Expectation should be that the effect would not be materially different than an individual contract approach Considerations for portfolios Type of service: inpatient, outpatient, ER, elective, non-elective, etc. Type of payor: insurance contract, co-pay, deductible, governmental, uninsured, charity, etc. May be multiple payors (insurance and co-payment) May also consider size of co-pay or deductible (high deductible vs low deductible plans) Timing of contracts A combination of the above may be considered 12

13 Long-Term Care Facilities Inpatient Services Step 1 Identify the Contract Application of the Portfolio Approach Other factors to consider Sufficiency and homogeneity of data System-wide or facility specific basis May also apply the portfolio approach to similar performance obligations Adding or removing individual contracts to or from a portfolio Contracts can be added or removed as more up to date information becomes available Pending insurance/medicaid Reclassifying co-pays and deductibles after insurance has paid 13

14 Long-Term Care Facilities Inpatient Services Step 1 Identify the Contract Self Pay Balances - Determination if Patient is Committed to Pay Entity may not be able to determine if an uninsured patient is willing and/or able to pay Until that determination is made, a contract with the customer cannot be presumed to exist in the revenue model Determination of ability to pay Past history with patient Qualification under charity care policy Medicaid pending status Historical experience 14

15 Long-Term Care Facilities Inpatient Services Step 2 Identify the Performance Obligation Can the patient benefit from the good or service, either on its own, or with other readily available resources? ( readily available resources are those that the customer possess or is able to obtain from the entity or another third party) Is the promise to transfer a good or service separate from the other promised goods or services in the contract? Indictors may include: The entity does not provide a significant service of integrating the goods and services Yes A good or service does not significantly modify or customize the other goods and services A good or service is not highly dependent or interrelated with the other goods and services No No The good or service is not distinct (these are then grouped into bundles of goods and services that are themselves distinct ) Yes The good or service is distinct 15

16 Long-Term Care Facilities Inpatient Services Step 2 Identify the Performance Obligation At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either: A good or service (or a bundled of goods or services) that is distinct A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer 16

17 Long-Term Care Facilities Inpatient Services Step 2 Identify the Performance Obligation Bundled Services Single Combined Performance Obligation: Room and Board Nursing Care Medication Ancillary Care Other Services Separate and Distinct Performance Obligations: Physician Services Non-medical ancillary services (barber, beauty, etc.) 17

18 Long-Term Care Facilities Inpatient Services Step 2 Identify the Performance Obligation AICPA Revenue Recognition Task Force Implementation Issue #8-10 Performance Obligations Example 3 Performance Obligations Skilled Nursing Facility Services Traditional Skilled Nursing Facility (TSNF) provides nursing home care to Resident A. As part of Resident A s care, TSNF provides on a daily basis, room and board, administration of medications, program activities and on certain days, in-house physical therapy services. The length of Resident A s stay at TSNF is not determinable as the date of discharge is based on patient progress; however the contract with the patient is for a 30 day period, with automatic renewal unless one of the parties provides notice of termination. While the contract is for 30 days, Resident A may terminate the contract on a daily basis with no penalty for termination. The amount billed for the services described are based on a daily rate to be paid by Resident A, or its third-party payor based on the actual days for which care is provided. TSNF considered if the room provided to the resident includes a lease component. That is, TSNF assesses if control of the identified asset (the room) transfers to Resident A for a specified period of time. If a lease component is identified, that component would be accounted for in accordance with FASB ASC 840 or 842, and any non-lease components would be accounted for in accordance with FASB ASC 606. In this case, TSNF concludes there is not a lease of the patient room to the resident. Although Resident A could benefit from some of the individual goods or services (for example, room, meals, drugs) provided as part of the individual plan of care (that is, some of the individual goods or services are capable of being distinct), the nature of TSNF s promise to Resident A is to transfer a combined item (skilled nursing facility services) to which the promised goods or services noted above are inputs. 18

