Page 0November 7, 2014
Prepared for Georgia HFMA Fall Institute
Healthcare Accounting and
Financial Reporting Update
Georgia HFMA Fall Institute
November 7, 2014
Michael A. Shamblin, CPA – Principal
Page 1November 7, 2014
Prepared for Georgia HFMA Fall Institute
Healthcare Accounting and Financial
Reporting Update Overview
• Recently Issued/Effective Accounting Standards
Updates
• Change is Coming – Lease Accounting
• AICPA Technical Questions and Answers for the
Healthcare Industry (AICPA Technical Q&As)
– Hospital as Collecting Agent for Physicians
– Accounting for Transfer from Not-for-Profit Hospital to For-
Profit Subsidiary
– Transfer of Assets from Subsidiary For-Profit Entity to Not-for-
Profit Stockholder Parent (Hospital)
Page 2November 7, 2014
Prepared for Georgia HFMA Fall Institute
Healthcare Accounting and Financial
Reporting Update Overview
• AICPA Technical Questions and Answers for the
Healthcare Industry - Continued
– Accounting for a Joint Operating Agreement
– Accounting for Computer Systems Costs Incurred in
Connection with the Health Insurance Portability and
Accountability Act of 1996 (HIPAA)
– Presentation of Bad Debts and Disclosure of Patient Service
Revenue
– Accounting of costs incurred during implementation of ICD-10
Page 3November 7, 2014
Prepared for Georgia HFMA Fall Institute
Healthcare Accounting and Financial
Reporting Update Overview
• Recognizing and Measuring Goodwill in an Acquisition
of Less Than a Wholly Owned Subsidiary
• Accounting for Meaningful Use of Electronic Health
Records
Page 4November 7, 2014
Prepared for Georgia HFMA Fall Institute
ASU 2014-09: Revenue from Contracts
with Customers (Topic 606)
• Effective: Public: PBA December 15, 2016
Non-Public: PBA December 15, 2017
[Apply Retrospectively]
• Impact:
– Supersedes the revenue recognition requirements in Topic
605, Revenue Recognition, and most industry-specific
guidance throughout the Industry Topics of the Codification.
– Supersedes most guidance provided in Topic 954-605: Health
Care Entities, Revenue Recognition.
– Topic 954-605 will still provide guidance related to Charity Care and
Related Fundraising Entities.
Page 5November 7, 2014
Prepared for Georgia HFMA Fall Institute
ASU 2014-09: Revenue from Contracts
with Customers (Topic 606)
– Exempts ‘non-public’ entities from certain of ASU 2014-09’s
disclosure requirements.
– Provides a principles-based framework for revenue recognition
in an effort to reduce inconsistencies and improve
comparability across entities, industries, jurisdictions and
capital markets.
• Step 1: Identify the contract(s) with a customer.
• Step 2: Identify the performance obligations in the contract.
• Step 3: Determine the transaction price.
• Step 4: Allocate the transaction price to the performance obligations in
the contract.
• Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation.
Page 6November 7, 2014
Prepared for Georgia HFMA Fall Institute
ASU 2014-09: Revenue from Contracts
with Customers (Topic 606)
– This change coupled with potential changes in healthcare
reimbursement methods (i.e. bundled payments, episodic-based
payments, etc.) will likely require significant analysis and may impact
healthcare providers’ revenue recognition and disclosure policies.
– Step 1: Identify the contract(s) with a customer.
• Does a contract exist? (Enforceable and collectible).
Page 7November 7, 2014
Prepared for Georgia HFMA Fall Institute
ASU 2014-09: Revenue from Contracts
with Customers (Topic 606)
– Step 3: Determine the transaction price
• To what amount does the healthcare provider expect to be entitled?
1) Self-pay patients and patients with high deductibles or copayments.
2) Collectibility based on consideration of what provider expects to collect after price
concession.
3) Provider may estimate transaction price based on historical data.
• ‘Variable Consideration’ concept will require specific consideration by
healthcare providers related to the recognition of certain transactions (i.e.
self-pay price concessions, collectibility of high deductibles/copayments
and certain third-party reimbursement subject to retroactive adjustments).
Page 8November 7, 2014
Prepared for Georgia HFMA Fall Institute
ASU 2014-09: Revenue from Contracts
with Customers (Topic 606)
• Estimation Methods:
1) Expected value – sum of probability-weighted amounts in a range of
possible consideration amounts. (ASU suggests this method may be
appropriate if the entity has a large number of contracts with similar
characteristics.)
