Financial Reporting
Scott Furniss
Sr. VP/CFO
St. Agnes HealthCare, Inc.
March 30, 2012
Intro
Today’s Discussion
 Finance Departments and Activities
 Accounting Concepts
 Common Issues
 Basic Accounting Transactions
 Basic Financial Statements
 Example Financial Statements
 Financial Ratios and Analysis
 Case Study
Finance Departments
Typical Finance Department
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General Accounting
Accounts Payable
Payroll
Treasury
Rates & Reimbursement
Taxes
Financial Analysis and Budget
Financial Reporting
All entities…. Hospital and Subsidiaries
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Typical Finance Department
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Daily Account posting
Bi-weekly Payroll
Monthly Close (J/E’s, Reconciliations, etc.)
Monthly Compliance Reports (HSCRC)
Monthly/Quarterly Management-Board Reports
Quarterly Disclosure Reports
Plus…
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Typical Finance Department
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Annual Budget
Annual Cost Reports (CMS, HSCRC, others)
Annual Tax Returns (IRS, PBGC, State)
Annual Financial Statements and Audit
All entities…. Hospital and Subsidiaries
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Accounting Concepts
Reporting Standards
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Generally Accepted Accounting Standards (GAAP)
Financial Accounting Standards Board (FASB)
Securities Exchange Commission (SEC)
Internal Revenue System (IRS)
Centers for Medicare & Medicaid Services (CMS)
Health Services Cost Review Commission (HSCRC)
Employee Retirement Income Security Act (ERISA)
Others….
Cash vs. Accrual Accounting
Two ways of recording transactions
• Accrual basis
– recognized when
event happens
– earned
– incurred
• Cash basis
– recognized when cash
changes hands
– received
– paid
Accrual Accounting Transactions
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1/10
1/15
1/31
2/10
2/28
3/15
3/31
$1,000 of supplies ordered
$600 of supplies arrive, no payment
Books closed for January
$400 of supplies arrive, no payment
Books closed for February
Invoice for $1,000 received and paid
Books closed for March
Accrual Transactions
Proper matching of revenue and expense transactions and
accounting periods
Valuation Methods
• Current Value: Cash, Vacation liabilities, inventories
• Market Value: Investments, Debt
• Historical Cost: Buildings and Equipment
• Net Realizable Value: Receivables, Payables
Accounts Receivable “Net Realizable Value”
• Contractual Adjustments – per contracts/agreements
• Charity Care – inability to pay known when served
• Bad Debt Expense – failure to pay after service
• Allowance for Uncollectible Accounts – impact of
Contractual Adjustments and Bad Debt
“Net Realizable Value”
• Original charges vs. estimate of final collections
Accounts Receivable
Allowance For
Uncollectible Accounts
$12,000,000
$2,500,000
Net Realizable Value
$9,500,000
A/R Valuation Analysis
Common Issues
Depreciation & Amortization
Systematic and rational allocation of the cost of a
long-term asset over its estimated useful life
Used for both tangible and intangible assets
Allocation of Tangible Assets = Depreciation
Allocation of Intangible Assets = Amortization
Examples:
• MRI - 10 years
• Building - 40 years
• Software - 5 years
Depreciation Methods
• Straight line method - primary
• Accelerated methods:
– Units-of-production
– Sum-of-the-years’-digits
– Double-declining balance
• Tax implications for taxable entities
Straight Line Depreciation
Valuation of Property Assets
(Straight Line Method)
Lease Accounting
• Operating vs. Capital
• Operating: Are we just leasing it for a short period of time?
• Capital: Will we own it or use it up by the end of the lease?