19 Long-Term Care Facilities Inpatient Services Step 2 Identify the Performance Obligation TSNF is responsible for the overall provision of care, which includes identifying goods or services to be provided, including how much skilled nursing care is necessary, which drugs to administer, and how long Resident A will need to stay in the facility and require a room, meals, and supplies. TSNF concludes that each day that Resident A receives services represents a separate contract and performance obligation based on the fact that Resident A has the unilateral right to terminate the contract after each day with no penalty or compensation due. If a contract can be terminated by either party at any time without compensating the other party for the termination (that is, other than paying amounts due as a result of goods or services transferred up to the termination date), the duration of the contract does not extend beyond the goods or services already transferred. That is the case whether or not the contract has a specified contract period. TSNF determined that the daily renewal is an option in which there is not a material right as the price of the renewal is a price consistent with the price for the initial day (that is, there is no discount for the renewal). As a result, TSNF would account for the renewal (that is, each day) when exercised by Resident A. While at TSNF, Resident A requested that TSNF provide her transportation services to her physician s office. Transportation for this type of request is not covered by TSNF in its normal routine of care and is a service the facility provides to its residents requiring an additional fee based on miles driven and the type of vehicle required for the transport. This transportation service for Resident A is capable of being distinct from the standard goods and services provided in the contract and is not a service that is provided in similar increments on a regular basis as part of the care contract with Resident A. Resident A could also purchase this service from other service providers and TSNF does not provide a discount on the transportation services. TSNF concluded that the transportation service provided by TSNF is a separate performance obligation that should be recognized as revenue as the service is provided. Because the patient simultaneously received and consumed the benefits of the services provided by TSNF in accordance with FASB ASC (a), TSNF concluded that the revenue should be recognized over time. 19

20 Long-Term Care Facilities Inpatient Services Step 3 Determine the Transaction Price The 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. This excludes amounts collected on behalf of third parties (e.g., sales taxes etc.). 20

21 Long-Term Care Facilities Inpatient Services Step 3 Determine the Transaction Price Self Pay Patients Commercially Insured Patients Contracted versus non-contracted Third Party Settlements and Risk Sharing 21

22 Long-Term Care Facilities Inpatient Services Step 3 Determine the Transaction Price Self-Pay Patients Price concessions versus impairment losses (i.e. contractual allowance versus bad debt) Implicit price concession versus acceptance of credit risk Factors to consider (if either one is met an implicit concession exists): Customary business practice of not performing a credit assessment prior to providing services Continuing to provide services to a patient (or patient class) even when historical experience indicates that it is not probable full payment will be received When the expectation is to accept a lower amount of consideration, the promised consideration is variable and therefore a price concession exists BAD DEBT EXPENSE.BELOW THE LINE 22

23 Long-Term Care Facilities Inpatient Services Step 3 Determine the Transaction Price Self-Pay Patients - Implicit Price Concessions Transaction price should be appropriately constrained Calculation of price concession should result in an estimate of cash collections at which is probable that the cumulative amount of revenue recognized would not result in a significant revenue reversal Factors to consider Current economic conditions in the local market Historical experience with similar patients or classes of patients Length of collection period Standard practices of offering discounts (uninsured, prompt-pay, etc.) Historical range of collection history (i.e. significant changes in collection patterns from period to period) 23

24 Long-Term Care Facilities Inpatient Services Step 3 Determine the Transaction Price Commercially Insured - Contracted vs Non-Contracted For contracted insurers, consideration will be determined through the contract with the insurer Non-contracted insurers expected reimbursement is variable consideration Recognition would likely be similar to that under current GAAP; however, the estimation process needs to be reviewed to ensure that all elements in the new standard (including applying the constraint) are considered and conclusions documented (see discussion of portfolio or individual approach previously) Expected reimbursement needs to be reassessed every reporting period 24

25 Long-Term Care Facilities Inpatient Services Step 3 Determine the Transaction Price Third Party Settlement Estimates - Contracted vs Non-Contracted Amounts reimbursed under government programs (e.g. Medicare, Medicaid) Subject to complex rules and regulations Subject to retrospective adjustments Can take several years to finalize Revenue from patients covered under government programs will typically have variable element Two methods available: Expected Value and Most Likely Amount Should use best predictor Not intended to be a free choice and should be applied consistently 25

26 Long-Term Care Facilities Inpatient Services Step 3 Determine the Transaction Price Third Party Settlement Estimates Expected Value The sum of the probability weighted amounts for a range of possible outcomes Generally appropriate where there are a large number of contracts with similar characteristics Most Likely Amount The single most likely amount of a possible range of outcomes Generally appropriate when only two possible outcomes However, ASC 606 does not limit the Most Likely Amount to only two possible outcomes May be appropriate for third party settlements even though the outcome is not binary if it leads to a better predictive estimate 26

27 Long-Term Care Facilities Inpatient Services Step 3 Determine the Transaction Price Third Party Settlement Estimates Estimate of variable consideration should consider the following: Historical and current reimbursement information Historical and current experience with the fiscal intermediary Current charges, allowable costs, and patient statistics Method selected (expected value or most likely amount) needs to be applied consistently 27