2) Most likely amount – the single most likely amount in a range of possible
consideration amounts.
Page 9November 7, 2014
Prepared for Georgia HFMA Fall Institute
ASU 2014-09: Revenue from Contracts
with Customers (Topic 606)
• Potential Impact
– Bad debts – Back to the Future. An operating
expense once again!
– Self-pay ER patient admitted. Gross charges of
$15,000. No assessment of ability to pay at time of
service.
• Does a contract exist? Both parties approved the
contract?
Page 10November 7, 2014
Prepared for Georgia HFMA Fall Institute
ASU 2014-09: Revenue from Contracts
with Customers (Topic 606)
– Hospital bills entire $15,000 to patient and pursues
collection. However, it only expects to collect $2,500
based on experience with similar patients.
– Is the $12,500 a bad debt or a price concession?
– If arrangement does not meet Step 1 “contract,” then
Hospital must meet either of the following to recognize
any revenue:
• No remaining obligation and all (or substantially all)
consideration received (cash basis?)
• Contract has been terminated and consideration received is
non-refundable.
Page 11November 7, 2014
Prepared for Georgia HFMA Fall Institute
Change is Coming - Lease Accounting
Page 12November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Overview of Key Points
– Why are FASB and IASB concerned with changing the accounting
for leases?
– What were the concerns with the first exposure draft on new lease
accounting rules?
– What were the significant changes in the second exposure draft?
– What can we do to prepare for the change that is coming?
Change is Coming -
Lease Accounting
Page 13November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Why are FASB and IASB concerned with changing
the accounting for leases?
“If it ain’t broke, don’t fix it.”
• So, is the accounting for leases broken?
Change is Coming -
Lease Accounting
Page 14November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Currently we have two lease model – Capital and
Operating
• Capital lease is on-balance sheet
• Operating lease is off-balance sheet
Change is Coming -
Lease Accounting
Page 15November 7, 2014
Prepared for Georgia HFMA Fall Institute
• What were the concerns with the first exposure draft
on new lease accounting rules?
• Approximately 800 comment letters were received
in response to first exposure draft.
Change is Coming -
Lease Accounting
Page 16November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Most comment letters did not say…
“Great job FASB, keep up the good work!”
Change is Coming -
Lease Accounting
Page 17November 7, 2014
Prepared for Georgia HFMA Fall Institute
• What the comment letters did say…
“Not so fast my friend!”
Change is Coming -
Lease Accounting
Page 18November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Original exposure draft (August 2010)
– Established concept of “right-of-use” asset
– Essentially, capitalize operating leases (including real estate
and equipment)
– Replaces rent expense with amortization expense and interest
expense (expense may not equal cash outflow on lease)
Change is Coming -
Lease Accounting
Page 19November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Original exposure draft (August 2010) - Continued
– Lessee must estimate the renewal period that is more likely than not
(greater than 50% chance) to become reality. Determination is
reassessed annually.
– Liability is recorded based on the estimated lease term (including
projected renewals to occur).
– Liability must be adjusted based on changes in projected renewal
period as of each financial reporting date.
Change is Coming -
Lease Accounting
Page 20November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Numerous concerns expressed in comment letters
– Complexity and cost of implementing new rules, specifically the
initial and subsequent measurement of lease assets and
liabilities
– Introduces more subjectivity (i.e. determination of lease term)
on balance sheet
Change is Coming -
Lease Accounting
Page 21November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Numerous concerns expressed in comment letters -Continued
– Less comparability for financial decision making because
of subjectivity
– Definition of lease (what’s in and what’s out???)
Change is Coming -
Lease Accounting
Page 22November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Numerous concerns expressed in comment letters –
Continued
– Concerns that new rules would result in higher lease expenses
in earlier periods compared to later periods.
– Banks and other lenders may need to be educated on how
lease expense will be impacted for debt covenants.
Change is Coming -
Lease Accounting
Page 23November 7, 2014
Prepared for Georgia HFMA Fall Institute
• What were the significant changes in the second
exposure draft?
