highlights of the draft health care audit guide - bkd · highlights of the draft health care audit...

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Highlights of the Draft Health Care Audit Guide

Kimberly McKay, Partner

BKD, LLP

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To Receive CPE Credit

• Participate in the entire webinar

• Answer the polls when they are provided

• If you are viewing this webinar in a group – Complete the group attendance form with

• Title & date of live webinar • Your company name • Your printed name, signature & email address

– All group attendance sheets must be submitted to L&[email protected] within 24 hours of live webinar

– Answer polls when they are provided

• If all eligibility requirements are met, each participant will be emailed their CPE certificates within 15 business days of live webinar

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Learning Objectives

• Upon completion of this webinar, participants will be able to

– Identify upcoming changes proposed by the draft of the Health Care Entities Guide

– Recognize how the proposed Guide differs from the current Guide, & how these differences will significantly affect a health care organization

– Prepare their organization for the changes required

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AICPA’s Health Care Audit Guide

• Published on the AICPA website on April 6, 2011

• http://www.aicpa.org/InterestAreas/AccountingAndAuditing/Resources/AcctgFinRptg/AcctgFinRptgGuidance/Pages/WorkingDraftHealthCareOrganizations.aspx

• Comment Period open until June 6, 2011

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AICPA’s Health Care Audit Guide

• First comprehensive revision since 1996

• FASB Accounting Standards Codification (ASC) changed the structure of all accounting & reporting standards

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Objectives of the Guide

• Supplemental guidance, not a complete set of GAAP or GAAS

• Highlights issues prevalent to health care organizations

• Improve clarity & reduce variance in practice

• Improve user friendliness

http://www.aicpa.org/InterestAreas/AccountingAndAuditing/Resources/AcctgFinRptg/AcctgFinRptgGuidance/Pages/WorkingDraftHealthCareOrganizations.aspx

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Objectives of the Guide

• Guide is no longer authoritative, references ASC throughout

• GASB has not finalized their codification project at this time

• Describes FinREC’s understanding of certain issues & may indicate FinREC’s preference

Preview of the Health Care Audit Guide

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Polling Question

• What type of entity do you work for?– Governmental

– Not-for-profit

– For profit

– Unsure

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Chapter 1 – Unique Considerations of Health Care Organizations

• Scope of the Guide – Who is included

– Senior Independent Living – Exercise judgment

– Does not apply to Foundations

• Retains entity orientation instead of transaction stream orientation

• Regulatory environment

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Chapter 1 – Unique Considerations of Health Care Organizations

• General discussion of Health Care Reform

– 501(r) regulations

– Updates will be made as necessary

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Chapter 2 – General Audit Considerations

• General auditing guidance

• Example footnote – Audit procedures do not include testing of tax exempt status, Medicare & Medicaid regulations. Management is responsible for compliance

• HIPAA Business Associate Agreements

• SOP 00-1 on auditing third-party revenues

• Risk-based capital requirements

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Chapter 3 – Unique Considerations for Not-for-Profit Organizations (NEW)

• Discusses the performance indicator (revenues over expenses) & what is excluded

• Provides for the flexibility of having other intermediate subtotals

• Can report natural or functional classification of expenses on the statement of operations

• If you report natural classifications, ASC 958-205-55 requires functional classification in the footnotes

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• CCRCs can have an unclassified balance sheet

• Puts into words what the example financials used to provide

• Source of publicly available example financial statements

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• Subsequent event disclosures (ASC 855)

• Conduit debt obligors

– If the debt has not begun trading in a public market – Evaluate subsequent events up through the date financial statements are available to be issued

– Public trading – Evaluate subsequent events through the issuance date of the financials

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Chapter 4 – Cash & Investments

• Centralized cash management arrangements –Subsidiaries would show a receivable from an affiliated organization not cash under ASC Topic 230 (FAS 95) unless the subsidiary has legal title to the deposit

– Would be an investing activity on the cash flow statement

• Cash from restricted donations not reported separately unless required by ASC 954-305-45 (i.e., designated for long-term purposes)

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• Election of trading securities ASC 320

– Trading securities unrealized gains & losses are within the performance indicator & therefore OTTI would not apply

– Additional guidance on impairment of investments

• Election of fair value option ASC 825

– Unrealized gains & losses would be within the performance indicator

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• Additional guidance on investment pools

