cfo breakout session: accounting & auditing update

CFO Breakout Session:Accounting & Auditing Update

Norman Mosrie, CPA, CHFP, FHFMAPartnerDixon Hughes Goodman LLPCharleston, WV

January 19, 2012

west virginia chapter

Winter Conference

Agenda EHR Incentive Payments ASU 2010-23: Charity Care Disclosure ASU 2010-24: Health Care Entities – Presentation of Insurance

Claims and Related Insurance Recoveries ASU 2011-04: Fair Value Measurement ASU 2011-07: Presentation and Disclosure of Patient Service

Revenue Miscellaneous Debt Topics GASB Developments Question & Answer Session Disclaimer

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EHR Incentive Payments

Background

American Recovery and Reinvestment Act of 2009 • Established incentive payments for professionals and hospitals

that meaningfully use certified electronic health record (EHR) technology

Goal of incenting hospitals to use EHR to:• Improve quality, safety, efficiency

• Improve coordination of health care

• Maintain privacy/security

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Medicare Incentive Payments

Incentive payment consists of:• Base sum of $2 million

• Plus $200 per discharge (between 1,150 – 23,000)

• Collectively multiplied by the Medicare share and a transition factor from 100% (Year 1) to 25% (Year 4)

Incentive payments unavailable for hospitals that first become meaningful users after 2015

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Medicare EHR Accounting and Reporting

HFMA Issue Analysis Paper December 2011www.hfma.org/EHRPayments

Overview of Accounting Models• Contingency

• Grant

SEC registrants vs. Non-registrants

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Contingency Accounting Model• Contingencies must be resolved prior to recognizing revenue

• Compliance with meaningful use for full reporting period• Discharge information related to discharges in the hospital’s

cost report year that begins in EHR reporting period• EHR reporting period is based on Federal fiscal year of

October 1 through September 30th

• Consequently, under this model typically the contingency related to discharge and other final payment calculation data is not met until the last day of the cost report year

• Incentive payment income recorded entirely in period last contingency resolved

• SEC has informally indicated that registrants should follow this model

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Grant Accounting Model• Grant income is recognized

• Hospital complies with grant requirements

• Payment is reasonably assured

• Cliff recognition

• Hospital unable to determine compliance until after EHR reporting period has ended

• Income recognized all at once

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Grant Accounting Model (continued)• Estimation recognition

• “Reasonable assurance” of compliance with minimum number of meaningful use criteria and other grant requirements

• Income recognized ratably over the period once “reasonable assurance is met”

• If reasonable assurance met during interim point during the reporting period, then a cumulative catch-up adjustment is made

• If reasonable assurance is no longer met, then a change in estimate would be made in that period

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Reasonable assurance is judgmental• How long has the hospital been operating and EHR system?

• How far along is the hospital with implementing computer physician order entry (CPOE)?

• How reliable are the processes and controls in place?

• Is the hospital doing the bare minimum to qualify for meaningful use (i.e. in Stage 1, hospitals have to comply with 14 core objectives and 5 of 10 menu set objectives)?

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7/1/11 9/30

Illustration of application of contingency model - ABC Hospital

6/30/136/30/12 11/15/12

EHR reporting period - Year 2

ABC's FY 2012 ABC's FY 2013

Year 2 preliminary incentive payment

received

Year 2 actual payment amount can be calculated

ABC's management identifies two contingencies: (1) Will ABC qualify for 2 Year 2 incentive payment? and (2) What payment amount will it be entitled to, based on actual (rather than estimated) data?

If the first contingency is resolved on September 30, 2012 (the 365th day of consecutive compliance) and the second contingency is resolved on June 30, 2013 (the last day of the fiscal year, when the incentive payment amount can be calculated based on actual data), then ABC recognizes income from the incentive payment all at once on June 30, 2012 (the day that the final contingency is resolved).


Statement of operations presentation• Nongovernmental hospitals

- Operating or non-operating on a facility basis that complies with existing GAAP

• Governmental hospitals

- GASB standards identify what should be reported in the non-operating cash flows category

- Revenue associated with operating cash flows (i.e. EHR incentive payments) should be reported as operating revenue

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Disclosures• Accounting policy including financial statement presentation and

method of income recognition

• General description of the program

• Based on best estimates subject to audit by the Federal government or its designee, with changes in estimate recognized in the period known

• Material changes in prior year estimates impacting current year income

• Overall extent of disclosures impacted by materiality

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EHR Accounting and Reporting

HFMA issues paper provides practical assistance on this emerging issue but is not authoritative. Stay tuned

for additional guidance on EHR accounting and reporting.