Change is Coming -
Lease Accounting
Page 24November 7, 2014
Prepared for Georgia HFMA Fall Institute
• FASB and IASB Redeliberations – Lessee Model
Change is Coming -
Lease Accounting
Balance sheet Income statement
1 Measured at present value of lease payments 2 Initially measured at same amount as liability, plus initial direct costs
DR ROU asset 2
CR Lease liability1
Lessee consumes more
than insignificant
portion of leased asset
Amortization expense
Interest expense
Lease expenseLessee does not
consume more than
insignificant portion of
leased asset
Page 25November 7, 2014
Prepared for Georgia HFMA Fall Institute
• FASB and IASB Redeliberations – Lessor Model
Change is Coming -
Lease Accounting
Lessor accounting approach
Page 26November 7, 2014
Prepared for Georgia HFMA Fall Institute
• FASB and IASB Redeliberations – Classification
of Leases*
Change is Coming -
Lease Accounting
*Both lessee and lessor
Page 27November 7, 2014
Prepared for Georgia HFMA Fall Institute
• FASB and IASB have not issued an estimated date
for a final rule
Change is Coming -
Lease Accounting
Page 28November 7, 2014
Prepared for Georgia HFMA Fall Institute
• What can we do to prepare for the change that is
coming?
Change is Coming -
Lease Accounting
Page 29November 7, 2014
Prepared for Georgia HFMA Fall Institute
• Be Prepared…– Look for updates in industry publications and
websites (i.e. Journal of Accountancy and
www.pyapc.com)
– Prepare an “inventory” of all operating leases
under contract. Determine how many “right-to-
use” assets would be added to balance sheet.
– Read debt covenants to determine whether they
have the potential to be impacted by a change
from rent expense to amortization and interest
expense.
Change is Coming -
Lease Accounting
Page 30November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Questions and
Answers for the Healthcare
Industry (AICPA Technical Q&As)
Page 31November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on a Hospital
as a Collecting Agent for Physicians
• Question
– When a hospital acts as collecting agent for the
physicians' fees (non-employed physicians), should
the amounts collected as physicians' fees be
included in the income and expenses of the provider
hospital?
Page 32November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on a Hospital
as a Collecting Agent for Physicians
• Answer
– No. GAAP says that health care entities may receive and hold
assets owned by others under agency relationships; for
example, they may perform billing and collection services for
physicians. In accepting responsibility for those assets, an
entity (Hospital) incurs a liability to the principal (Physician)
under the agency relationship to return the assets in the future.
In the preceding example, the hospital is functioning as a
conduit with respect to the physicians' fees. As a result, the
fees should be reported as a liability to the physicians and not
recognized in the statement of revenues and expenses of the
Hospital.
Page 33November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Transfer of Assets
from Not-for-Profit Hospital to For-Profit Subsidiary
• Question
– How should subsequent transfers of assets,
evidenced as additional investment, from a not-for-
profit hospital to a for-profit subsidiary be accounted
for by the transferee and transferor?
Page 34November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Transfer of Assets
from Not-for-Profit Hospital to For-Profit Subsidiary
• Answer
– Additional investments in for-profit subsidiaries
(subsequent to the original transfer of assets) should
be reflected by the transferee (Subsidiary) as an
increase in capital stock or paid-in capital, or both.
The transferor (Hospital) would record a
corresponding increase in its investment account in
the for-profit subsidiary.
Page 35November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Transfer of Assets from Subsidiary For-
Profit Entity to Not-for-Profit Stockholder Parent (Hospital)
• Question
– How should transfers of assets from a Subsidiary for-
profit entity to a not-for-profit entity parent (Hospital)
that is a minority stockholder of the Subsidiary be
recorded?
Page 36November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Transfer of Assets from Subsidiary For-
Profit Entity to Not-for-Profit Stockholder Parent (Hospital)
• Answer
– This transaction would generally be recorded as a dividend, which
would be reported as a reduction in the Subsidiary's retained
earnings. Any dividend in excess of retained earnings is a
"liquidating" dividend; as such, it would be reported as a reduction
in the Subsidiary's paid-in capital account. If the Hospital accounts
for its investment in the Subsidiary using the equity method, then
the Hospital would report all dividends received as a reduction of
its investment account. If the Hospital's investment in the
Subsidiary is accounted for using the cost method, because the
conditions for applying the equity method are not met, the
dividends would be reported as income.
Page 37November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting
for a Joint Operating Agreement
• Question
– Two not-for-profit health care systems enter into a
Joint Operating Agreement whereby both (the
Venturers) agree to jointly operate and control certain
of their hospitals while sharing in the operating
results and residual interest upon dissolution based
upon an agreed-upon ratio. Neither of the Venturers
receives cash or other monetary assets as part of
entering into the Agreement. How should the
Venturers account for the Agreement?
