Accounting and Finance Reporting Changes: What Your Healthcare Organization Needs to Know Tyler Bernier, CPA August 16, 2013
Agenda • EHR Incentives • RAC and Similar Accruals • Clarified Audit Standards • FASB Update • Bad debt expense and allowance disclosures • Malpractice claims • Charity care disclosure • Other Updates
Agenda • GASB Update • GASB codification and clarification • Reporting entity and component units • Financial reporting – Deferred inflows and outflows and net position • Pension plans – employer accounting • Other GASB updates • Proposed Changes • Lease Accounting – FASB/IASB • Single Audit
Electronic Health Records • Incentives from both Medicare and Medicaid • Current guidance • AICPA - preliminary conclusion • SEC - additional guidance • White Paperby Health Care Expert Panel/HFMA
Electronic Health Records • Medicare reimbursement • Demonstrate meaningful use • 90 consecutive days – year 1 • Within a Federal Fiscal Year • Maintain meaningful use and attest annually • Medicaid reimbursement • Varies by state • Idaho: attestation similar to Medicare – 50/40/10 payments • Some states reimburse before meeting meaningful use
Electronic Health Records • AICPA/HFMA white paper • Not approved by SEC, FASB, GASB, others • “Reasonable assurance” • Cliff or ratable method • Recommended revenue location: • In performance indicator • Separate from patient revenue • Generally, operating
Electronic Health Records • SEC Method/Model • “Gain contingency” - delays recognition • Relevant Accounting Considerations • Gain contingency • Revenue recognition • Matching
Electronic Health Records • Medicare EHR reimbursement treatment method • Revenue recognition method - PPS • Record upon attestation • Record upon receipt – more conservative approach • Record when final calculation available – most conservative • Recommend - other operating
Electronic Health Records • Medicare EHR reimbursement treatment method • Revenue recognition method - CAH • Same as PPS, except option to defer revenue • Based on matching concept • Defer based on avg. lives of related EHR equipment or 4 years • Recommend - other operating • Other Considerations
Electronic Health Records • Impact • Potential for change if authoritative guidance is released • If not deferred for CAH, operating revenues will be overstated in year 1 and understated in future years based on recognition of expenses • Without authoritative guidance, disclosure of policy is most important aspect
Electronic Health Records • DISCLAIMER • There is no authoritative guidance • Treatment will need to be analyzed on an individual entity basis • Result should reasonably follow authoritative guidance framework
RAC and Similar Accruals HFMA Principles and Practices (P&P) Board Issue Analysis, “Accounting for RAC Audit Adjustments and Exposures” • Accounting for Recovery Audit Contractor (RAC) audit settlement liabilities • Potentially relates to other audit contractors – MIC, MAC, ZPIC, etc.
RAC and Similar Accruals • Applicable situations • Notification of RAC audit adjustments • Notification of a RAC audit adjustment recovery • Billing and/or payment for services that are potentially non-reimbursable • Concerned about RAC audit adjustments not yet identified
RAC and Similar Accruals • RAC adjustments represent persuasive evidence that criteria for revenue recognition have not been met • Liability and contractual adjustment in period of notification • Consideration of causes of adjustments and whether they apply to other accounts within the scope (look-back period) of RAC audits • Consider potentially successful appeals
RAC and Similar Accruals • RAC adjustments • For positive adjustments (receivables), • Only recorded once finalized through CMS • Gain contingency accounting • Changes in estimates recorded in current period • Apply historical take-backs to future claims, unless process is corrected
RAC and Similar Accruals • Reserves should be based on specific identification • Don’t duplicate reserves already made • General reserves should not be recorded • SOP 00-1 – “Auditing Health Care Third Party Reserve and Related Receivables” • Other entity experience only applies if operating and billing procedures are identical
RAC and Similar Accruals • Impacts • Review reserves to determine if they are specifically identified and calculated or general in nature • Identify root cause of RAC adjustments and whether they apply to existing balances • Potential identification of billing/documentation issues resulting in self-reporting • Discuss with legal counsel, if discovered
Clarified Audit Standards • Combination, re-organization, and clarification of existing standards • Some new matters incorporated • Why does this matter to you as the provider?
Clarified Audit Standards • Group Audit Requirements • Definition of group audit • Identification of components • Impacts on You • Increased communications • Potentially lowered testing scopes • Potentially expanded scope of testing
Clarified Audit Standards • Updated audit opinions • Additional paragraphs • Titles included • “Unmodified” vs. “unqualified”
Health Care Accounting Standards Update FASB Updates
Bad Debts and Allowance ASU 2011-07 – “Presentation and Disclosure of Patient Service Revenue, Provision of Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities”
Bad Debts and Allowance Affects HC entities that “recognize significant amounts of patient service revenue at the time services are rendered even though the entities do not assess a patient’s ability to pay.” Effective for first annual period ending after December 15, 2012
Bad Debts and Allowance • Provision for bad debts associated with patient service revenue will be transferred from an operating expense to a deduction from net patient service revenue. • Other bad debts - still an operating expense • Presented on a separate line after NPSR
Bad Debts and Allowance Example Disclosure from Accounting Standards Update:
Bad Debts and Allowance • Disclosures • Policy for assessing the timing and amount of uncollectible patient service revenue recognized as bad debts by major payor source of revenue • Major payor sources shall be identified by the entity - consistent with how the entity manages its business • Example per standard: Third-party payors Self-pay Total all payors
Bad Debts and Allowance • Disclosures • Qualitative and quantitative information about significant changes in the allowance for doubtful accounts • Significant changes in estimates and underlying assumptions • The amount of self-pay write offs • The amount of third-party payor write offs • Other unusual transactions impacting the allowance for doubtful accounts
Bad Debts and Allowance • Disclosures • Two examples in the ASU provide a detailed example of expected disclosures • Includes charity care and/or uninsured discount policies • Also includes allowance for doubtful accounts in third-party payor accounts
Bad Debts and Allowance • Impacts on certain financial ratios: Improved Operating and Total Margins Days Cash on Hand **Net Days in Accounts Receivable (depending on which net revenue is used for calculation) • More transparency in allowance disclosures
Malpractice Claims ASU 2010-24 – “Health Care Entities (Topic 954) Presentation of Insurance Claims and Related Insurance Recoveries” • Requires that insurable risk claims be recorded gross - insurance liability and insurance recovery receivable, if applicable • Record based on contingency accounting • Analyze receivable for collectibility
Malpractice Claims • Types of Insurance • Malpractice Insurance • Workers’ Compensation • Health/Dental Insurance • Types of Coverage • Claims made policies • Excess insurance coverage • Umbrella coverage, etc.