• Default = Operating… unless it meets specific criteria
• Why care? …. Operating = Lease expense
• Capital = Depreciation and interest expense
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Capital Leases
4 Ways to become a Capital Lease:
 Title passes to Lessee at end of lease term
 Bargain purchase option ($1 buy-out)
 Lease term is > 75% of estimated useful life (AHA
guidebook)
 NPV of lease payments >90% of property leased
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Donor Restricted Funds
• Unrestricted – can be used for any purpose to support entity
• Temporarily Restricted – restricted by donor for specific
purpose
• Permanently Restricted – only income on investments can be
used for purpose determined by the donor
• Uniform Prudent Management of Institutional Funds Act
(UPMIFA) rules can limit annual spending
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Allocation of Costs
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Benefits
Depreciation
Overhead
Support Services
Other
• Purpose = reflect “total” cost of business at
Department level
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Capitalized Expenses
Costs to make items operational
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Shipping
Installation
Calibration & Testing
System “build” (but not data conversion)
Training costs are not capitalized
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Basic Accounting
Transactions
Transaction Data Pyramid
Financial
Statements
Departmental Reports
Trial Balance
General Ledger
Daily Transactions & Journal Entries
Basic Accounting Transactions
Transaction based activity:
• Accounts Payable – invoices/payments
• Purchasing Activity – supplies and services
• Patient Charges
• Payroll
• Collections on receivables
• Investment and Debt activity
Basic Accounting Transactions
Journal Entry Activity:
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Depreciation expense
Bad Debt Expense
Accrual adjustments
Reconciliation adjustments
This can be a manual activity, data “upload”, or an interface…
Example Activity Entries
Trial Balance
• List of all account BALANCES
• Total debits = total credits
• Preliminary to preparation of financial statements
Basic Accounting Transactions
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Double-entry bookkeeping
Debits & Credits
Cash Transactions
Journal Entries
Subsidiary records
– Accounts Receivable
– Accounts Payable
– Payroll
– Purchase Orders
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Example Trial Balance
Departmental Reports
Basic Financial Statements
Basic Financial Statements
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Balance Sheet
Statement of Operations (Income Statement)
Statement of Changes in Net Assets
Statement of Cash Flows
Notes to the Financial Statements
Basic Financial Statements
• Balance Sheet
– Shows assets, liabilities and equity
(Assets = Liabilities + Equity)
– Statement of position - a snapshot in time
– Always as of a date, not for a period of time
Balance Sheet
Assets - items of value to which a company has a
legal claim
Liabilities - amounts owed by company
Equities - ownership’s net claim on the assets
Balance Sheet
Current Liabilities
Current Assets
Long-Term Debt
Long-Term Assets
Equity
Current Assets
• Will be consumed within 12 months
• Listed in order of liquidity:
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Cash
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Current Assets
• Cash
– checks and money on deposit
– credit card receipts
• Short-term investments
– marketable securities
– certificates of deposit
– other investment instruments
Current Assets
• Accounts receivable
– funds owed to the company
– government and insurance payors
– individual patients
– other
• Inventories
– Medical, surgical and office supplies
– Fuel, food
Current Assets
• Prepaid expenses
– prepaid insurance
– prepaid rent and supplies
– prepaid interest and property taxes
Fixed (Long-Term) Assets
• Useful life > 1 year
• Long-term assets include:
– Property, plant and equipment
– Natural resources
– Intangible assets
Property, Plant & Equipment
• Land improvements
– parking lots, sidewalks, landscaping
• Buildings
• Fixed equipment
– Boilers, HVAC
• Major equipment
– MRI, Linear Accelerators
Intangible Assets
• Items of value which lack physical characteristics
– Goodwill
– Patents/Trademarks
– Franchises/Licenses
– Customer lists
– Computer software
Current Liabilities
• Payable within 12 months
– trade accounts payable (invoiced)
– salaries, wages, payroll taxes payable, accrued
vacation
– accrued liabilities (known, but not yet invoiced)