Page 38November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting
for a Joint Operating Agreement
• Answer
– Even though the Agreement does not provide for a separate
legal entity (such as a corporation or partnership), the same
principles apply. For example, because there is joint control
(that is, neither party controls the venture), consolidation would
not be appropriate. Instead, such agreements should be
accounted for similar to a corporate joint venture using the
equity method of accounting. Because the transaction did not
reflect the culmination of the earnings process, the Venturers'
basis in the investment would be recorded at net book value.
Page 39November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Computer
Systems Costs Incurred in Connection with HIPAA
• Question
– How should health care entities account for computer
systems costs incurred in connection with HIPAA?
Page 40November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Computer
Systems Costs Incurred in Connection with HIPAA
• Answer
– The accounting for specific compliance costs
depends on whether the costs relate to "upgrades
and enhancements" or maintenance. The following
summarizes the financial reporting requirements for
each type of cost:
Page 41November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Computer
Systems Costs Incurred in Connection with HIPAA
– Upgrades are defined in GAAP as, "an improvement to an existing
product that is intended to extend the life or improve significantly the
marketability of the original product through added functionality,
enhanced performance, or both. If the changes increase the security
of the data from tampering or alteration or reduce the ability of
unauthorized persons to gain access to the data, those changes
would be tasks that the software previously could not perform and the
associated qualifying costs of application development stage
activities should be capitalized. Conversely, if the changes merely
reconfigure existing data to conform to the HIPAA standard or
regulatory requirements, such changes would not result in the
capability to perform additional tasks and the associated costs should
be expensed as incurred.
Page 42November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Computer
Systems Costs Incurred in Connection with HIPAA
– Maintenance costs should be expensed as incurred.
Training costs and data conversion costs, except for
costs to develop or obtain software that allows for
access or conversion of old data by new systems,
should also be expensed as incurred.
Page 43November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Presentation of Bad Debts
and Disclosure of Patient Service Revenue
• Question
– Health System consists of a parent holding company and two
operating subsidiaries. Subsidiary A is an acute care hospital that has
a policy of providing services to patients regardless of their ability to
pay. Subsidiary A records patient service revenue at the time services
are rendered and, thus, typically recognizes significant amounts of
patient service revenue associated with uninsured self-pay patients
prior to assessing its collectability. Subsidiary B is an ambulatory
surgery center that does not have a policy of providing services to
patients regardless of their ability to pay; thus, its provision for bad
debts is a reflection of its credit risk. Health System issues
consolidated financial statements. In addition, each subsidiary issues
standalone financial statements.
Page 44November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Presentation of Bad Debts
and Disclosure of Patient Service Revenue
• Question - Continued
– GAAP requires that a health care entity present all bad
debts associated with patient service revenue as a
deduction from revenue if a significant amount of patient
service revenue is recognized at the time services are
rendered and the entity does not assess the patient’s ability
to pay. Thus, in the separate subsidiary statements,
Subsidiary A’s statement of operations presents bad debts
associated with patient service revenue as a deduction from
patient service revenue, while Subsidiary B’s statement of
operations displays bad debts related to patient service
revenue as an operating expense.
Page 45November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Presentation of Bad Debts
and Disclosure of Patient Service Revenue
• Question - Continued
– In determining how to present bad debts in Health System’s
consolidated statement of operations, should the assessment
of significance be made at the consolidated reporting entity
level (regardless of the presentation in the separate subsidiary
financial statements), or should the determinations made at the
separate subsidiary reporting level be retained in
consolidation?
Page 46November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Presentation of Bad Debts
and Disclosure of Patient Service Revenue
• Answer
– The determination of whether the presentation of bad debts at the
consolidated reporting entity level should be based on an entity-
wide assessment of significance or on significance determined at
the level of each individual subsidiary is an accounting policy
election. If Health System decides to retain the presentations
determined based on assessments made at the individual
subsidiary reporting level, the consolidated statement of
operations would reflect bad debts related to Subsidiary A’s patient
service revenue as a deduction from patient service revenue and
the bad debts related to Subsidiary B’s patient service revenue as
an operating expense.
