Accounting and Auditing Standards Update

Accounting and Auditing Standards Update June 2, 2011 Jennifer Smith, CPA Scott Yandle, CPA

Objectives for Session Educate and inform you about the new accounting pronouncements that will be in effect for the current year or will be in effect in the future. Discuss the impact the new accounting pronouncements will have on financial reporting.

Charity Care • EITF Issue No.09-L issued August, 2010 • Effective for fiscal years beginning after 12/15/10 with early adoption permitted • Required to use cost as the measurement basis for charity care disclosures, based on the direct and indirect costs of providing the charity care • Required to disclose a description of method used to calculate cost • Required to disclose reimbursements received intended to compensate for providing charity care

GASB Codification P80 (formerly GASB 20) • If your Governmental Hospital has elected to apply GASB Codification P80 (formerly GASB 20) then: - The Hospital should apply all FASB Statements and Interpretations issued after November 30, 1989, except for those that CONFLICTwith or CONTRADICT GASB pronouncements - http://www.gasb.org/tech/index.html

ASC 805Business Combination(Formerly SFAS 164)

Not-for-Profit – Mergers and Acquisitions • Effective Date • Effective for mergers occurring on or after December 15, 2009 • Effective for acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2009.

Not-for-Profit – Mergers and Acquisitions • Acquisition “is a combination in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses (The formation of a new entity is not a significant factor in assessing whether one entity has obtained control over another.)”’

Not-for-Profit – Mergers and Acquisitions • Acquisition • Similar to prior guidance (formerly SFAS 141R), with exceptions made due to unique NFP considerations • Goodwill recognized only if substantial portion of revenues are supported from exchange transactions (business-type entity) • Donor relationships not recognized as separate intangible • No recognition of conditional promises to give unless criteria under Topic 958 (formerly SFAS 116) met at acquisition • No amortization of goodwill – evaluate each year for impairment • Applies to goodwill previously recorded as well – beginning with 12/31/10 year end entities

Not-for-Profit – Mergers and Acquisitions • Acquisition Examples • Physician practice • Purchase price of $1,000,000 and company value (net of identifiable assets and liabilities assumed) of $850,000 = goodwill of $150,000 • Goodwill of $150,000 tested annually for impairment • Foundation • Purchase price of $1,000,000 and company value (net of identifiable assets and liabilities assumed) of $850,000 • No goodwill recorded – difference recorded through statement of activities in year of acquisition

Not-for-Profit – Mergers and Acquisitions • Merger “is a transaction or other event in which the governing bodies of two or more not-for-profit entities cede control of those entities to create a new not-for-profit entity. If the participating entities retain shared control of the new entity, they have not ceded control. To qualify as a new entity, the combined entity must have a newly formed governing body; a new entity often is, but need not be, a new legal entity.”

Not-for-Profit – Mergers and Acquisitions • Merger • Governing bodies cede control to create new NFP • Likely to be rare – neither predecessor entity can retain control – e.g. current board/trustee representation, etc. ceases • Use “Carryover Method” • Similar to pooling of interests except start from merger date (the new entities initial reporting date) vs. beginning of period • No Goodwill

Non-controlling Interests in Consolidated Financial Statements (ASC 810‐10‐65‐1, Transition Related to FASB Statement No. 160)

Minority Interest • Requires all entities to report non-controlling (minority) interests in subsidiaries in the same way—as equity in the consolidated financial statements. • For not-for-profit entities, this is effective for fiscal years and interim periods within those fiscal years, beginning on or after December15, 2009.

Minority Interest • This statement shall be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, except for the presentation and disclosure requirements. • The presentation and disclosure requirements shall be applied retrospectively for all periods presented.

Minority Interest Hospital A Consolidated Statement of Financial Position As of December 31

Minority Interest Hospital A Consolidated Statement of Operations and Other Changes in Unrestricted Net Assets As of December 31

Minority Interest Hospital A Notes to Consolidated Financial Statements Changes in Consolidated Unrestricted Net Assets Attributable to Hospital A and Transfers (to) from the Noncontrolling Interest Year End December 31

ASU No. 2010-24: Healthcare Entities (Topic 954)Presentation of Insurance Claims and Related Insurance Recoveries

ASU No. 2010-24 • Effective for fiscal years beginning on or after December 15, 2010 • Early application is permitted

ASU No. 2010-24 • Applies to all healthcare entities • Issued to address diversity in practice of accounting for medical malpractice and similar claims and their related insurance recoveries • Gross versus net

ASU No. 2010-24 • Clarifies that healthcare entities should not net insurance recoveries against related claim liabilities • Entity should evaluate its exposure to losses arising from claims and recognize a liability apart from any anticipated insurance recoveries. • If the entity is indemnified for losses, it should recognize a receivable at the same time, measured on the same basis as the related liability, subject to the need for a valuation allowance for uncollectible amounts.

