Accounting Update Overview with a Healthcare Slant

Page 0 September 18, 2014

Prepared for East Tennessee State University

Accounting Update Overview

East Tennessee State University

September 18, 2014

Presented by Doug Arnold, CPA, Principal

Pershing Yoakley & Associates, P.C.

with a



ASU 2012-01, Health Care Entities (Topic 954):

Continuing Care Retirement Communities -

Refundable Advance Fees

• Effective: Public: Periods beginning after (PBA)

December 15, 2012

Non-Public: PBA December 15, 2013

[Apply Retrospectively]

• Impact:

– Advance fees should be classified as deferred revenue if required to be

refunded upon reoccupancy and which limits a refund to proceeds of

reoccupancy

– Refundable advance fees that are contingent on reoccupancy but not limited

should be displayed as a liability at the estimated refundable amount

– Deferred revenue is amortized into income, consistent with the method for

calculating depreciation



ASU 2012-05: Statement of Cash Flows (Topic 230): Not-for-Profit

Entities: Classification of the Sale Proceeds of Donated

Financial Assets in the Statement of Cash Flows

• Effective: Prospectively PBA June 30, 2013

• Impact: Cash flow statement presentation for cash

flows from the sale of donated assets:

– Operating Activities: Converted nearly immediately

to cash (unless restricted to long-term use: then

financing)

– Investing Activities: Not sold immediately



ASU 2013-04: Liabilities (Topic 405): Obligations Resulting from

Joint and Several Liability Arrangements for Which the Total

Amount of the Obligation Is Fixed at the Reporting Date

• Effective: Public: December 15, 2013

Non-Public: December 15, 2014


• Impact: Requires an entity to measure obligations for joint

and several obligations for which the total amount of the

obligation is fixed as of the reporting date as:

– The amount the entity has agree to repay, plus

– Any additional amount the entity expects to pay on behalf of

co-obligors



ASU 2013-06: Not-for-Profit Entities (Topic 958):

Services Received from Personnel of an Affiliate

• Effective: PBA June 15, 2014. Modified retroactive

adoption

• Impact:

– Expense and “contribution” from commonly controlled affiliates

must be recognized in recipient’s financial statements

– Usually recognized at cost but entity can elect fair value if cost

is not deemed appropriate

– The amount is shown outside of the Performance Indicator as

an equity transfer

– Not applicable if compensation is received



ASU 2013-10: Derivatives and Hedging (Topic 815): Inclusion of the

Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a

Benchmark Interest Rate for Hedge Accounting Purposes

• Effective: Prospectively for new or redesignated

hedging relationships on or after July 17, 2013

• Impact: Expands benchmark rates to include

federal funds rates



ASU 2013-12: Definition of a Public Business

Entity – An Addition to the Master Glossary

• Effective: No actual effective date

• Impact:

– Identifies entities within the scope of the Private

Company Decision-Making Framework (the Guide)

– Clarifies those entities which potentially qualify for

alternative financial accounting and reporting

guidance



ASU 2013-12: Definition of a Public Business

Entity – An Addition to the Master Glossary

• Overview:

– Provides a single definition of “Public Business Entity”

(generally one that files financial statements with the SEC)

– Excludes all NFPs from this definition. Change from past

practice of “conduit debt” as indicator

– Board will consider NFPs on a standard-by-standard basis

as to when NFPs may utilize alternative reporting

– Does not affect existing requirements

– As a future project, will determine if it is necessary to

undertake a project for existing GAAP “public company”

requirements



“Private Company Council” Standards

• 2014-02: Intangibles and Other (Topic 350):

Accounting for Goodwill

• 2014-03: Derivatives and Hedging (Topic 815):

Simplified Hedge Accounting

• 2014-07: Consolidation: Applying Variable Interest

Entities Guidance to Common Control Leasing

Arrangements



ASU 2014-09: Revenue from Contracts

with Customers (Topic 606)

• Effective: Public: PBA December 15, 2016

Non-Public: PBA December 15, 2017


• 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.





– 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.





– 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).





– 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).





• 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.





• 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?





– 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.