Page 47November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Presentation of Bad Debts
and Disclosure of Patient Service Revenue
• Answer - Continued
– Alternatively, Health System may elect to assess “significance” at the
consolidated reporting entity level regardless of the presentations used in
the separate subsidiary financial statements. In that case, if consolidated
patient service revenues are deemed to include a significant amount of
revenue recognized under a policy in which services are provided to
patients regardless of their ability to pay, then the entire provision for bad
debts related to consolidated patient service revenues (that is, the
combined bad debts of Subsidiaries A and B) would be presented as a
deduction from the consolidated net patient service revenues. If such
revenues are not deemed to be significant at the consolidated reporting
entity level, the entire provision for bad debts related to consolidated
patient service revenues should be presented as an operating expense.
Page 48November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Costs
Incurred During Implementation of ICD-10
• Question
– How should a health care entity account for costs
incurred in connection with the implementation of
ICD-10?
Page 49November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Costs
Incurred During Implementation of ICD-10
• Answer
– The costs associated with process reengineering (for example,
assessing the current state of business processes, process
redesign or reengineering, or work force restructuring) are
expensed as incurred. Costs associated with acquisition of
fixed assets are accounted for in accordance with an entity's
policy for capitalizing long-lived productive assets. If an outside
consultant is engaged to conduct the project, the total
consulting contract price should be allocated among these
activities based on the relative fair values of each component
(which are not necessarily the separate prices stated within the
contract for each element).
Page 50November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Costs
Incurred During Implementation of ICD-10
• Answer - Continued
– Significant expenses also are likely to be incurred in
connection with training coders and clinicians to
comply with the ICD-10 requirements. All training
costs should be expensed as incurred, even those
that are incurred during the application development
stage.
Page 51November 7, 2014
Prepared for Georgia HFMA Fall Institute
AICPA Technical Q&As on Accounting for Costs
Incurred During Implementation of ICD-10
• Answer - Continued
– Modifications of software that do not result in
additional functionality are expensed as maintenance
costs. Modifications that result in additional
functionality are considered upgrades or
enhancements of the existing system and are
expensed or capitalized in accordance with GAAP.
Page 52November 7, 2014
Prepared for Georgia HFMA Fall Institute
Recognizing and Measuring
Goodwill in an Acquisition of
Less Than a Wholly Owned
Subsidiary
Page 53November 7, 2014
Prepared for Georgia HFMA Fall Institute
Recognizing and Measuring Goodwill in an Acquisition
of Less Than a Wholly Owned Subsidiary
• GAAP requires that goodwill be allocated between
controlling and noncontrolling interests
• Goodwill allocated to the controlling interest is
measured as the excess of: (a) the fair value of the
controlling interest’s portion of the business
acquired over (b) the controlling interest’s
percentage of the amounts for the identifiable asset
acquired less liabilities assumed from the acquired
Page 54November 7, 2014
Prepared for Georgia HFMA Fall Institute
Recognizing and Measuring Goodwill in an Acquisition
of Less Than a Wholly Owned Subsidiary
• Goodwill allocated to the noncontrolling interest is
measured as the difference between goodwill of the
acquired business less the goodwill allocated to the
controlling interest
• The allocation of goodwill between controlling and
noncontrolling interests will not always be
proportional to the percentages owned
• The situation could occur when the acquirer pays a
premium for a controlling interest in the acquired
Page 55November 7, 2014
Prepared for Georgia HFMA Fall Institute
Recognizing and Measuring Goodwill in an Acquisition
of Less Than a Wholly Owned Subsidiary
• Example 1 – Assume the following (in thousands)
– Parent acquires 65% of Subsidiary Entity for $750
– The total fair value of the Subsidiary Entity is $1,100
– The fair value of the Subsidiary Entity’s net
identifiable assets and assumed liabilities is $800
Page 56November 7, 2014
Prepared for Georgia HFMA Fall Institute
Recognizing and Measuring Goodwill in an Acquisition
of Less Than a Wholly Owned Subsidiary
• The calculation and presentation of goodwill are as
follows:
Fair value of 100% of Subsidiary Entity 1,100$
Fair value of 100% of identifiable net assets (800)
Total goodwill as if 100% acquisition 300$
Consideration for 65 of Subsidiary Entity 750$
Fair value of 65% of identifiable net assets (65% x 800) (520)
Goodwill allocated to controlling interest 230$
Goodwill allocated to noncontrolling interest 70$
Page 57November 7, 2014
Prepared for Georgia HFMA Fall Institute
Recognizing and Measuring Goodwill in an Acquisition
of Less Than a Wholly Owned Subsidiary
• From this example, the following observations could
be drawn:
– Goodwill allocated to the controlling interest is not
65% of the total goodwill – rather 77% ($230 ÷ $300)
– The calculation implies a control premium of $35 was
paid by the controlling acquiring company calculated
as $750 – ($1,100 x .65) = $35.