– Investor would recognize its beneficial-type interest in the pool

– Changes in fair value of the pool are included in the performance indicator if the sponsor & participant are unrelated entities

– Financially interrelated entities – Investment in the pool recorded as part of its interest in the sponsor entity using the equity method, unless electing the fair value option

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– Financially interrelated entities – Changes in fair value would be reported in the same manner as all other unrealized gains & losses if the participant can influence financial decisions ofthe pool

– Sponsor accounting – Record 100% of the pooled investments & a corresponding liability if the sponsor legally owns the pool

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• Additional guidance on alternative investments

– Cost, Equity or Fair Value methods – See table in Chapter 12

– ASC 820-10 practical expedient for using NAV as fair value

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Polling Question

• Do you have derivatives, such as interest rate swaps? – Yes

– No

– Unsure

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Chapter 5 – Derivatives (New)

• ASC Topic 815-30 (FAS 133) & ASC Topic 815-25 (FAS 161)

• Cash Flow Hedges vs. Fair Value Hedges

• Statement of operations presentation considerations– Fair Value Hedge – In the performance indicator

– Cash Flow Hedge – Effective portion excluded from the performance indicator & ineffective portion is included in the performance indicator

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Chapter 5 – Derivatives (New)

• Guidance on when a hedge is terminated or cash flow hedging is terminated

• Examples

– Hedges

– Embedded derivatives

– Puts & calls

– Swaps

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Chapter 6 – Property & Equipment & Other Assets

• Intangibles ASC 350 – Types of intangibles

– Evaluation goodwill for impairment

• Capitalized Interest ASC 835-20– Two different methods – tax-exempt debt for the project or

outstanding borrowings

– Does not apply to construction acquired with restricted contributions

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Chapter 6 – Property & Equipment & Other Assets

• Asset retirement obligations– Asbestos & other environmental remediation obligations

• Impairment of long-lived assets

• Discontinued operations

• ASC 350-40 internally developed software costs

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Chapter 7 – Municipal Bond Financing (NEW)

• Definition of a public entity for reporting purposes (traded in a public market)

• EMMA

• Obligated group statements

• Classification of remarketing & variable rate demand bonds

• Extinguishment of debt & defeasance guidance

• Arbitrage

• Guidance on auditor association with municipal debt offerings

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Chapter 8 – Contingencies & Other Liabilities

• ASU 2010-24 Gross presentation of insurance recoveries

• Effective date for fiscal years beginning after December 15, 2010 (calendar year-end 2011)

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Chapter 8 – ASU 2010-24

• In current practice, health care organizations show liability for many common contingencies net of insurance recoveries (i.e., offsetting)

• Decision is that net presentation should not be permitted & a receivable from the insurance company should be evaluated & presented separately, if appropriate

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• Any difference between recognized liabilities & insurance receivables will be recognized as a cumulative effect adjustment

• Retrospective application is permitted

• Need to evaluate if you have a system to capture appropriate information to record insurance claims & recoveries at gross

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Polling Question

• Are you self insured for malpractice or health insurance? – Yes

– No

– Unsure

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• Malpractice Accruals – ASC Topic 954-450-25-2A indicates that accruals should not be on funding amounts because the risk of adverse deviation does not meet criteria of a liability

• Discussion of discounted versus undiscounted liability

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• When discounting may be appropriate

– Liability is fixed or reliably determinable

– Amount & timing of cash payments is fixed or reliably determinable

– Expected insurance recoveries are also discounted

• Auditor should consider tests of estimates & timing of payments

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• FinREC believes that if an entity discounts accrued malpractice claims they should disclose in footnotes

– Policy on timing of recoveries

– Policy for discounting claims

– Interest rate used

– Undiscounted amounted of accrued claims

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• Claims made insurance accruals – ASC Topic 720-20-25-14 – Recognize an IBNR if loss is probable & reasonably estimated

• 720-20-30-2 states purchasing tail coverage is not relevant in determining loss to be accrued (cannot net an insurance receivable)

• Need to consider the need for an IBNR on claims made insurance accruals

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• EITF Issue 10-F Accounting for legal costs associated with medical malpractice claims

• Heard by FASB at August 18, 2010 meeting

• HC entities would no longer be required to accrue costs associated with litigating or settling claims

