10/30/2016
CPAs & ADVISORS
experience clarity //
REVENUE RECOGNITION FOR HEALTH CARE PROVIDERS
Kimberly McKay, CPA
Managing Partner – BKD. LLP - Houston
FASB ASU NO. 2014-09 – REVENUE FROM
CONTRACTS WITH CUSTOMERS (TOPIC 606)
Objective: To develop a single,
principle-based
revenue standard for U.S.
GAAP & IFRS
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OVERVIEW
• A new, principle-based revenue standard
• Affects all FASB reporting entities
• Joint project with IASB to clarify principles
for revenue recognition & create a
common revenue standard
• Better comparability of revenue
recognition across industries
• Improved disclosure requirements
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FASB/IASB REVENUE RECOGNITION
TIMELINE
2002
2003
September
Beginning of
Revenue
Project
December
November
May 2014
Discussion
Paper
Revised
Exposure Draft
Final
Standard
2008
2009
2010
2011
June
Initial
Exposure Draft
2012
2014
2018
January 1st
Effective Date
for Public
Entities
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EFFECTIVE DATE
TRANSITION APPROACHES
Transition
Approach
Full Retrospective
2017
Restate for all
contracts
2018
Date of Cumulative
Effect Adjustment
Apply to all contracts
January 1, 2017
Retrospective Using
Restate for all
One or More Practical contracts except
Expedients
contracts covered by
practical expedients
Apply to all contracts
January 1, 2017
Cumulative Effect at
Date of Adoption
Apply to all contracts
January 1, 2018
No contracts
restated; reported
based on legacy
guidance
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SCOPE
• All Entities that enter into contracts with customers
 Public, private, not for profit
 Regardless of industry
• All contracts with customers except





Lease contracts
Insurance contracts
Financial instruments
Guarantees
Non-monetary exchanges in the same line of
business to facilitate sales to customers
• Excludes
 Contributions
 Collaborative agreements
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CORE PRINCIPLE
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
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PRACTICAL EXPEDIENTS
Guidance specifies the accounting is for an
individual contract with a customer,
however, as a practical expedient, an entity
may apply guidance to a portfolio of
contracts if it does not differ materially
from applying the guidance on an
individual basis
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REVENUE RECOGNITION PROCESS
Identify Contract with a Customer
Identify Performance Obligations
Determine the Transaction Price
Allocate the Transaction Price
Recognize Revenue When/As a Performance Obligation is Satisfied
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AICPA REVENUE RECOGNITION TASK FORCES
Aerospace and Defense
Airlines
Asset Management
Broker-Dealers
Construction Contractors
Depository Institutions
Gaming
Health Care
Hospitality
Insurance
Not-for-profit
Oil and Gas
Power and Utility
Software
Telecommunications
Timeshare
AICPA REVENUE RECOGNITION TASK FORCES
• Develop a new Accounting Guide on Revenue Recognition
• Guide to provide helpful hints and Illustrative examples on
how to apply the standard
• Guidance will not be prescriptive but instead intended to be a
resource
• Full implementation issues will be posted for comment after
review from the overall Revenue Recognition Working Group
and FinREC
• List of issues by industry is posted on the AICPA website
• www.aicpa.org
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REVENUE RECOGNITION GUIDE IMPLEMENTATION
PROCESS
AICPA
RRTF
TRG
RRWG
FASB
Staff
Fin
REC
HEALTH CARE ISSUES IDENTIFIED
• Revenue recognition for self-pay patients
• Application of Steps 1 and 3
• Application of the portfolio approach
• Identifying the performance obligation and recognition of
refundable and non-refundable entrance fees for CCRC’s
• Significant Financing Components
• Disclosure requirements as compared to ASU 2011-07
• Contract acquisition costs
• Determination of the transaction price as it relates to thirdparty estimates
• Bundled payments and risk sharing arrangements
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SELF-PAY REVENUE
• Current practice
 Gross charges, net of self-pay discounts recorded as contractual
adjustments
 Bad debt expense recorded and presented separately as a
reduction to net patient service revenue if an entity does not
assess collectability
• New guidance
 Record revenue at amount entity expects to be entitled to
 Bad debt expense presented as operating expense
 Use of judgment in determining what constitutes bad debt
versus implicit price concessions
• No change in charity care guidance
STEP 1 – IDENTIFY CONTRACT(S) WITH A CUSTOMER
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COLLECTIBILITY
• Collectibility will be explicit threshold that must be assessed before
applying revenue recognition model to contract. Entity must
evaluate customer credit risk & conclude that it is “probable” that it
will collect amount of consideration due in exchange for goods or
services
• Assessment is based on both customer’s ability & intent to pay as
amounts become due
• Difficult for health care entities to assess
• No such thing as cash basis in the model
CONSIDERATION RECEIVED BEFORE STEP 1 IS MET
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STEP 3 – IDENTIFYING THE TRANSACTION PRICE
• Transaction price is the amount of consideration an entity expects
to be entitled to
• Transaction price reflects the effects of the following:
•
•
•
•
Variable consideration
Significant financing component
Consideration payable to a customer
Noncash consideration
• Consideration is variable if explicitly stated, or if
• Customer has valid expectation arising from entity’s customary business
practices that entity will accept an amount that is less than the stated contract
price
• Other facts and circumstances indicate that the entity’s intention is to offer a
price concession to the customer
PORTFOLIO APPROACH
• Entities can apply the standard or aspects of it to a portfolio of
contracts or performance obligations with similar characteristics
(i.e., portfolio approach)
• Entities must reasonably expect that the financial statement effect
of using the portfolio approach will not differ materially from
applying the standard on a contract-by-contract basis
• Key considerations
 How to apply a portfolio approach
 How to establish portfolios
 How to determine effect would not differ materially
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PORTFOLIO APPROACH
• Portfolio approach may be applied to all aspects of the model or
only to certain steps
• If establishing portfolios, an entity will need to use judgment to
determine the size, composition and number of portfolios
 Health care entities may consider segregating by payor class,
type of service and other categories
• An entity also will need to consider materiality and documentation
requirements
IDENTIFYING THE CONTRACT – EXAMPLE
Background
• Hospital provides services to uninsured (self pay) patient in emergency
room
• Hospital has not previously provided medical services to this patient
• After providing services to patient, Hospital obtains information about
the patient’s ability and intention to pay
• Hospital designates the patient to a customer class
• The standard rate for the services provided are $10,000
• Hospital expects to accept a lower amount of consideration for the
services provided as such the promised consideration is variable
• Based on historical cash collections from this customer class and other
relevant information about the patient, Hospital determines that it
expects to be entitled to $1,000
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IDENTIFYING THE CONTRACT - EXAMPLE
Evaluation
• On the basis of its collection history from patients in this
customer class, Hospital concludes it is probable it will collect
$1,000 (estimate of variable consideration)
• Therefore, the contract with the patient has met the
requirements of Step 1 and will be accounted for under the
model
SELF PAY REVENUE RECOGNITION ISSUES
• HC entities need to consider specific facts and circumstances to
determine if an enforceable contract exists
• Currently, there is no concept of cash basis in the standard
• Medicaid pending status patients
 Use of historical information
 Use of portfolio approach
• Explicit versus Implicit price concessions
• Day 1 versus Day 2 accounting
 Where do subsequent changes to variable consideration get
reported?
• Practical implementation
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CCRC SPECIFIC CONSIDERATIONS
• The AICPA Healthcare Revenue Recognition Task
Force is analyzing the following primary issues as
they relate to CCRCs
• Accounting for monthly/periodic fees and nonrefundable
entrance fees under the different contract types (A, B, C, D),
including portfolio versus individual contract approach to
revenue recognition
• Significant financing component considerations for refundable
and nonrefundable entrance fees
• Obligation to provide future services and use of facilities
• Contract acquisition costs
CCRC SPECIFIC CONSIDERATIONS
• Entrance Fees
• Determining the performance obligations – series guidance
• Allocating the transaction price to the single performance
obligations
• Consideration of the variable consideration for maintenance fees
• Satisfying the performance obligation
• Amortization over the pattern of transfer of goods and
services
• Consideration of Significant Financing component
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DISCLOSURES
• Disclosures to enable the users to understand the nature, amount,
timing and uncertainty of revenue and cash flows from customers
• An entity shall disaggregate revenue recognized from contracts with
customers depending on the nature of that revenue
• i.e major payor type, geographical considerations, timing of goods and services
• Aggregated amount of the transaction price allocated to
performance obligations that are unsatisfied, including methods,
inputs and assumptions
• Timing and satisfaction of performance obligations
• Entity to disclose both qualitative and quantitative information
DISCLOSURES
• Per ASC 606-10-50 entities to disclose:
• Revenue from contracts with customers, including the
disaggregation of revenue into appropriate categories
• Contract balances, including the opening and closing balances of
receivables, contract assets and contract liabilities
• Revenue recognized in the reporting period that was included in
the contract liability at the beginning of the period
• Revenue recognized in the reporting period from performance
obligations satisfied
• Significant judgments and changes in judgments, made in
applying the requirements to those contracts
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DISCLOSURES – OPEN QUESTION
Does ASC 606 require a health care
entity to disclose the amount of the
implicit and explicit price
concessions granted to customers?