28 Long-Term Care Facilities Inpatient Services Step 3 Determine the Transaction Price Third Party Settlement Estimates Reassessment of Variable Consideration Differences between original estimate and subsequent revisions are changes in the estimate of variable consideration Accounted for as adjustments to revenue in the period of revision Should disclose these differences in the financial statements Differences not considered to be restatements unless they meet the definition of an error Significant Financing Component Typically not present with third party settlements 28

29 Long-Term Care Facilities Inpatient Services Step 4 Allocate the Transaction Price to the Performance Obligations Not applicable! Allocation is not necessary as there is only one performance obligation. 29

30 Long-Term Care Facilities Inpatient Services Step 5 Recognize Revenue Revenue is recognized as/when an entity satisfies each performance obligation. Satisfaction occurs as/when the entity transfers control (the ability to direct the use of and obtain substantially all of the remaining benefits from an asset, or prevent others from doing so) of the goods or services to the customer. Revenue is recognized either: (i) Over time, when the following criteria are met: The customer simultaneously receives and consumes all of the benefits provided by the entity s as the entity performs; The asset that is created or enhanced is controlled by the customer; The entity s performance does not create an asset with an alternative use to the entity AND there is an enforceable right to payment for performance completed to date. (ii) At a point in time: If the criteria for recognition over time under ASC 606 are not met. 30

31 Long-Term Care Facilities Inpatient Services Step 5 Recognize Revenue Long-Term Care Facilities satisfy the delivery of inpatient healthcare services performance obligation over time Certain ancillary services (barber, beauty) are recognized at a point in time once the service has been rendered Ensure all conditions are met and no future performance obligations exist 31

32 Long-Term Care Facilities Other Revenue Streams Certain Long-Term Care groups have other revenue streams. Rehabilitation Services Respiratory Therapy Occupational Therapy Physical Therapy Staffing Services 32

33 Long-Term Care Facilities Other Revenue Streams Rehabilitation Services: Typically two types of contracts: Contract bill: facility group contracts with a third party health care provider to provide services to their patients at pre-determined rates Direct bill facility group contracts with patient directly to provide services 33

34 Long-Term Care Facilities Other Revenue Streams Staffing Services Customer is typically other non-related facilities who enter into a contract for Qualified Healthcare Professionals (QHPs) Rates are usually set by the hour per position (RN, LPN, CNA) 34

35 Presentation and Disclosures 35

36 Presentation & Disclosure Qualitative and quantitative disclosures include: i. Contracts with customers ii. Significant judgments in the application of the guidance iii. Assets recognized from the costs to obtain or fulfill a contract with a customer iv. Use of practical expedients. 36

37 Contracts with Customers Disaggregation of revenue, including amounts due from third-party payors related to retroactive adjustments Information about an entity s contract assets and contract liabilities (including reconciliations) Information about the entity s performance obligations The entity s remaining performance obligations at the end of the reporting period (not typically applicable for Long-Term Care Facilities) 37

38 Contracts with Customers Disaggregation of revenue An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Payor Type Operating Segment / Service line 38

39 Contracts with Customers Required disclosure information about an entity s contract assets and contract liabilities: Opening and closing balances of receivables, contract assets, and liabilities Reconciliation of significant changes in contract asset or liability balances during the reporting period Amounts due from 3 rd party payors for retroactive adjustments (such as final settlements or appeals) are reported separately on the balance sheet 39

40 Contracts with Customers Information about the entity s performance obligations When are the obligations satisfied? What are the payment terms? What is the nature of the goods and services the entity has promised to transfer? Are there obligations for returns, refunds? Are there any types of warranties and related obligations? Revenue recognized in the reporting period from obligations satisfied, either completely or partially, in a prior period. 40

41 Significant Judgments and Estimates A facility shall disclose the judgments, and changes in judgements, made in applying the guidance, particularly to the following: Determining the timing of satisfaction of performance obligations Determining the transaction price and amounts allocated to performance obligations 41

42 Assets Recognized from the Costs to Obtain or Fulfill a Contract with a Customer A facility shall disclose the following related to capitalized costs to obtain or fulfill a contract: Judgments made in determining the amount of costs incurred to obtain or fulfil a contract with a customer Method used to determine the amortization for each reporting period 42

43 Use of Practical Expedients Facilities will need to disclose its policy for electing either of the following: Existence of significant financing component Incremental costs of obtaining a contract 43

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