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Medicaid EHR Incentive Payments

State Medicaid programs may also establish their own EHR meaningful use incentive programs

Requirements for qualifying for receipt of Year 1 Medicaid EHR meaningful use incentive funds may be less rigorous than the Year 1 Medicare requirements

Concepts in the HFMA Medicare issues paper may be helpful in determining accounting policy

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ASU 2010-23:Charity Care Disclosure

ASU 2010-23: Charity Care Disclosure Issued August 2010

Amends ASC 954 (Health Care Organizations) and AAG-HCO

What’s Changing?• Charity care disclosure must be based on estimated costs of providing

the services- Include direct and indirect costs- Variety of estimation approaches permitted

• Also disclose- Measurement approach utilized - Amount of any funds received to offset or subsidize charity services

provided Effective Date and Transition

• Effective for fiscal years beginning after December 15, 2010• Early application permitted• Requires retrospective application to prior periods presented

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ASU 2010-23: Charity Care DisclosureIllustrations

Organization that uses cost accounting system dataOf the Health System’s total expenses reported ($100,000,000 and $125,000,000 in 20x1 and 20x0, respectively), an estimated $15,000,000 and $20,000,000 arose during 20x1 and 20x0, respectively, from providing services to charity patients. The estimated costs of providing charity services are based on data derived from the System's cost accounting system. The System received $100,000 and $75,000 in contributions that were restricted for the care of indigent patients during 20x1 and 20x0, respectively

Organization that uses cost-to-charge ratioOf the Hospital’s $80 million of total expenses reported, an estimated $12.5 million arose from providing services to charity patients. The estimated costs of providing charity services are based on a calculation which applies a ratio of costs to charges to the gross uncompensated charges associated with providing care to charity patients. The ratio of cost to charges is calculated based on the Hospital’s total expenses (less bad debt expense) divided by gross patient service revenue. During the year, Hospital received $2 million in grants from ABC County to help defray the costs of indigent care

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ASU 2010-24:Health Care EntitiesPresentation of Insurance Claims and Related Insurance Recoveries

ASU 2010-24: Health Care EntitiesDisplay of Malpractice Claims And Other Similar Contingent Liabilities Applies to all health care entities Issued August 2010 Effective for fiscal years, and interim periods within those

years, beginning after December 15, 2010 Retrospective application not required

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ASU 2010-24: Health Care EntitiesDisplay of Malpractice Claims And Other Similar Contingent Liabilities

What’s Changing?• Clarifies that health care entities should not net insurance recoveries

against related claim liabilities.

• Entity should evaluate its exposure to losses arising from claims and recognize a liability apart from any anticipated insurance recoveries.

• If the entity is indemnified for losses, it should recognize a receivable at the same time, measured on the same basis as the related liability, subject to the need for a valuation allowance for uncollectible amounts.

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ILLUSTRATION Facts

• HCO’s gross liability for malpractice claims is $5 million• Of that, $1.5 million has been submitted to the insurer under a claims-made

policy Current Accounting Guidance

• Accrue a liability only for claims where risk has not been transferred to external third-party under the terms of the policy (ASC 954-450, AAG-HCO Chapter 8)

• HCO accrues a malpractice liability of $3.5 million Revised Guidance (ASU 2010-24)

• Accrue the gross liability• Accrue an insurance receivable for claims covered by insurance at the

reporting date• HCO will accrue a malpractice liability of $5 million and an insurance

receivable of $1.5 million

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Additional Clarification (or Change!!!)• Clarifies that health care entities should apply this gross up to all similar

contingent obligations (e.g., workers compensation)

• The “transfer of risk to a third-party” concept was removed so the gross up applies to all policies (e.g., Occurrence based policies)

• The ASU requires the accrual of legal and processing costs related to these contingent obligations (whereas, accruing legal costs is generally considered a policy election for other industries)

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ASU 2011-04:Fair Value Measurement

