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{FASB A&A Update}. Southwest Ohio HFMA Chapter October 17, 2014 Andrew Gentzkow and Dawn Stark. Overview. Private Company Reporting. Newly established Private Company Council Characteristics of private companies that are different from public:
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{FASB A&A Update} Southwest Ohio HFMA Chapter October 17, 2014 Andrew Gentzkow and Dawn Stark
Private Company Reporting • Newly established Private Company Council • Characteristics of private companies that are different from public: • Types and number of financial statement users • Access to management • Investment strategies • Ownership & capital structures • Accounting resources • Learning about new financial reporting guidance
Private Company Reporting • PCC identifies, deliberates and proposes specific exceptions and modifications to US GAAP for private companies • FASB considers the PCC proposals and, if approved, issues them for public comment • Final standards are issued as FASB ASU’s, not as PCC Standards • Not-for-Profit Organizations are not “private companies”
Private Company Reporting • What’s changing under ASU 2013-12 • Clarifies definition of “public” and “nonpublic” business entities for financial reporting purposes • Not-for-profit entities treated as a class unto themselves • Effective date and transition • New definition apply prospectively to new accounting and reporting standards issued after December 2013 • Prior definition continues to apply to standards issued on or before December 2013
Private Company Reporting • ASU 2013-12 modifies the master glossary to define a “Public Business Entity” as a business entity meeting any one of the following criteria: • Files financial statements with SEC • Required by Securities Exchange act of 1934 to file • Required to file with Regulatory agency for upcoming issuance of securities • Has securities that are traded on an exchange or OTC Market • Securities are unrestricted and required by law or contract to issue GAAP statements • This update defines who can use PCC standards
Private Company Reporting Applies prospectively to new standards going forward Remains in effect for all standards previously issued
Private Company Reporting • Issued • Accounting for Goodwill (ASU 2014-02) • Variable Interest Entity Guidance for Common Control Leasing Arrangements (ASU 2014-07) • Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps (ASU 2014-03) • Proposed • Business Combinations- Accounting for Identified Intangible Assets
Going Concern What’s changing under ASU 2014-15: • Shifts responsibility to management to evaluate • Requires management to consider if: • Probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. • Without taking into account management’s plans to alleviate doubt that have not been fully implemented by the date of the financial statements • Disclosures: • Conditions or events giving rise to doubt • Management’s evaluation of the significance of those conditions or events • Management’s plans that either alleviate or are intended to alleviate the doubt • Effective for periods ending after December 15, 2016
Reporting DiscontinuedOperations What’s changing under ASU 2014-08: • Raises the bar for when disposals can be reported as discontinued operations • Eliminates the concept of “continuing involvement” • Extensive new disclosures, including disclosure of “significant dispositions” that do not qualify for discontinued operations Transition: • Applied prospectively • Early adoption permitted • Adopt 1st quarter of calendar year 2015/fiscal year 2016 • All others: for annual financial statements with fiscal years beginning on or after December 15, 2014
Donated Personnel Services Received from Affiliates What’s changing under ASU 2013-06: • Applies to not-for-profit entities, including not-for-profit, business oriented health care entities, that receive services from personnel of an affiliate that directly benefit the recipient not-for-profit entity AND for which the affiliate does not charge the recipient not-for-profit entity • Provides guidance that not-for-profit entities apply for recognizing and measuring services received from personnel of an affiliate • Expense and “contribution” associated with donated personnel services received must be recognized in the recipient’s financials • Transaction would be measured based on affiliate’s actual costs unless cost would over/understate the value received, then can elect fair value
Donated Personnel Services Received from Affiliates • Addresses reporting by recipient entity only (not the entity providing the services) • Applies only to recognition and measurement of personnel costs • Applies only when services are provided by employees of an affiliate that controls, is controlled by, or is under common control with the recipient entity • Does not apply to situations where recipient compensates the affiliate for the services provided • Applies to services received from for-profit affiliates as well as not-for profit affiliates Transition: • Effective for periods beginning after June 15, 2014 with early adoption permitted • Prospective application with option to apply modified retrospective application
