health care - bkd
TRANSCRIPT
4/2/2018
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Health Care
FASB Revenue Recognition Basics for CHCsA Basic Overview & Introduction for Community Health Centers
April 3, 2018
4/2/2018
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Presenters
David Fields, CPA, CMA®, [email protected]
Ally Jackson, [email protected]
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What Is Revenue Recognition?
• A new Financial Accounting Standards Board (FASB) pronouncement (ASU 2014-09 – Topic 606) affecting revenue recognition for all entities following accounting principles generally accepted in the United States of America
• All not-for-profit CHCs impacted
• CHCs under Governmental Accounting Standards Board(GASB) have a project, but not complete
Why Does a CHC Care?
• Revenues are a critical financial measure
• This will significantly affect all CHCs except governmental CHCs under GASB
• The standard will require time
• Time to understand it
• Time to develop & update policies
• Time to implement it
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FASB Goals for the Standard
• Eliminate flaws & inconsistencies in previous rules
• Create a single comprehensive framework for all to apply
• Standardize practice
• Improve usefulness of required financial statement disclosures
• Consolidate all revenue recognition guidance into one standard
Today’s Goals
• When? – Effective date
• A new framework
• Introduce the new five-step model
• Including key definitions & terms
• Overview of the impact on your CHC
• Action items
• Future revenue recognition webinars
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When Will Revenue Recognition Be Effective for My CHC?
Timing – Nonpublic Entities
• Annual reporting periods beginning after December 15, 2018
• December 31, 2019, year-ends & after
• June 30, 2020, if a midyear audit period
• Other year-ends would be March 31, 2020, or November 30, 2020
• Start thinking now due to comparative disclosures
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Timing – Public Entities
• Annual reporting periods beginning after December 15, 2017
• December 31, 2018, year-ends & after
• June 30, 2019, if a midyear audit period
• Other year-ends would be March 31, 2019, or November 30, 2019
• If you are a December 31 year-end public entity, you are under revenue recognition now
Public Entities – Conduit Debt Obligor
What CHC could be a public entity?
• A conduit debt obligor
What is a conduit debt obligor?
• Issuer of debt that is traded, listed or quoted on an exchange or over-the-counter market
• Volume &/or frequency of trading is not a factor• Bonds are biggest risk for CHCs, but not all bonds qualify
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Public Entities – Conduit Debt Obligor
How does a CHC know if they are one?
• Traditional mortgages typically do not qualify
• New market tax credit debt is typically not publicly traded
• Bonds should specifically be investigated• Not just whether they are traded, but whether they CAN be traded
• Organization management should determine & document conclusion
• Review bond documents & discuss with bond attorneys &/or trustees
A New Framework
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A New Framework
Current Guidance
Recognize revenue when it
is earned & realizable
Standards have a lot of industry-
specific sections
Rules-based standard
A New Framework
• New guidance
• 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
• Standard not industry-specific
• Industry-specific guidance in AICPA’s Revenue Recognition Accounting & Auditing Guide (AAG) Chapter 7
• Shift to principles-based standard
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Introduce the New Five-Step Model& Provide Key Definitions & Terms
Revenue Recognition: Five-Step Model
1) Identify the contracts with customers
2) Identify the performance obligations
3) Determine the transaction price
4) Allocate the transaction price to the performance obligations
5) Recognize revenue when (or as) performance obligations are satisfied
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Identify the Contracts with Customers
• Characteristics/definition of a contract
• Between two or more parties
• Creates enforceable rights & obligations
• Is in one of the following forms
• A written arrangement
• A verbal arrangement
• An arrangement implied by the entity’s ordinary practices when conducting business
Identify the Contracts with Customers
• To recognize revenue from a contract, it must meet the following conditions
• Approval & commitment of the parties including determining customer rights & payment terms
• Commercial substance – something happened
• Probability of collection – not for free
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Identify the Contracts with Customers
• Key CHC elements of this step
• “Contracts” for patient visits
• Any signed patient forms >> Written
• Scheduled appointment or customary business practice >> Implied
• CHC contracts
• Exist with third parties
• Involve credentialing & other terms
• Governed by state & federal laws governing Medicaid & Medicare
Identify the Performance Obligations
• Organization transfers a distinct good or service
• Key CHC elements of this step
• Service is performed for a patient
• Item is sold to a patient: think prescription
• Current CHC practice management systems handle the majority of the performance obligation tracking sufficiently
• Future webinars to explore risks for more complex items outside of traditional patient service revenue
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Determine the Transaction Price
• The amount of consideration to which the entity expects to be entitled
• Price concessions – complicated element for CHCs
• Gross charges do not equal the transaction price
• Reduce by explicit price concessions: see definition
• Reduce by implicit price concessions: see definition
• Gross charges – explicit – implicit = transaction price
Determine the Transaction Price – Terms
• Explicit price concessions