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FINANCIAL REPORTING
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THIRD PARTY SETTLEMENTS
• Determination of the transaction price for third party
settlements
• Medicare/Medicaid cost report settlements
• RAC accruals
• Risk adjustments for Prepaid Health plans
• Other
• Use method which entity expects to better predict the
amount of consideration to which it will be entitled
• Use of Expected Value (probability-weighted amount)
• Use of Most Likely Amount (single most likely amount in a range of
possible considerations)
THIRD PARTY SETTLEMENTS
Expected value
Most likely amount
•
Sum of the probability-weighted amounts in
a range of possible outcomes
•
The single most likely amount in a range of
possible outcomes
•
Most predictive when the transaction has a
large number of possible outcomes
•
Most predictive when the transaction has
two possible outcomes
• Required to evaluate whether to “constrain” amounts of
variable consideration included in transaction price
• Objective of the constraint – include variable consideration in
the transaction price only to the extent it is “probable” that a
significant revenue reversal will not occur
• Estimates must be updated each reporting period
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CONTRACT ACQUISITION COSTS
• Incremental costs of obtaining a contract
• Costs the entity incurs that would have not been incurred if the
contract was not obtained - Recognize as an asset if the entity to
expects to recover those costs
• Costs that would have been incurred regardless of whether the
contract was obtained – Expense as incurred
• Costs to fulfill a contract
• Costs related directly to a contract (i.e. costs of renewal of an existing
contract) – Recognize as an asset if costs are expected to be recovered
• Direct labor, Direct materials, costs charged under a contract
CONTRACT ACQUISITION COSTS
• Costs to fulfill a contract
• Costs to be expensed as incurred
• Administrative and General costs unless explicitly chargeable to
the customer under the contract
• Costs of wasted materials, labor or other resources to fulfill the
contract
• Costs related to past performance
• Costs for which an entity cannot distinguish whether it relates to a
performance obligation
• Practical Expedient – recognize as an expense when incurred if
the amortization period of the asset is one year or less
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CONTRACT ACQUISITION COSTS
• Amortization and Impairment
• Asset should be amortized consistent with the pattern of
transfer of the customer services
• Entity shall update the amortization for significant changes
in the pattern of transfer
• Asset should be evaluated for impairment
OTHER FACTORS TO CONSIDER
• New standard’s effect on revenue and trends in key
performance indicators
• Effect on internal control over financial reporting
• Effect on tax filings
• Approach taken by industry and other peers
• Cost of implementation
• Business effect
• Magnitude of required changes
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OTHER FACTORS TO CONSIDER
• Availability of personnel with necessary skills
• Ability of systems and processes to provide comparative
historical results
• Access to data and underlying support for new accounting
estimates
• Timely conclusion of unresolved interpretations
• Entity’s overall ability to manage potentially significant change
across the organization
WHAT TO DO NOW
Read the standard & related resources
Identify a champion or task force to study the new standard
Identify revenue streams
Document processes, analysis & conclusion for each
revenue stream & collaborate with others in your industry
Determine changes needed
Educate audit committees & boards
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THANK YOU
FOR MORE INFORMATION // For a
complete list of our offices and
subsidiaries, visit bkd.com or contact:
Kimberly McKay
Managing Partner
Houston, Texas
[email protected]
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