– advances from third-party payers
– interest payable
Long-Term Liabilities
• Repaid over a period > 1 year
– bonds and notes payable
– bank loans
– pension liability
Equity
• Net assets of the company
• Owners’ claims on the company assets
– stock
– contributed (or paid in) capital
– accumulated profits/losses
• Restricted and Unrestricted
Unique to Not-For-Profits
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Assets limited as to use
Contributions receivable
Advances from 3rd party payors
Third party settlements
Restricted net assets
No Tax expense/liability
Unique to Health Care
ASSETS:
• Assets Limited as to Use
– Proceeds from tax-exempt bond issues
• Construction Fund
• Debt Service Reserve Fund
– Board Designated
– Donor Restricted
• Contributions
Unique to Health Care
LIABILITIES AND NET ASSETS:
• Advances from third-party payors
• Temporarily and permanently restricted Net Assets
Statement of Operations
Operating Revenues
Operating Expenses
Net Operating Income
Basic Financial Statements
STATEMENT OF OPERATIONS:
• Revenues and Gains
• Expenses
• Other Income and Expenses
Unique to Health Care NFP’s
OTHER REVENUES:
• Separate from Patient Revenue…
• Contributions
• Net Assets Released from Restrictions
• Rental Income
• Parking/Cafeteria Sales
• Grants
Basic Financial Statements
STATEMENT OF CHANGES IN NET ASSETS:
• Operating income
• Grants
• Contributions
• Net assets released from restrictions
• For operations
• For property and equipment
Basic Financial Statements
STATEMENT OF CASH FLOWS:
• Operating activity
• Investing activity
• Financing activity
• Unrestricted and Restricted
Notes to Financial Statements
 Significant Accounting Policies
 Major Assets and Liabilities Detail
 Commitments and Contingencies
 Other Information
Notes to Financial Statements
SIGNIFICANT ACCOUNTING POLICIES:
• Organizational structure
• Charity Care
• Revenue Methodology
• Asset Valuations
Notes to Financial Statements
ASSET AND LIABILITIES DETAIL:
• Investments
– Cost vs.. Current Value
• Property and Equipment
• Debt and Assets Held by Trustee
Notes to Financial Statements
COMMITMENTS AND CONTINGENCIES:
• Pension and Post-Retirement Benefits
• Malpractice
• Outstanding Litigation
• Credit Risk/Payor Mix
Notes to Financial Statements
OTHER INFORMATION:
• Related Party Transactions
• Credit Risk/Payor Mix
• Functional Expenses
– Healthcare services
– General and administrative
Financial Ratios and
Analysis
Financial Ratios and Analysis
Average Age of Plant
Accumulated Depreciation/Depreciation Expense
Average Daily Census
Bad Debt Expense/Total Operating
Revenue
Patient Days/365
Bad Debt Expense/(Net Patient Revenue + Other
Operating Revenue)
Cash Flow
Net Income + Depreciation & Amortization
(Net Income + Depreciation & Amortization)/Total
Liabilities
Cashflow/Total Liabilities
“Cushion” Ratio
Days Cash on Hand
EBIDA (Earnings Before Interest,
Depreciation & Amortization)
Cash/Maximum Annual Debt Service
Cash/(Operating Expenses - Depreciation &
Amortization)/365)
Net Income + Interest, Depreciation & Amortization
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Financial Ratios and Analysis
EBIDA Margin
Interest Coverage
Long Term Debt/Capitalization
Maximum Annual Debt Service (MADS)
Coverage
EBIDA/Total Revenue
Net Income Available for Debt Service/ Interest
Expense
Long Term Debt/(Unrestricted Net Assets + Long
Term Debt)
Net Income Available for Debt Service/MADS
Operating Margin
Net Operating Income/Total Operating Revenue
Operating Cash Flow Margin
EBIDA/Total Operating Revenue
Current Liabilities/(Total Operating Expense Depreciation & Amortization)
Payment Period
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Financial Ratios and Analysis
Sample Hospital - Key Financial Metrics Report
Fiscal Year End
2007
2008
2009
2010
2011
Operating margin (%)
1.46
1.69
0.41
1.81
1.13
Excess margin (%)
3.79
3.96
3.11
1.06
2.70
EBIDA margin (%)
10.75
10.83
9.44
7.75
9.18
16.9
18.1
16.2
11.6
14.6
Max debt service coverage (x)
3.93
5.30
4.82
4.06
5.01
Maximum debt service-to-total revenue (%)
2.72
2.04
1.96
1.91
1.83
Income Statement and Cash Flow
Cash flow/total liabilities (%)
Debt
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Financial Ratios and Analysis
Sample Hospital - Key Financial Metrics Report
Fiscal Year End
2007
2008
2009
2010
2011
Days cash on hand
163
179
154
128
140
Unrestricted cash/debt (%)
130
166
160
126
145
Cushion ratio (x)
14.9
21.8
19.8
17.2
19.3
Long-term debt/capitalization (%)
32.9
27.6
27.6
32.4
30.5
Average age of plant (years)
11.4
11.5
12.7
12.5
11.1
Balance Sheet
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Questions?