ASU 2011-04: Fair Value Measurement

Final ASU issued in May with 300+ pages Converges US GAAP and IFRS rules on fair value

measurement Effective:

• For public entities, effective during interim and annual periods beginning after December 15, 2011

• For non-public entities, effective for annual periods beginning after December 15, 2011

Applied prospectively Early adoption by public entities is not allowed, nonpublic

entities can but no earlier than for interim periods beginning after December 15, 2011

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ASU 2011-04: Fair Value Measurement

Objectives:

• Primary Objective - Consistency in word used by the standard setters

• Secondary Objective – Provide clarification and some refinement to measurement/valuation

Expected Impact:

• No significant impact to measurement

• Significant additional disclosure, but generally expected to come from information that is readily available

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Fair Value AccountingNew Disclosures Required Disclose/describe sensitivity of measurement to changes in

inputsExample: “The significant unobservable inputs used in the fair value measurement of ABC Company’s residential mortgage-backed securities are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.”

Disclose ALL transfers between Level 1 and Level 2 (not just those that are “significant”)

For fair value measurements included in “FAS 107” disclosures, must indicate level and significant inputs used

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ASU 2011-07:Presentation and Disclosure of Patient Service Revenue

ASU 2011-07: Presentation and Disclosure of Patient Service Revenue

Formerly EITF 09-H Amends ASC 954, Health Care Entities Effective date

• For public entities, effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011

• For non public entities, effective for the first annual reporting period ending after December 15, 2012

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ASU 2011-07: Presentation and Disclosure of Patient Service Revenue

Scope• Applies to “HCOs that recognize patient service revenue at the time

services are rendered even though the HCO does not assess the patient’s ability to pay”

• Applies only to HCOs that have significant (not defined, so will require judgment) amounts of such revenue

• Applies only to provision for bad debts associated with patient service revenue

• Does not apply to bad debts associated with any other sources of revenue

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Examples Within Scope of ASU

• Hospital A serves a large population of patients who are unable to pay for services. Hospital must often provide treatment before it can obtain information on patient’s ability to pay. Many patients’ accounts that would otherwise qualify for charity care are written off to bad debts, because the patient cannot provide required documentation. Thus, Hospital A’s provision for bad debts is not a reflection of Hospital A’s credit risk. Its income statement has an artificial “gross-up” of revenue which is unlikely to ever be realized, with a large related bad debt write-off - Hospital A is within scope of ASU- Hospital A must show entire provision for bad debts associated with its

patient service revenue as a deduction from revenue Not Affected by ASU

• Laboratory B assesses the expectation of collectability for every patient. If a patient is deemed to be unable to pay (and Lab B decides to provide the service anyway), no revenue is recorded for that patient. Lab B’s provision for bad debts is reflective of its credit risk.- Lab B is not within scope of ASU, because it assesses collectability prior to

providing service- Lab B continues to report the provision for bad debts associated with its

patient service revenue as an operating expense

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Impact Of Adoption Of ASU 2011-07Presentation

AfterStatement of Operations

Net patient service revenue $200,000

Provision for bad debts (80,000)

Net revenue $120,000

Operating expenses (list) (115,000)

Excess of revenues over expenses 5,000

BeforeStatement of Operations

Net patient service revenue $200,000

Operating expenses:

Specific expenses (listed) (115,000)

Provision for bad debts (80,000)

Total operating expenses (195,000)

Excess of revenues over expenses 5,000

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Impact Of Adoption Of ASU 2011-07Disclosures

Sources of revenue by major payor

Policy for assessing the timing and amount of uncollectible revenue recognized as bad debts

Policy for assessing collectability in determining the timing and amount of revenue (net of contractual allowances and discounts) to be recognized

Patient service revenue (net of contractual allowances and discounts) before any provision for bad debts

Quantitative and qualitative information about significant changes in the allowance for doubtful accounts related to patient accounts receivable

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ASU 2011-07: Draft AICPA Technical Practice Aid (TPA) in Consolidated Financials

Question• For a consolidated health care entity that prepares separate subsidiary

statements, do you apply the ASU at the subsidiary level and roll the results up?

• Or do you make a separate assessment for the consolidated health care entity as a whole?