– The control premium is included in the allocation of
goodwill to the controlling interest ($300 x .65) + $35
= $230
Page 58November 7, 2014
Prepared for Georgia HFMA Fall Institute
Accounting for Meaningful Use
of Electronic Health Records
Page 59November 7, 2014
Prepared for Georgia HFMA Fall Institute
Accounting for the Meaningful Use
of Electronic Health Records
• Contingency Accounting Model – SEC registrants
must use this model
• Grant Accounting Model – An option for non-SEC
registrants
Page 60November 7, 2014
Prepared for Georgia HFMA Fall Institute
Accounting for the Meaningful Use
of Electronic Health Records
• Contingency Model
– Appropriately identify contingencies that must be
satisfied prior to recognizing the revenue
– Likely contingency – receipt of an incentive payment
occurs only if the hospital is successful in complying
with the meaningful use criteria during the entire
EHR reporting period (90 consecutive days in the
first payment year and 365 consecutive days during
each of the second through fourth years)
Page 61November 7, 2014
Prepared for Georgia HFMA Fall Institute
Accounting for the Meaningful Use
of Electronic Health Records
• Contingency Model - Continued
– The contingency model would not permit income
from incentive payments to be recognized until the
hospital has actually complied with the meaningful
use criteria for the full EHR reporting period in a
given year
– It would not be appropriate under a contingency
model to consider the probability of complying with
the requirements when considering when to
recognize income from the incentive program
Page 62November 7, 2014
Prepared for Georgia HFMA Fall Institute
Accounting for the Meaningful Use
of Electronic Health Records
• Contingency Model - Continued
– Because another contingency relates to the
discharges upon which the final incentive payment is
based, it is expected that hospitals using the
contingency model would typically not meet the
contingency for discharge and other final payment
calculation data until the last day of the cost report
year (which may be after the EHR reporting period
ends – EHR reporting period is based on a Federal
fiscal year ending September 30)
Page 63November 7, 2014
Prepared for Georgia HFMA Fall Institute
Accounting for the Meaningful Use
of Electronic Health Records
• Contingency Model - Continued
– Submission of the cost report and its subsequent
desk review or audit by CMS would not likely be
viewed as contingent events that must occur prior to
the recognition of income
– Healthcare entities applying a contingency model
should give careful consideration to all potential
contingencies and document how such contingencies
were considered and/or resolved
Page 64November 7, 2014
Prepared for Georgia HFMA Fall Institute
Accounting for the Meaningful Use
of Electronic Health Records
• Grant Accounting Method
– Incentive payments are considered grants related to
income and not grants related to assets
– Income from grants shall not be recognized until
there is reasonable assurance that (a) the entity will
comply with the grant conditions; and (b) the grants
will be received
Page 65November 7, 2014
Prepared for Georgia HFMA Fall Institute
Accounting for the Meaningful Use
of Electronic Health Records
• Grant Accounting Method - Continued
– Cliff Recognition - A hospital may not be able to determine
with reasonable assurance that it will comply with the
conditions associated with the grant until after the Federal
Fiscal EHR reporting period has ended, and the income would
be recognized all at once at that time.
– Ratable Recognition – A hospital may be reasonably assured
at the outset of the Federal Fiscal EHR reporting period that it
will successfully demonstrate compliance with the meaningful
use objectives. If so, grant income would be recognized
ratably over the passage of time.
Page 66November 7, 2014
Prepared for Georgia HFMA Fall Institute
Accounting for the Meaningful Use
of Electronic Health Records
• Grant Accounting Method - Continued
– Cumulative Catch-Up Adjustment – If compliance with the
meaningful use objectives is not reasonably assured at the
outset of the Federal Fiscal EHR reporting period, but instead
is attained at some interim point during the period, then a
favorable cumulative catch-up adjustment would be reported at
that point. Income should be recognized ratably for the
remainder of the period.
Page 67November 7, 2014
Prepared for Georgia HFMA Fall Institute
Questions?
Contact information for Mike Shamblin
(800) 270-9629