• Instead, HC entities would be allowed to make a policy election to expense legal fees as incurred or accrue estimated legal fees when claim is incurred

• Effective date to be determined

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• Physician guarantees

– Minimum revenue guarantees

• Record a liability initially measured at fair value

• Most entities also record an intangible asset that is amortized over life of the contract

– Financing transactions

• Accounted for as loans

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• Compensation related liabilities

– Deferred compensation arrangements

– Post retirement & employment benefits

• Tax considerations for not-for-profit entities, including uncertain tax positions

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• Provider fees – TPA 6400.30

– If there is a guaranteed return by the state it should be recorded as a receivable

– If monies go into a pool – Payments should be recognized as an expense

– Subsequent reimbursements from the pool should be recognized as revenue when payment is assured & entitled

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Chapter 9 – Net Assets (Equity)

• Net asset classifications

• Releases from restriction– Temporarily restricted funds must be used first unless the

expense is directly attributable to another source of revenue (i.e., a cost reimbursed contract)

– ASC 954-210-50 restrictions on contributions of long-lived assets are satisfied when the asset is placed in service

• UPMIFA disclosures

• Noncontrolling interest of a consolidated subsidiary should be a separate component of net assets

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Chapter 10 – Health Care Service Revenue & Related Receivables

• Different revenue arrangements (capitated, episodic, fee for service, etc.)

• SOP 00-1 Auditing third-party revenues

– Retroactive adjustments – Reasonable estimates should be made based on entity specific information

• 954-605-35-1 requires differences in original estimates & final settlements to be disclosed

• Settlements can only be netted if a right of offset exists

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Chapter 10 – Health Care Service Revenue & Related Receivables

• FinREC recommends additional disclosures

– Disclose settlements from each significant third-party payor

– Provide a summary of activity for each operating period

– Disclose status of third-party settlement claims

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RAC Accruals

• Will not be specifically addressed in the Health Care Audit Guide

• HFMA Principles & Practices Board white paper

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• Charity care – Current guidance requires disclosure of charity care revenue recognition policy & amount, if material

• Effective for fiscal years beginning after December 15, 2010, early adoption permitted

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• Costs should be determined on the basis of direct & indirect costs related to providing the service

• Required disclosures

– Subsidies received intended to compensate an entity for providing charity care, i.e., uncompensated care fund

– Description of the method used to determine the costs of providing charity care

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FASB Revenue Recognition Project

• Revenue recognition project – Not complete so excluded from the Guide

• Heard at March 18, 2010 EITF meeting, EITF Project 09-H

• Current practice – Revenue recorded at gross charges, then deducted as an expense (except for GASB)

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FASB Revenue Recognition Project

• EITF Conclusions– Tentatively agreed that collectability should be reasonably

assured prior to recognizing revenue

– Should be applied prospectively

– Did not reach a conclusion if it should be applied on a portfolio or individual basis – FASB staff to do research

– Alternative to be researched – netting of the revenue & related bad debt

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EITF – Project 09-H

• Presentation of Bad Debts net against revenue

• Ratified by FASB December 1,2010

• Rescinded December 8, 2010, & re-exposed

• Concerns about presentation, disclosures & other implementation guidance

• Stay tuned

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Chapter 11 – Contributions Received & Made

• Contributions of long-lived assets

• Contributions vs. exchange transactions

• Pledges & promises to give

• Not-for-profit organizations that raise or hold contributions for others

• Split-interest agreements

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Polling Question

• Are you planning to purchase or merge with another health care organization in the next year? If so, what type? – Yes, Physicians

– Yes, Long-term Care or Home Health

– Yes, Hospital

– Yes, Other

– No, Not Planning or Unsure

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Chapter 12 – Reporting Entity & Related Entities

• Mergers & acquisition guidance

– Diversity in practice

– Necessary due to the elimination of pooling of interest method

– Subsequent accounting for goodwill & intangibles

– Noncontrolling interests

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Accounting for Mergers

• Carryover basis at merger date

• GAAP assets & liabilities carry over

• Carry forward classification & elections

– Exceptions

• Merger results in modification of a contract

• Reclassification necessary to conform accounting policies

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Acquisition Method

• If a transaction is accounted for as an acquisition

– Same as acquisition under ASC Topic 805 (FAS 141(R))