• Reductions in accepted payment from your fee schedule based on an agreement with a third party or an internal organizational policy
• CHC examples
• Contractual adjustments
• Sliding fee discounts
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Determine the Transaction Price – Terms
• Implicit price concessions
• Chapter 9: Health Center Program Compliance Manual says
• “The health center must operate in a manner such that no patient shall be denied services due to an individual’s inability to pay”
• This leads to implicit price concessions after explicit price concessions
• While CHCs should try to maximize their legal reimbursement, CHCs understand they will not collect 100% of the remaining balance due to them
• The implicit price concessions a CHC does not expect to collect are based on historical collections
• For example, understanding that a CHC typically only collects X% of their self-pay balance
Determine the Transaction Price – Terms
• Bad debt expense
• Limited/smaller balance due to implicit price concessions
• Typically patient/payor-specific event known to entity that suggests the patient/payor no longer has ability & intent to pay amount due –represents impairment, like bankruptcy of patient/payor
• Will be an expense rather than contra revenue account
• Under ASU 2011-07, many CHCs adopted it as a contra revenue
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Determine the Transaction Price
• Variable Consideration
• Commonly price concessions
• Potentially discounts – like prompt payment discounts
• Rare items
• Rebates with the exception of some in-house pharmacy
• Refunds, credits, incentives, performance bonuses, penalties or payments dependent on future events
Determine the Transaction Price
• Other terms – all rare for CHCs unless noted
• Significant financing
• Concept of a year or less – consider if a material impact
• Noncash consideration
• Consideration to a customer: think coupons/vouchers/etc.
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Portfolios – Price Concessions
• Do we seriously have to do this for every contract/patient individually? Thankfully, no
• Expect CHCs to use the practical expedient – Portfolios
• Similarities to groupings for allowance calculation now
• Common payor types with similar characteristics
• Key – this approach would not differ materially from considering contracts individually
• More detailed explanation to follow with webinar #2
Allocate the Transaction Price to the Performance Obligations
• What do you do if there are multiple performance obligations?
• CHCs
• Seeing patients has minimal issues because focused on the visit rather than each component of a visit
• Think incentives or bundled payments, i.e., prenatal to delivery, where the accounting is more complex
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Recognize Revenue
• Occurs when customer obtains control of the good or service
• CHCs
• Patient visit is performed/completed
• Good is given: prescription, medical device, etc.
Recognize Revenue
• Note that technically all services are considered over time
• Irrelevant for most CHC services, as the services are performed in one day & don’t typically cross reporting periods
• More complex with incentives, bundled payments or other items earned over time
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Overview of the Impacton Your CHC
Impact – Changing Items
• Fundamental change in terminology
• Updates in policies
• Change in the mapping of revenue cycle
• AR system >> G/L >> financials & footnotes
• Change in the financial statement disclosures
• This will all take time
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Impact – Practice Management System
• Your existing practice management system will work
• Posting contractual adjustments (explicit price concessions) more timely or automatically will help
• New adjustment codes may be required
• Potential revisions to monthly revenue journal entries
Impact – Statement of Operations
• Your statement of operations presentation will change
• Patient service revenue = transaction price (one line item)
• Bad debts >> operating expense
• The excess (deficiency) of revenues over expenses will not change dramatically for most revenue items
• Potential exceptions (covered during webinar #4)
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Impact – Items That Will NOT Change
• Exceptions/transactions not covered by the revenue recognition standard
• Leases – Topic 840
• Guarantees – Topic 460 – unlikely to impact CHCs
• Others with limited applicability
• Major issue is grants/contributions – exchange/nonexchangetransactions – Topic 958 exposure draft
• Separate webinar when the standard is finalized
Adoption
• Full retrospective method
• Retrospective to each prior reporting period presented
• Note practical expedients are available
• Modified retrospective method
• Retrospective & cumulative effect at date of application
• Disclosures required
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TIME!
• Management’s time
• Auditor’s time & CHC’s expense
• Be proactive because it will give you more flexibility with time & competing priorities
Action Items
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Action Items
• Determine your year of adoption
• Start thinking timeline
• Consider revenue streams of your CHC that will be impacted
• Accumulate questions for your auditor/advisor
• Continue to educate yourself & organization
Future RevenueRecognition Webinars
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Future Revenue Recognition Webinars
• FASB Revenue Recognition for CHCs: A Focus on Patient Service Revenue• Step-by-step working through the five-step model
• FASB Revenue Recognition for CHCs: A Focus on Financial Reporting• Statement of operations, footnote & adoption methodology
• FASB Revenue Recognition for CHCs: A Focus on Other Affected Revenue Streams• How to handle things like pharmacy & third-party cost report settlements
• bkd.com/FASB4CHCs
Questions?
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