Joint and Several Liability What’s changing under ASU 2013-06: • Provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangement to reduce diversity in practice • Entity measures obligations resulting from joint and several liability arrangements as the sum of: • Amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors • Any additional amount the reporting entity expects to pay on behalf of its co-obligors Transition: • Effective for annual periods ending after December 15, 2014. • Early adoption permitted
Joint and Several Liability • Facts: • Obligated group issued debt totaling $300 million • Hospitals are joint and severally liable for repayment of debt • In addition to the consolidated financial statements, each hospital issues standalone statements
Joint and Several Liability • Conclusion: • Each hospital’s standalone statements should display its share of the obligation with disclosure of the amount contingently owed (Hospital B’s statement shows $100 million liability and disclose $200 million contingent obligation) • Disclosures should include nature and amount of obligation as well as information about risks such obligations pose to entity’s future cash flows • If in a future period it becomes probable that Hospital A will be required to pay Hospital C’s portion, Hospital A would record incremental additional liability at that time
Revenue Recognition Finally issued! Effective Date: for periods beginning after 12/15/2016 (Public) and December 15, 2017 (nonpublic)
Overview • Healthcare entity implications: • Recognition and measurement of revenue from self pay patients • Estimating “variable consideration” • Pattern of recognition of revenue under CCRC contracts
Identifying Contracts with Customers • The definition of contract and customer establish the scope of the model • Contract: An agreement between two or more parties that creates enforceable rights and obligations. Can be written, oral or implied by an entity’s customary business practice • Customer: A party has contracted with an entity to obtain goods or services
Identifying Contracts with Customers • An entity shall account for a contract with a customer that is within the scope of this Topic only when the following criteria are met • Parties have approved the contract in writing, orally, or in accordance with other customary business practices • Both parties have enforceable rights and obligations • Parties can identify the payments terms • Contract has commercial substance • Probable that the entity will collect the consideration to which it is entitled
Identifying Contracts with Customers • If contract does not meet the previous criteria in ASC 606-10-25-1 • An entity shall continue to assess the contract to determine whether the criteria in paragraph in ASC 606-10-25-1 are subsequently met. • When consideration is received from the customer, the entity shall recognize the consideration received as revenue only when either of the following events has occurred: • Entity has no remaining obligations to transfer goods or services to the customer, and all or substantially all, of the consideration promised by the customer has been received by the entity and is nonfundable. • The contract has been terminated, and consideration received from the customer is nonrefundable.
Determine the Transaction Price • Amount expected to be entitled to in exchange for transferred goods/service • In some cases the promised consideration may be variable because facts and circumstances indicate that the entity may accept a lower price that the amount stated in the contract- price concession. • If a portion of the transaction price is variable or contingent on the outcome of future events, adjust transaction price to reflect the uncertainty • Use probability-weighted estimate or most likely amount expected, whichever is the best predictor
Revenue Recognition…CCRC Considerations Impact of the new revenue recognition standards on CCRC’s • Step 2: Identifying the performance obligations and Step 5: Recognize revenue as obligations is satisfied • CCRC advance fees refundable only from proceeds of reoccupancy • Applicability of revenue recognition guide to CCRC • Time value of money • Performance obligations and pattern of transfer • Obligation to provide future services • Contract acquisition costs
Revenue Recognition • Resources available: • FASB Joint Transition Resource Group • Will consider issues that apply to common transactions that could reasonably create diversity in practice • AICPA Revenue Guide Project • 15 chapters for specific industries, including healthcare • Healthcare task force are already considering implementation issues such as • Self-pay revenue recognition • Pattern of revenue recognition that would apply to CCRC entrance fees
Revenue Recognition…Common Questions • For healthcare entities, who is the customer (patient or the third party payor)? • The healthcare entity’s customer is the patient. The healthcare entity’s contract with the third party payoris relevant in determining the transaction price (Step 3). What happens to bad debt expense as a result of the new ASU? • All previous ASU will be superceeded. Therefore, entities that applied ASU 2011-07 will no longer present bad debts on patient revenue as a component of net patient revenue. What happens to charity care? • The rules associated with the recognition and disclosure of charity care remain the same under the new ASU.