– Steps

• Identify acquirer

• Determine acquisition date– Generally the closing date

• Recognize assets acquired & liabilities assumed at FV

• Recognize & measure goodwill or contribution received

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Chapter 12 – Reporting Entity & Related Entities

• Comprehensive table on various types of relationships & how to account for them

• Consolidation guidance

• Equity transfers & transactions

• Investor-owned entities– Variable interest entities

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Chapter 13 – Managed Care Services

• Presentation & disclosure considerations

• Accounting for health care costs

• Accounting for loss contracts

– Premium revenue is expected to cover health care costs – Losses should be recognized when probable

• Accounting for stop-loss insurance – Amounts recoverable from stop-loss insurers should be

recorded as a receivable

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Polling Question

• Are you a Continuing Care Retirement Community (CCRC)?– Yes

– No

– Unsure

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Chapter 14 – CCRC’s

• Guidance on refundable fees paid only from reoccupancy

– Most controversial

– If the resident agreement does not stipulate that the refundableamount is limited to reoccupancy the advance fee will be reported as a liability

• Examples of refundable & nonrefundable fees, future service obligations, etc.

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• Classification of refundable entrance fees

– Diversification between SEC filers & Non-SEC

– SEC typically show as a current liability because of a demand or “put” provision

• FINrec believes that non-SEC CCRCs may continue to classify refundable advance fees based upon the expected timing of refunds to be made

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• CCRC’s can show an unclassified balance sheet

• FINrec believes that CCRC’s should disclose

– Amounts classified as current & noncurrent for deferred revenues

– Any applicable state regulatory requirements

– Amount of advance fees that are subject to repayment based on the resident’s ability to terminate the agreement

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Chapter 15 – Unique Considerations of Government Health Care Entities

• GAAP Hierarchy

– Category A – GASB statements

– Category B – GASB technical bulletins & if cleared by GASB AICPA Audit Guide & SOPs

– Category C – AICPA Practice bulletins

– Category D – Implementation Guides published by GASB staff

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Chapter 15 – Unique Considerations of Government Health Care Entities

• Consolidates all categories previously discussed, cash, investments, derivatives, etc.

• GASB codification project

• Paragraph 7 option – Pre-1989 FASB

– GASB 62 eliminates the election provided in paragraph 7

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Appendices

• A – SOP 98-2 (fundraising)

• B – SOP 99-1 (AUP on corporate compliance program)

• C – SEP 00-1 (third-party revenues)

• D – Information Sources

• E – References to Technical Practice Aides

• F – Supplementary Information

• Glossary

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Appendix – Example Financials

Stay Tuned

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Polling Question

• Would you like to see the AICPA publish example financial statements? – Yes

– No

– Unsure

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FASB & IASB Joint Project – Leases

• Joint project of Financial Accounting Standards Board & International Accounting Standards Board

• Public roundtable meetings have been held, including industry specific work groups

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Exposure Draft Issued August 2010Comment Period – December 15, 2010

• Lessee

– Right to use leased items – asset

– Obligation to make payments – liability

• Lessor

– Right to receive payments – asset

– Obligation to perform under the lease – liability

• Initial measurement

– Asset & liability recorded at discounted present value of the required payments

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Lease Accounting

• FASB & IASB have not committed to an effective date

• Expect final standard 2011

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Electronic Health Records

• Combined project of the AICPA expert panel & the HFMA Principles & Practices Board

• Draft white paper is currently in review with the SEC

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Electronic Health Records

• Preliminary findings (subject to approval by the SEC)– Grant Accounting

– Reported in other operating revenue, not patient service revenue

– Guidance currently only for PPS hospitals

– Recognition period will be over the reporting period equal to the certified meaningful use period

• 90 days the first year

• Full year in subsequent years

– Subject to A-133?

Questions?

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Kimberly K. McKay, CPA

Partner

111 S. Tejon, Suite 800

Colorado Springs, CO 80903-2286

[email protected]

719.471.4290

www.bkd.com

How to Contact Us

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CPE Credit

Up to 1.5 CPE credits will be awarded upon verification of participant attendance; however, credits may vary depending on state guidelines.

For questions, complaints or comments regarding CPE credit, please email the BKD Learning & Development Department at L&[email protected].

highlights of the draft health care audit guide - bkd · highlights of the draft health care audit...

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