Beyond looking at such analyses, organizations should have their finance teams examine the issue, set roles for key senior staff leaders, and gain insights from their auditors and others who use their financial statements.
Jan. 16—As healthcare organizations prepare to dive into year-end statements, an issue analysis—sourced from the experiences of HFMA members—has been released to provide insights on overhauled accounting and reporting standards.
Titled “Revenue Recognition, Including Implicit Price Concession and Bad Debt Considerations, for Healthcare Organizations: Accounting Issues and Trends,” the guide aims to help healthcare provider organizations implement accounting changes that apply for the first time to 2018 year-end statements.
The accounting changes from the Financial Accounting Standards Board (FASB) were included in Accounting Standards Update 2014-09, “Revenue from Contracts (Topic 606).” Issued in 2014, the update eliminated industry-specific revenue recognition guidance and replaced it with a single principles-based revenue recognition standard that applies to most industries, with limited exceptions.
The newly released issue analysis was developed by HFMA’s Principles & Practices Board (P&P Board) to provide some clarity to the healthcare industry on certain accounting and reporting issues resulting from the new rules.
Although the FASB changes went into effect on an interim basis at the beginning of 2018, many public healthcare organizations only now are trying to understand how to implement the new standards for their year-end financial statements.
“It’s something that’s really on a lot of folks’ minds as they finally get to year end, where this thing hits for end-of-the-year financial statements,” said Brian Conner, chair of the P&P Board and a partner at Moss Adams.
The FASB changes are “going to affect the way that healthcare organizations account, report, and recognize the revenues associated with their business; more importantly, it’s going to impact the systems, processes, and controls around how they accumulate that information and how it gets reported,” Conner said in an interview.
Although the bottom line for many healthcare providers may not change, providers may need to modify accounting systems, develop documentation, review contracts, and add new disclosures and language to financial statements as a result of FASB’s Topic 606, according to a FAQ also issued by the P&P Board. Some organizations may experience a change in the timing of revenue recognition, and possibly some significant financial statement adjustments. Changes in classification of certain items also could have a significant impact on KPIs used by management.
The nine-page issue analysis, which was put together based on the experiences of a range of HFMA provider members, highlights current issues and considerations in accounting for revenue. The inclusion of providers’ experiences and insights is a key way the P&P Board analysis of the new FASB rules differs from those offered by accounting firms and other entities.
The HFMA analysis includes sections on net patient service revenue accounting, accounting for other revenues, disclosures, accounting system implications, KPIs, and accounting policy documentation.
The analysis addresses how each of the five steps in the new FASB revenue recognition model applies to recognition of net patient service revenue by healthcare providers. For example, prior to Topic 606, a hospital might have recorded a provision for doubtful accounts for a portion of the self-pay balance owed by a patient with commercial insurance. Under Topic 606, the amount previously displayed as a provision for doubtful accounts would not be reported separately in the hospital’s financial statements; instead, it would be treated as an implicit price concession and included as a component of net patient service revenue.
The new analysis references work on the issue by the American Institute of CPAs, and Conner suggested healthcare organizations also consult that 10-part analysis.
“What we’re trying to do with this is take some of that guidance and also use more practical and internal-implementation suggestions,” Conner said. “So not only are we breaking down the standard itself, but we’re also trying to say, ‘OK, here’s what you would do with your systems’ or ‘Here’s what you would do with key performance indicators’—things like that which are ancillary to financial reporting and that organizations really care about.”
Organizations should have their finance teams examine the issue and establish as key leads their CFO or director of finance, Conner said. Additionally, healthcare organizations can gain insights from their auditors and from examining the financial statements filed by other public entities.
Since many users of financial statements will be very focused on the issue, Conner suggested healthcare organizations work with bond holders, lenders, equity holders, and other stakeholders to ensure the finished statements are clear and in accordance with GAAP.
“This is a big change, and you could have lots of problems with your users if you don’t have it properly implemented,” Conner said.
The analysis was not sent out for public comment, and therefore was considered factual but not authoritative.
Healthcare organizations unable to correctly implement the FASB standard “potentially have some substantial effort working with your auditors to make sure that you correct it on the back end,” Conner said. “So, the better you’re able to prepare for this, the less work you have with your auditors on the back end.”
Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Email Rich at [email protected]. Follow Rich on Twitter: @rdalyhealthcare