GASB 65: Items Previously

Reported as Assets and Liabilities

• Effective: PBA December 15, 2012. Restate earlier periods

• Impact: Identify items previously reported as assets/

liabilities as deferred outflows/inflows of resources (GASB

63)

• Other:

– Refunding of debt-report as deferred inflow/outflow

– Debt issuance costs/loan origination costs - expense in period

incurred

– Gain/loss on sale/leaseback – reclassify as deferred inflow/outflow

– Prepaid debt insurance - recognize as asset and amortize

– Limit the use of the word “deferred”



GASB 68: Accounting and Financial Reporting for

Pensions - an amendment of GASB Statement No. 27

• Effective: PBA June 15, 2014. To the extent

practical restate prior periods presented

• Impact:

– Defined benefit plans:

• A liability should be recognized for the total pension

liability less legally restricted plan assets. Previously,

only recognized difference in amounts paid versus

actuarially determined annual contribution



Other Healthcare Specific Items

• ICD-10 implementation (TPA 6400.48)

• Presentation of Claims Liabilities and Insurance

Recoveries (TPA 6400.49)

• Accrual of Legal Costs Associated with Contingencies

Other than Malpractice (TPA 6400.50)

• Insurer Payment of Claims Directly (TPA 6400.51)

• Insurance Recoveries from Certain Retrospectively

Rated Insurance Policies (TPA 6500.52)



Accounting for Recovery Audit

Contractor (RAC) Audit Adjustments

• As of June 30, 2014, CMS reported that

approximately $2 billion of overpayments had been

recovered for fiscal year 2014

• ASC 954-605-25-6 states, “Estimates of contractual

adjustments, other adjustments, and the allowance

for uncollectibles shall be reported in the period

during which the services are provided even though

the actual amounts may become known at a later

date.”





• HC providers should consider:

– Recording a RAC reserve upon receipt of

notification of RAC audit adjustments, based on

information provided by RAC contractor, previous

RAC experience and any relevant appeals

considerations.

– Recording a general RAC reserve in the

absence of known RAC audit adjustments, based

on its own relevant, historical RAC experience.





• Consider whether RAC audit findings represent a

change in estimate or correction of an error.

• Additional Guidance: HFMA’s June 2010 Issue

Analysis, Accounting for RAC Audit Adjustments

and Exposures



Assessments and Arrangements

Similar to Taxes

• Tennessee: Annual Coverage Assessment

– Used to increase Federal matching funds (federal

financial participation)

– State FY 2015: Assessment equals 4.52% of net

patient revenue as shown on provider’s 2008

CMS Cost Report

• Accounting treatment for such programs determined

by the extent to which funds paid by provider are

“guaranteed” to be returned to the provider



Assessments and Arrangements

Similar to Taxes

• If guaranteed, deposit accounting is appropriate

• If not guaranteed, expense is recognized upon

payment of the assessment. Revenue is then

recognized for any subsequent payments received

from the state.



Proposed Lease Accounting Rules

• May 2013 Exposure Draft: Comments received

September 2013

• Original ED:

– All leases with maximum term of 12 months recognize assets

(ROU) and liabilities

– The subsequent accounting for a lease greater than 12 months

will be based upon its classification as either a Type A or a

Type B lease. The classification as Type A or B is based upon

the nature of the leased asset. Classification is not reassessed

unless contract is modified.




– If the underlying asset is not property (defined as

land or a building, or part of a building, or both), a

lessee would classify the lease as a Type A lease

• However, if the lease term is for an insignificant part

of the total economic life of the underlying asset or the

present value of the lease payments is

insignificant relative to the fair value of the

underlying asset at the commencement date, it would

be classified as a Type B Lease




• If the underlying asset is property, a lessee would

classify the lease as a Type B lease. However, if the

term of the lease is for the major part of the

remaining economic life of the underlying asset or

the present value of the lease payments account

for substantially all of the fair value of the

underlying asset at the commencement date, it

would be classified as a Type A Lease




• Type B - Recognize a single lease cost, combining

the unwinding of the discount on the lease liability

with the amortization of the right-of-use asset, on a

straight-line basis (straight-line method)

• Type A - Recognize the unwinding of the discount

on the lease liability as interest separately from the

amortization of the right-of-use asset which is to be

amortized on a straight-line basis, with certain

exceptions (accelerated method)




• Updates through July 30, 2014:

– Sale/leaseback – if leaseback is Type A, no sale has

occurred.

– Separate disclosure of Type A and Type B leases.

Cannot present in same line item.

– Only incremental costs qualify as initial direct costs



Questions?

Contact information for Doug Arnold

(800) 270-9629

[email protected]