ASU silent on this matter• Policy decision

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Miscellaneous Debt Topics

Definition Of “Public Entity”

Some FASB GAAP differentiates between entities with “debt or equity securities that trade in public markets” and other entities • Historically, has primarily affected extent of disclosures

FSP FAS 126-1, Applicability of Certain Disclosure and Interim Reporting Requirements for Obligors for Conduit Debt Securities• Affected organizations that issue municipal bonds through

governmental issuers (conduit obligors)

• Conduit obligors whose bonds trade in public markets (e.g., the OTC market) are considered "public entities”

- Does not include private placements

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Definition Of “Public Entity”

Common misconceptions• “Public entity” status does not

- Require an NPO to apply FASB standards that exempt NPOs

- Impose SEC or other regulatory filing requirements on NPOs

- Result in an NPO being required to comply with Sarbanes-Oxley

In the Codification, the “public entity” concept is dealt with primarily through the Glossary and the Scope sections of topics

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Joint & Several Obligations

Presentation in Obligated Group members’ standalone financial statements• Pervasive practice – allocation with disclosure

• Views:

- Allocated portions (balance sheet and statement of operations)

- Gross Presentation (100% recorded in each member’s financial statements)

FASB is evaluating the issue

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GASB Developments

Comprehensive reconsideration of GAS 14Effective for periods beginning after June 15, 2012Key aspects to consider:• Component unit criteria

• Blending

• Disclosures

GAS 61: The Financial Reporting Entity

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Amends Financial Accountability Concept• Must be fiscally dependent on primary government (same as before)

• A financial benefit or burden relationship must also be present for the component unit to be included

If any one of these conditions exists, then there is a financial benefit or burden relationship:• Primary government is legally entitled to or can otherwise access the

organization’s resources

• Primary government is obligated in some manner for the debt of the organization

• Financial Benefit or Burden Relationship

- Primary government is legally obligated or has otherwise assumed the obligation to finance the deficits of, or provide financial support to, the organization

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Amends Major Component Unit Requirements• Clarifies types of relationships that affect determination of major

component units

• Eliminates requirement that the determination include consideration of each component unit’s significance relative to other component units

Amends The Criteria For Blending Component Units• When the governing bodies of the two entities are substantively the

same, a financial benefit or burden must also exist for blending to occur

• Blending will occur for component units whose total debt outstanding is expected to be repaid entirely or almost entirely by the primary government

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Amends requirements for reporting the funds of a blended component unit• For financial reporting purposes, funds of a blended component unit

have the same financial reporting requirements as the primary government

• Provides reporting guidance if the primary government is a business type activity that reports in a single column

Amends requirements for reporting equity interests in component units• Primary government must report an asset for its equity interest in a

discretely presented component unit

Amends note disclosures• Governments should disclose the rationale for including each

component unit and the manner in which it is included

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Effective for periods beginning after December 15, 2011Key aspects to consider:• Leasing

• Business combinations

• Goodwill

• Elimination of “paragraph 7” option

GAS 62: Codification of Pre-1989 FASB Standards

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GAS 62: Codification of Pre-1989 FASB Standards

Going forward, governmental entities will just rely on GASB standards• If GASB doesn’t have a standard that addresses the issue, then FASB

codification can be used as an example and guide (but not authoritative)

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Accounting changes and error correctionsCapitalization of interest costsContingenciesExtinguishments of debtImputation of interest costs

Investments in common stockLeasesRegulated operationsSpecial and extraordinary itemsStatement of net assets classification

GAS 62:Specific Topics Addressed

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GASB’s Technical Agenda(Active Projects)

ED F

Derivatives: Application of Termination Provisions 4Q10 2Q11

Postemployment Benefits – Pension 2Q11 2Q12

Deferred Inflows and Deferred Outflows, and Net Position 3Q11 1Q12

Postemployment Benefits – OPEB 2Q12 2Q13

Financial Guarantees 2Q12 4Q12

Business Combinations 2Q12 1Q13

ED – Exposure Draft F – Final Standard

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Question & Answer Session

Disclaimer

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The views expressed in this session are the

views of the expert panel member and do not

necessarily represent the views of the AICPA,

the financial accounting standards board, or

other authoritative entity.

cfo breakout session: accounting & auditing update

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