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Nov 14, 2016

Monumental Financial Accounting Standards Updates are Looming…Is Your Organization Prepared?

Featuring Mary Paladino

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Since its passing in March 2010, the Patient Protection and Affordable Care Act (ACA) has dominated every aspect of the health care industry. Most health care organizations have been forced to dedicate an enormous amount of time and resources to the on-going evaluation and implementation of ACA programs and provisions. That being said, the Financial Accounting Standards Board (FASB) has also been quite busy shaking up the accounting and financial reporting world. If your health care practice or facility issues financial statements, you will be impacted. Since 2014, the FASB has issued over 50 Accounting Standards Updates (ASUs). Two of these updates (ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU No. 2016-02, Leases (Topic 842)) will profoundly change the current accounting and financial reporting practices for most health care entities.
Both of these ASUs will undoubtedly require considerable up-front planning and analysis to be properly implemented. With the effective dates of these ASU’s looming large, the time has come to ensure that implementation strategies for these ASUs is on every health care organization’s agenda.
Revenue from Contracts with Customers
ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09) was issued in May 2014. Therefore, financial executives should be aware that significant changes are coming to the way revenue is currently recognized. The new revenue standard is effective for public companies for annual periods beginning after December 15, 2017, and for private companies for periods beginning after December 15, 2018. Despite this fact, studies show that many companies are behind on implementation planning.
ASU 2014-09 replaces substantially all pre-existing revenue guidance (including industry-specific guidance), and moves away from rules-based guidance and towards principle-based guidance. Principle-based guidance generally involves a higher degree of estimation and the increased use of professional judgment. The core principle of ASU 2014-09 is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” ASU 2014-09 lays out a Five-Step Approach to properly recognize revenue under the new standard.
Issues surrounding the implementation of this standard were expected, and have proven to be numerous and often complex. While the new revenue standard eliminates industry specific guidance, the American Institute of Certified Public Accountants (AICPA) formed 16 industry specific task forces (including a Health Care Task Force) to assist in identifying and addressing industry specific issues.
Accounting for patient service revenue has long been unique and complex. As such, it is not at all surprising that the Health Care Task Force has identified eight implementation issues to date with regard to the application of ASU 2014-09. Such issues include how to determine if there is a contract and the transaction price for health care services provided to self-pay patients. As the Health care Task Force continues to work through these implementation issues, Health care entities should be working on their implementation strategies.
In September 2016, the AICPA issued “New Revenue Recognition Accounting Standard – Learning and Implementation Plan” which provides guidance and a suggested timeline for public entities to implement the new revenue recognition standard (nonpublic entities have an additional year to adopt the new guidance). The action steps outlined in the AICPA’s Learning and Implementation Plan include the following:
  1. Assign individual company staff or form a task force to become experts and take the lead on understanding and implementing the new revenue recognition standard;
  2. Evaluate the changes from current GAAP to the new revenue recognition standard and evaluate the impact on how your company accounts for existing revenue streams and the results to the company’s financial statements. In addition, evaluate how the standard will affect operational and performance metrics, company contracts, compensation plans, accounting policies, internal controls, and tax matters. This would also include working with your auditor to ensure that your approach to implementing the new revenue recognition standard and any changes in accounting for revenue recognition are documented completely and accurately;
  3. Determine how you will retrospectively adopt the new revenue recognition standard, and how to track the accounting differences for periods that require restatement (in conjunction with Step 4);
  4. Determine whether any changes will need to be made to IT systems or software applications to capture information needed for the new revenue recognition standard, including the following:
    1. Retrospective adoption
    2. The additional qualitative and quantitative disclosures required;
  5. Determine what interim disclosures will need to be made;
  6. Develop an evolving project plan for implementation of the revenue recognition standard considering all of the steps above and facilitate training for your staff;
  7. Educate key stakeholders (audit committee, board of directors, and investors) on the new revenue recognition standard and what changes to expect in your company’s financial statements.
As can be seen, implementation of this standard should not be taken lightly, and health care organizations should begin this process sooner than later. Additional implementation guidance specific to the health care industry will continue to become available as the Health Care Task Force works through the various identified issues. We will continue to keep our readers and clients informed as additional guidance materials become available.
ASU No. 2016-02, Leases (Topic 842)
After years of debate and deliberation, the FASB finally issued ASU 2016-02, Leases, in February 2016. ASU No. 2016-02 is effective for public companies for periods beginning after December 15, 2018, and for nonpublic companies for periods beginning after December 15, 2019. The amendments in ASU 2016-02 will replace all pre-existing lease guidance under FASB ASC 840. Health care organizations generally have significant equipment and/or facility operating lease arrangements. As such, ASU 2016-02 will have a profound impact on the financial statements of many health care organizations.
ASU 2016-02 will require lessees to capitalize leases as “right to use assets,” and recognize a corresponding liability for the present value of future lease payments. The recognition, measurement, and presentation of expenses and cash flows arising from leases by a lessee will not significantly change from current guidance. In preparing for the implementation of the new lease standard, the following actions should be considered:
  1. Review existing contracts for lease arrangements, including contracts that may have “embedded” lease arrangements;
  2. Prepare a comprehensive inventory of all existing leases (both real-estate and non-real estate leases);
  3. Classify each lease as either a finance lease (similar to capital leases under existing guidance) or as an operating lease;
  4. Review each lease contract for “lease” components and “non-lease” components and allocate costs accordingly;
  5. Determine the amounts, terms, and other factors that should be considered in determining the lease liability;
  6. Develop policies to account for leases under the new guidance and train staff accordingly;
  7. Evaluate the impact of the new guidance on debt arrangements and other existing contracts.
Implementation of the new revenue recognition and lease standards will be a challenge for most health care organizations. Despite the fact that health care resources are already spread thin, it is critical to dedicate the time and resources to develop implementation strategies to adopt these standards. Time spent up-front will go a long way towards ensuring a smooth transition.