This Principles and Practices Board statement was developed in response to frequent requests from HFMA members for accounting and financial reporting guidance for assessments and other arrangements in lieu of taxes.
P&P Board Statement 17: Assessments and Arrangements Similar to Taxes
Note on Statement 17: Assessments and Arrangements Similar to Taxes on Tax-Exempt Institutional Healthcare Providers
This Principles and Practices Board project was undertaken in response to frequent requests from HFMA members for accounting and financial reporting guidance for assessments and other arrangements in lieu of taxes. This statement addresses recommended accounting for three broad types of transactions: arrangements for governmental services, charity pools, and general governmental support. An exposure draft of this statement was issued on April 1, 1993. The HFMA Board approved the release of this statement on March 29, 1994.
The separate reporting in general purpose financial statements of any amounts discussed in this statement depends on the materiality of the amount. In most cases, the amounts will be combined with other reported amounts.
Statement 17: Assessments and Arrangements Similar to Taxes on Tax-Exempt Institutional Healthcare Providers
1.1 With increasing frequency, tax-exempt institutional healthcare providers are required to pay assessments and taxes and participate in arrangements in lieu of taxes. This statement addresses the accounting and financial reporting for these transactions. These recommendations also are appropriate for use by taxable institutional healthcare providers. While the specific terms of these arrangements may be different among state and local governments, this statement groups all these arrangements into the following broad types:
- Healthcare providers make payments for governmental services, such as sanitation services or fire protection. These types of payments by a tax-exempt entity are referred to in this statement as being for governmental services. These payments are similar to payment of property taxes by a taxable entity.
- Healthcare providers, regardless of their tax status, make payments to a government agency which, in turn, provides funds to compensate providers for healthcare services provided to medically indigent patients. This type of arrangement is often referred to as a charity pool. The funds collected from providers by the government agency for the charity pool may be supplemented by government funds so that providers may recover more than the payments made.
- Healthcare providers make payments to government units, referred to in this statement as general governmental support; these payments constitute one element of their total community support. These payments may not be distinguishable from other taxes collected by the government. Often, these payments have evolved from payments into a charity pool but the linkage to financial support of charity services is no longer clear.
1.2 Currently, these types of transactions are made for various purposes and are paid to a number of government agencies and organizations. There may be a variety of arrangements within individual states, because some payments are related to local governmental services. Accounting and financial reporting practices related to these payments are inconsistent.
1.3 This statement describes arrangements by healthcare providers for governmental services (Section 2), charity pools (Section 3), and general governmental support (Section 4), and identifies the appropriate accounting and financial reporting for these arrangements.
1.4 There are mixed views about the appropriateness of certain arrangements this statement addresses. In some cases, providers have at least a short-term financial benefit from the arrangement, as described later. In these circumstances, some providers conclude that the financial advantage outweighs other considerations. Others believe, however, that these arrangements should not be required of tax-exempt entities. This Principles and Practices (P&P) Board statement takes no position on the appropriateness of these arrangements. Rather, this statement addresses the accounting and financial reporting for these arrangements.
2.1 As state and local governments face rising costs and a limited ability to increase revenue, they increasingly examine the status of entities that are tax-exempt. A variety of challenges to tax exemption have been attempted by government agencies to compel tax-exempt providers to share the cost of local services normally supported by tax revenues. Results have been mixed. Some tax-exempt providers have granted various concessions, such as discounted healthcare services to government employees in lieu of tax payments. In some cases, tax-exempt providers have voluntarily agreed to pay for governmental services.
Description of Provider Arrangements
2.2 Payments by tax-exempt healthcare providers for governmental services may relate to fire, security, sanitation, and other services. Also, providers may supply healthcare or other services at no charge or discount the price of these items in exchange for the receipt of governmental services.
2.3 While all payments by providers for governmental services are properly reported as operating expenses, currently a variety of classifications are used. In addition, there are no specific accounting and reporting guidelines for providing healthcare services at reduced or no charge in exchange for governmental services.
Recommended Accounting and Financial Reporting
2.4 The P&P Board concludes that the proper accounting for a tax-exempt provider's payment for specific governmental services depends on whether there is a specifically identified tax for the service or whether the service is funded as part of the general tax-funded activities of the government.
2.5 If a specifically identified tax is paid by all entities, regardless of tax status, the payment is recorded as an operating expense identified with the expense that is taxed. For example, all entities pay a telephone excise tax regardless of tax status and record it as part of telephone expense. Similarly, if all entities pay specific fees for fire protection services, the payment is recorded as fire protection expense.