Revenue Recognition • Potential impact of Revenue Recognition standard: • Comparability of historical financial results • Long term – will have little impact • Year to year financial results could be impacted • Outside users (bank, bonding companies) will have to adapt how they analyze
Revenue Recognition • Potential impact of Revenue Recognition standard: • Administrative burden • Possible limitations of IT systems • Time involved in analyzing each contract • Retrospective implementation (even limited) • Contract terms • Might see a change in how contracts are negotiated, designed or worded as companies try to get to a desired accounting result
Proposed Pronouncements and Projects Proposed Pronouncements and Projects
Financial Statements of Not-for-Profit Entities • Since 2011, the FASB has been working with the Not-for-Profit Advisory Committee (NAC) to improve financial reporting of NFP entities. • Objective is to reexamine existing standards for financial statement presentation of NFP entities focusing on improving: • Net asset classification requirements • Information provided in financial statements and notes about liquidity, financial performance and cash flows. • Exposure draft expected in 4th quarter 2014.
Financial Statements of Not-for-Profit Entities • Net Asset Classes • With donor-imposed restrictions • Without donor-imposed restrictions
Financial Statements of Not-for-Profit Entities • Fundamental shift in financial statement presentation • Operating- Cash flows associated with “core” business assets and liabilities • Investing – investment of “noncore” assets • Financing – How the business is financed (debt, equity) • Would eliminate healthcare performance indicator (though one could be voluntarily presented).
Financial Statements of Not-for-Profit Entities • Reporting of expenses for all NFP entities • Requiring NFPs to report expenses by function and by nature in one location • Statement of Activities/Operations • Separate Statement of Expenses • In the footnotes
Extraordinary Items Concept of Extraordinary Items • Exposure draft released in July 2014 • Objective of this proposed ASU: • Reduce the cost and complexity of income statement presentation by eliminating the concept of extraordinary items • Maintaining or improving the usefulness of the information provided to the users of the financial statements • Transition • Applied prospectively • Effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, • Early adoption permitted.
Lease Exposure Draft Joint project with IASB Current status • Re-deliberation • Expecting final standard next year (2015) • Implementation probably 2018 or after • Leases < 12 months scoped out
Lease Exposure Draft Current provisions • Lessees would report virtually all leases like capital leases are reported today • Balance sheets would be “grossed up” to reflect right of use assets and lease obligation liabilities • Different pattern of expense recognition for leases similar to old FAS 13 capital leases than operating leases • Lessor model generally mirrors lessee model
Lease Exposure Draft Lessee Accounting • Balance sheet • Lease asset and liabilities recognized on balance sheet • Statement of Operations • Type B lease – Use straight line expense model (rent expense) • Type A lease – Apply financing lease expense model (amortization and interest expense)
Lease Exposure Draft Potential impact of Leases standard (primarily from Lessee’s standpoint): • Essentially all leases on will be “on the balance sheet” • Impact on key financial ratios and metrics, such as: • Working capital • Debt to net worth • Debt service coverage • EBITDA • Net Operating Income • Resulting impact on loan covenants • May change “buy” vs. “lease” decisions • Lessees may be motivated to favor short-term leases
Lease Exposure Draft Lessor Accounting • Financing lease • De-recognize the underlying lease asset; replace with a lease receivable and residual asset- relatively unchanged from existing rules • Operating lease (unchanged from existing rules) • Leased asset remains on books and is depreciated • Recognize rental income
Simplification Agenda • Presentation of debt issuance costs • Measurement date of defined benefit plan assets • Balance sheet classification of debt • Accounting for income taxes
Goodwill Accounting NFPand Public Entities • What could be changing: • Added to agenda in November 2013 • FASB staff is performing outreach and research on four possible alternatives: • Private company alternative (ASU 2014-02) • APB 17 approach (amortize over useful life, capped at maximum) • Direct write-off of goodwill • Simplified impairment test • Different conclusions might be reached for public business entities than for NPO’s
Pushdown Accounting • Exposure draft released in April 2014 • Should an acquiree’s standalone statements reflect historical basis of assets and liabilities, or “new basis” resulting from acquisition date remeasurement? • No guidance available for private companies or NFP entities • Proposal would provide all entities with an unrestricted OPTION to apply pushdown accounting • Final standard expected 4th quarter of 2014