ASU No. 2010-28: Intangibles – Goodwill and Other(Topic 350)

ASU No. 2010-28 • For nonpublic entities, this is effective for periods beginning after December 15, 2011. Nonpublic entities may elect to adopt the provisions for periods beginning after December 15, 2010. • Affects entities that have recognized goodwill and have one or more reporting units whose carrying value is zero or negative

ASU No. 2010-28 • Goodwill impairment testing involves 2 steps (no change) • Step 1: Assess whether the carrying amount of goodwill exceeds fair value • Step 2: Determine whether goodwill has been impaired, and if so, calculate the amount of impairment

ASU No. 2010-28 • Entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists • In determining “more likely than not,” the entity should consider whether there are any adverse qualitative factors indicating impairment

ASU No. 2010-28 • Examples of when impairment might be more likely than not: • A significant adverse change in legal factors or in the business climate • An adverse action or assessment by a regulator • Unanticipated competition • A loss of key personnel

ASU No. 2010-28 • Examples of when impairment might be more likely than not (continued): • A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of • The testing for recoverability of a significant asset group within a reporting unit

ASU No. 2010-28 • Examples of when impairment might be more likely than not (continued): • Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit

Intangible Assets(GASB Codification Section 1400 -formerly GASB 51)

GASB Codification 1400 (formerly GASB 51) Accounting and Financial Reporting for Intangible Assets • Intangible assets lack physical substance, is non-financial in nature and has an initial useful life extending beyond a single reporting period. • These assets include easements, computer software, water rights, timber rights, patents, and trade marks • Goodwill is explicitly excluded from the scope of GASB Codification 1400.

Accounting and Financial Reporting for Derivative Instruments(GASB Codification D40 – formerly GASB 53)

GASB Codification D40 (formerly GASB No. 53) – Accounting and Financial Reporting for Derivative Instruments • Effective– for fiscal periods beginning after June 15, 2009. (June 30, 2010 and afterwards) Earlier application is encouraged. • Reason– to enhance the usefulness and comparability of derivative instrument information reported in the financial statements. • Key – have to evaluate effectiveness of hedge to determine how entry is recorded.

GASB Codification D40 (formerly GASB No. 53) – Accounting and Financial Reporting for Derivative Instruments Effective hedge: • Balance Sheet entry, no longer adjust unrealized gain/loss through “Nonoperating Revenues (Expenses)” • Unrealized gain/loss gets classified as a “Deferred inflow/outflow of resources” on the Balance Sheet. Ineffective hedge: • Adjust unrealized gain/loss through “Nonoperating Revenues (Expenses)” with offsetting asset or liability recorded on the Balance Sheet

GASB Codification D40 (formerly GASB No. 53) – Accounting and Financial Reporting for Derivative Instruments Termination of Hedge Accounting: • Hedging derivative instrument fails to meet the criteria for effectiveness (previous slides) • Likelihood that a hedged expected transaction will occur is no longer probable • Hedged asset or liability is sold or retired • Hedging derivative instrument is terminated • Current refunding or advanced refunding resulting in the defeasance of the hedged debt • Hedged expected transaction occurs

GASB Codification D40 (formerly GASB No. 53) – Accounting and Financial Reporting for Derivative Instruments Examples of Terminating Events: • Converting variable rate bonds to fixed rate bonds (variable rate bonds had swap agreement) • Swap became an asset, and unrealized gain (loss) flows through investment income • Issuance of new bonds which refund existing bonds outstanding (bonds refunded had swap agreement) • At the time of refunding, the fair market value of the swap is included in the calculation of the gain/loss on refunding and is amortized • Going forward, the unrealized gain/loss flows through nonoperating revenues (expenses)

OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans (GASB Codification P50 and Pe5 – formerly GASB 57)

GASB Codification P50 and Pe5 (formerly GASB 57) – Agent Employer Plans • Introduces alternative measurement method for post retirement benefits other than pensions (formerly GASB 45 plans) • Would save employers participating in agent multi employer plans or plans having less than 100 participants on cost of having actuarial valuations annually and coinciding with balance sheet date

Effective Date • Effective for periods beginning after June 15, 2011. Earlier implementation is encouraged.

The Financial Reporting Entity: An Amendment of GASB Statements No. 14 and No. 34 (GASB 61)

GASB 61 • Effective for periods beginning after June 15, 2012. Earlier application is encouraged. • Will result in restatement in the initial year of application • Improves guidance for including, presenting, and disclosing information about component units and equity interest transactions

GASB 61 • Amends Financial Accountability Concept • Must be fiscally dependent on primary government (same as before) • A financial benefit or burden relationship must also be present for the component unit to be included

GASB 61 • If any one of these conditions exists, then there is a financial benefit or burden relationship: • Primary government is legally entitled to or can otherwise access the organization’s resources • Primary government is obligated in some manner for the debt of the organization

GASB 61 • Financial Benefit or Burden Relationship (continued) – • Primary government is legally obligated or has otherwise assumed the obligation to finance the deficits of, or provide financial support to, the organization

GASB 61 • Amends Major Component Unit Requirements • Clarifies types of relationships that affect determination of major component units • Eliminates requirement that the determination include consideration of each component unit’s significance relative to other component units

GASB 61 • Amends the criteria for blending component units • When the governing bodies of the two entities are substantively the same, a financial benefit or burden must also exist for blending to occur • Blending will occur for component units whose total debt outstanding is expected to be repaid entirely or almost entirely by the primary government

GASB 61 • Amends requirements for reporting the funds of a blended component unit • For financial reporting purposes, funds of a blended component unit have the same financial reporting requirements as the primary government • Provides reporting guidance if the primary government is a business type activity that reports in a single column

GASB 61 • Amends requirements for reporting equity interests in component units • Primary government must report an asset for its equity interest in a discretely presented component unit

GASB 61 • Amends note disclosures • Governments should disclose the rationale for including each component unit and the manner in which it is included

Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 1989 FASB and AICPA Pronouncements (GASB 62)

GASB 62 • Effective for periods beginning after December 15, 2011. Earlier application is encouraged. • Brings the accounting guidance together in one place • Will eliminate the need for users to determine which FASB and AICPA pronouncements apply to governments

Accounting and Auditing Standards Update