2.6 If only tax-exempt entities pay a specifically identified tax, it is recorded as a general governmental support expense as discussed in Section 4 of this statement.
2.7 Provision of healthcare services to a government in exchange for receiving governmental services is a nonmonetary transaction which is recorded on the basis of the "fair values of the assets (or services) involved...."1 If healthcare services are rendered in lieu of an assessment, fee, or other payment to a government, it is appropriate to record revenue and expense. When these healthcare services are rendered, the fair value is recognized as revenue and general governmental support expense.
3.1 Currently, "Federal financial participation" augments state funds used for Medicaid. As a state devotes more funds to this program, the amount of Federal financial participation also rises within the Federally prescribed limits. As states found increasing needs to fund their Medicaid program but limited funds to pay for these benefits, some instituted plans for providers to supply funds to a charity pool which is mAudio Webcasthed by the Federal financial participation. Thus, the state had more funds to repay providers, to pay for healthcare services for more Medicaid patients, and to reduce the healthcare services for which providers received no compensation. Payments into a charity pool are made by providers regardless of tax status.
Description of Provider Payments and Receipts
3.2 In most cases, provider payments are made to a of Provider state agency. The payment amount may be a percent of the amount to be received or may relate to a provider's revenue, cost, operating margin, or other factors. Payments have sometimes been recorded as an offset to revenue, sometimes as a receivable to be offset against related amounts when received, and sometimes as an operating expense, identified as a contribution, tax, or other type of expense.
3.3 Amounts received by the provider may relate to the cost of providing healthcare services to qualifying patients, to the value of bad debts or charity service provided, or to other factors. Payments received have been accounted for in a number of ways, including as recoveries of receivables, as reductions of bad debt expense, or as patient service revenue, other revenue, or nonoperating gain, and may or may not relate to healthcare services to specific patients.
Recommended Accounting and Financial Reporting
3.4 The P&P Board concludes that the proper accounting for a provider's payments (or obligation and to make a payment) into a charity pool depends on whether or not recovery of any of the funds paid is guaranteed.
3.5 If recovery of any of the amount paid to the charity pool is guaranteed, the recoverable portion is properly recorded as a receivable. If recovery of any payment, or portion thereof is not guaranteed, the amount is recorded as a general governmental support expense as discussed in Section 4 of this statement.
3.6 When a provider is legally entitled to payment from a charity pool, such as when healthcare services are provided to qualifying patients, any unrestricted excess over a receivable recorded as described in paragraph 3.5 is recorded as patient service revenue. Restricted excess amounts are recorded in accordance with the restriction.
General Governmental Support
General payments are made to government agencies by some tax-exempt healthcare providers. These payments may have no relationship to specific governmental services received by the provider.
Description of Provider Payments
4.2 In some areas, payments to charity pools, discussed in Section 3 of this statement, have evolved into general payments similar to taxes that are unrelated to governmental payments for charity service. Providers may make payments similar to general taxes for other reasons.
Recommended Accounting and Financial Reporting
4.3 The P&P Board concludes that the proper accounting for a provider's liability for general and Financial governmental support, including the types of arrangements described in paragraph 4.2, is properly recorded as general governmental support expense.
Summary of Recommendations
5.1 If a specifically identified tax is paid by all entities, regardless of tax status, the liability is recorded as an operating expense identified with the expense that is taxed. If only tax-exempt entities pay a specifically identified tax, the tax is recorded as a general governmental support expense.
5.2 Provision of healthcare services to a government in exchange for receiving governmental services is a nonmonetary transaction which is recorded on the basis of the "fair value" of the services involved. The fair value of the services provided is recorded as revenue and general governmental support expense.
5.3 Payments to a charity pool with recovery guaranteed are reported as a receivable. Other payments to a charity pool are recorded as a general governmental support expense.
5.4 Receipts from a charity pool in excess of receivables due from the pool are recorded as patient service revenue.
1993-94 Principles and Practices Board Members
Edmund R. Abel, FHFMA, CMPA, CPA
John T. Bigalke, FHFMA, CPA
Eugene R. Curcio, FHFMA, CPA
Paul R. DeMuro, FHFMA, CMPA, CPA
John R. Doidge, FHFMA, CMPA
Richard Donoghue, CPA
Terry Duis, FHFMA, CPA
Robbin R. Grill, CPA
Thomas F. McNulty, CMPA
David B. Petrie. FHFMA, CMPA
Suzanne M. Petru, FHFMA, CPA
James G. Sullivan, CPA
Patricia Hlavinka, CPA
1. Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions," paragraph 18.