The Healthcare Financial Management Association (HFMA) has published an issue analysis, "Revenue Recognition, Including Implicit Price Concession and Bad Debt Considerations, for Healthcare Organizations: Accounting Issues and Trends," to guide healthcare provider organizations as they implement accounting changes resulting from the Financial Accounting Standards Board (FASB) Accounting Standards Update 2014-09, "Revenue from Contracts (Topic 606)," a cross-industry update. Calendar year 2018 marked the first implementation period for FASB Topic 606.
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. 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 key performance indicators used by management.
To provide some clarity to the healthcare industry on certain accounting and reporting issuesrelated to FASB Topic 606, HFMA’s Principles and Practices Board's nine-page issue analysis highlights current issues and considerations in accounting for revenue. It includes sections on net patient service revenue accounting, accounting for other revenues, disclosures, accounting system implications, key performance indicators, and accounting policy documentation.
The analysis addresses how each of the five steps in the new FASB revenue recognition model apply 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.
Principles and Practices Board issue analyses are not sent out for public comment. Therefore, they are factual, but not authoritative. Additional interpretive guidance may be released as circumstances evolve. Consultation on these matters with independent auditors is highly recommended.