Malpractice Claims • Impacts: • Limited, if any expected impact on income statement • Potential additional liabilities on balance sheet • Meaning of recording a liability? • Legal counsel • Insurance agency • Board • If material, disclosures necessary • Fiscal years beginning after December 15, 2010
Goodwill and Intangibles Impairment ASU 2010-28 – “Intangibles --- Goodwill and Other” ASU 2011-08 – “Intangibles—Goodwill and Other (Topic 350) Testing Goodwill for Impairment” ASU 2012-02 – “Intangibles – Goodwill and Other”
Goodwill and Intangibles Impairment ASU 2010-28 – Goodwill Impairment If goodwill has zero or negative carrying amounts, step 1 may be skipped as fair value is expected to exceed $0. Entity is still required to complete Step 2 of impairment test if it is more likely than not that a goodwill impairment exists. Effective – beginning after 12/15/11
Goodwill and Intangibles Impairment ASU 2011-08 – Goodwill Impairment • Optional pre-step 1 assessment • Qualitative assessment of goodwill • More-likely-than-not impairment analysis • Several factors listed in ASU to consider for analysis • Effective - beginning after 12/15/11
Goodwill and Intangibles Impairment ASU 2012-02 – Intangibles Impairment Relates to indefinite-lived intangible assets, other than goodwill Qualitative assessment of goodwill, similar to new goodwill analysis – more-likely-than-not Effective - beginning after 9/15/12
Goodwill and Intangibles Impairment • Impacts: • Qualitative analysis will need to be documented, rather than a quantitative calculation (step 1 analysis) • Should reduce time in assessment of goodwill and other intangible assets • Optional steps in impairment assessment
Business Combinations ASU 2010-29 – “Business Combinations” Expanded disclosure requirements for business combinations for public entities Effective for first annual period beginning on or after December 15, 2010
Business Combinations • Disclosure of revenue and earnings of the combined entity as though the combination occurred at the beginning of the comparable period reported (i.e. beginning of PY). • Supplemental pro forma disclosure requirements • Material, nonrecurring pro form adjustments
Fair Value ASU 2011-04 – “Fair Value Measurement” Additional explanation of FV measurement and expanded disclosures Effective for fiscal years beginning after December 15, 2011
Fair Value • Expanded Disclosures for Public Entities • Information about transfers between Level 1 and 2 • Sensitivity of Level 3 measurements • To changes in unobservable inputs • To interrelationships between unobservable inputs • Level of FV for items not measured at FV, but required to be disclosed at FV
Cash Flows – Donated Financial Assets ASU 2012-05 – “Statement of Cash Flows” Donated financial assets should be reported as operating inflows or, if restricted, financing activities. Effective for fiscal years beginning after June 15, 2013. Early adoption permitted.
Joint & Several Obligations ASU 2013-04 – “Liabilities” Reporting and disclosure requirements in certain joint and several liability arrangements. Effective for fiscal years beginning after December 15, 2013 (2014 for nonpublic). Early adoption allowed.
Joint & Several Obligations • Entity involved in joint & several liability arrangement which is fixed at the reporting date • Record amount entity agreed to in its arrangement with co-obligors. • Plus, any additional amounts expected to be paid on behalf of co-obligors. • Disclosures of the nature and amounts of total obligation and other related information.
Contributed Services ASU 2013-06 – “Not-for-Profit Entities” Related to contributed serviced from an affiliate organization. Effective prospectively for periods beginning after June 15, 2014. Early adoption permitted.
Contributed Services • Recorded at cost of affiliate • If considered to over or understate value, an election may be made for fair value. • For HC entities, should be reported as an “equity transfer” (increase in net assets) • Related to services received from NFP and FP affiliates
Health Care Accounting Standards Update GASB Updates
GASB Codification GASB Statement No. 62 – “Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements” • Effective for periods beginning after December 15, 2011.
GASB Codification • The objective is to incorporate into the GASB statements, pronouncements issued on or before November 30, 1989 • FASB Statements and Interpretations • Accounting Principal Board Opinions • Accounting Research Bulletins of the AICPA • Removes GASB 20 accounting policy option
GASB Codification • Additional Topics Considered • Includes sections related to a variety of transactions • From FASB and AICPA literature • Applies to governmental activities, business-type activities, proprietary funds, but not all governmental funds • 27 broad transactions were included • Has not addressed: • Governmental combinations – GASBS 69 • Fair value measurement – exposure draft anticipated