FASB and GASB Rules and Guidelines

What happened to charity care in financial statements

December 19, 2016 3:28 pm

There was a time when the amount of charity care provided was a significant disclosure in annual financial statements.

The disclosure of charity care has become less relevant to users of financial statements, even as information concerning a not-for-profit healthcare organization’s charitable activities — and its ability and intent to meet its tax-exempt purpose — has never been more relevant and important. Healthcare finance leaders should understand the reasons why disclosure of charity care has been marginalized. Moreover, they should be aware of the trends to augment the charity care disclosures required by U.S. generally accepted accounting principles (GAAP) and the likely near-term impact in terms of accounting standard changes.

Why Charity Care Disclosures Have Been Marginalized

One reason charity care disclosures have become less meaningful is that the magnitude of the disclosure has decreased dramatically, probably in large part because of the Affordable Care Act (ACA). ACA provisions such as the Medicaid expansion, additional coverage provided by subsidized exchanges, extended dependent coverage, and guaranteed issue all have decreased the number of uninsured patients who previously would have been included in charity care disclosures.

These factors may not have changed the amount of uncompensated care that any given healthcare organization is providing, but they certainly have changed the way organizations characterize charity care in financial statement disclosures, with the result that organizations’ have reported declines in costs for charity care. For example, the Cleveland Clinic, one of the largest hospitals in the country, reported a 40 percent reduction in its cost of charity care delivered in 2014, the same year significant ACA features such as Medicaid expansion and exchanges were implemented. a

An accounting standards update issued by the Financial Accounting Standards Board (FASB) also has contributed to the decline in the magnitude of charity care disclosures in financial statements. The FASB’s Accounting Standards Update 2010-23, Measuring Charity Care for Disclosure, effective in 2011, requires all organizations to measure charity care based on the cost of the care provided. Although this update was intended to provide consistency in how charity care is disclosed, it eliminated the common measurement of charges foregone, which—when measured on a gross-charge basis—results in a much higher number than the disclosure of the allocated cost of providing that same service.

The GAAP for charity care also are extremely narrow, especially in the larger context of providing community benefit or tax-exempt purpose information. The FASB Accounting Standards Codification® Master Glossary states:

In Section 954-605-25 of the Accounting Standards Codification, the FASB states:

Most organizations’ charity care policies are layered and involve sliding or adjusted fee-scale discounts that include, but don’t exclusively consider, providing care at no cost. Because of the GAAP for charity care, it is often difficult for organizations to capture the cost of care delivered to patients under a charity care policy that might provide for discounted care in many circumstances. Moreover, as mentioned above, this definition of charity care is not intended to measure the entirety of uncompensated care or community benefits delivered by healthcare organizations.

New FASB revenue recognition guidance also may increase the challenges of identifying the cost of charity care to be disclosed in the financial statements. The American Institute of Certified Public Accountants (AICPA) recently issued a working draft of guidance regarding healthcare revenue recognition, Health Care Entities Revenue Recognition Implementation Issue, which highlights additional considerations and data elements that organizations may be required to manage, including the existence of a contract, probability of collection, and the effect of these determinations on charity care criteria. The new revenue recognition standard may require organizations to exercise judgment in distinguishing among charity care, bad debt expense, implicit price concessions, and explicit price concessions, and other factors.

Trends to Augment Charity Care Disclosures

As the magnitude of charity care disclosures in annual financial statements decreases, healthcare organizations and those charged with their governance confront a dilemma: How to effectively communicate the levels of uncompensated care and community benefits they are providing.

Many organizations have attempted to augment required charity care disclosures with additional disclosures regarding other uncompensated care, such as payment shortfalls related to care for Medicaid patients. These additional disclosures include providing community benefit and uncompensated care information in footnotes, unaudited footnotes, and supplemental financial statement information, and other reporting methods.

However, including disclosures not articulated in GAAP can be an issue, particularly for auditors, because of the potential lack of comparability across the industry. In fact, an Audit Risk Alert issued by the AICPA in 2012 addressed this very concern. Regarding the potential for quantifying the estimated cost of other community benefits in a manner specified by the IRS in Schedule H, the AICPA’s alert noted two points:

  • The FASB has not developed any standards with respect to community benefit information other than charity care.
  • The fact that certain information is quantifiable based on formulas developed by a regulatory body for a specific use does not, in and of itself, justify inclusion in financial statements or notes.

Under the FASB’s conceptual framework, not all information that might be useful to users of financial statements is incorporated into financial statements. The ability to measure service accomplishments is generally undeveloped within financial-reporting standard setting, and such information may be better furnished in other ways, such as in management’s discussion and analysis. As a result of this conceptual framework, the cost of community benefit infrastructure and other accomplishments and the amount of provider taxes paid have been included in supplementary information or notes marked as unaudited.

The AICPA’s alert notes that even those presentations may not be appropriate, depending on the nature of the information. This issue also is addressed in HFMA’s Principles & Practices (P&P) Board Statement No. 15, Valuation and Financial Statement Presentation of Charity Care and Bad Debts by Institutional Healthcare Providers, which notes that shortfalls in payments for Medicare patients often are not included in uncompensated care disclosures because Medicare is not an income-based or ability-to-pay based program.


The decline in charity care disclosures highlights the issues in balancing the need to communicate with stakeholders regarding community benefits, uncompensated care, and tax exemption with the constraints that prevent an organization from doing so in annual financial statements. To navigate these issues, HFMA’s P&P Board recommends organizations consider taking the following steps:

  • Revisit charity care disclosures to ensure that appropriate data are effectively captured.
  • Direct constituents to other forms of community benefit reporting, such as tax or regulatory documents, for holistic views of an organization’s efforts.
  • Revisit the Board’s Statement No. 15 for best practices on charitable and community benefit reporting and processes.
  • Monitor new revenue recognition guidance from the AICPA and others to update reporting and data capture as appropriate.

In the end, as finance leaders of healthcare organizations, we all want our reporting to accurately and comprehensively communicate all the ways in which our organizations create a positive impact for our communities.

Brian Conner, CPA, is a partner and national practice leader for the hospitals practice, Moss Adams LLP, Stockton, Calif., a member of HFMA’s Northern California Chapter, and the chair of HFMA’s Principles & Practices Board.


a. Tribble, S.J., “Cleveland Clinic Reports 40% Drop in Charity Care After Medicaid Expansion,” Kaiser Health News, April 2, 2015.


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