west virginia chapter
Winter Conference
CFO Breakout Session:
Accounting & Auditing Update
Norman Mosrie, CPA, CHFP, FHFMA
Partner
Dixon Hughes Goodman LLP
Charleston, WV
January 19, 2012
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
2
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
4
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 2011
www.hfma.org/EHRPayments
 Overview of Accounting Models
• Contingency
• Grant
 SEC registrants vs. Non-registrants
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Medicare EHR Accounting and Reporting
 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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Medicare EHR Accounting and Reporting
 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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Medicare EHR Accounting and Reporting
 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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Medicare EHR Accounting and Reporting
 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)?
10
Illustration of application of contingency model - ABC Hospital
Year 2 preliminary
incentive payment
received
Year 2 actual
payment amount
can be calculated
EHR reporting period - Year 2
7/1/11
9/30
ABC's FY 2012
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?
6/30/12
11/15/12
6/30/13
ABC's FY 2013
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).
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Medicare EHR Accounting and Reporting
 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 nonoperating cash flows category
- Revenue associated with operating cash flows (i.e. EHR
incentive payments) should be reported as operating
revenue
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Medicare EHR Accounting and Reporting
 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
13
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.
14
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
15
16
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 Disclosure
Illustrations
 Organization that uses cost accounting system data
Of 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 ratio
Of 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 Entities
Presentation of
Insurance Claims and
Related Insurance
Recoveries
ASU 2010-24: Health Care Entities
Display 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
21
ASU 2010-24: Health Care Entities
Display 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.
22
ASU 2010-24: Health Care Entities
Display of Malpractice Claims And Other Similar Contingent Liabilities
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
23
ASU 2010-24: Health Care Entities
Display of Malpractice Claims And Other Similar Contingent Liabilities
 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
27
Fair Value Accounting
New Disclosures Required
 Disclose/describe sensitivity of measurement to changes in
inputs
Example:
“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
30
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 “grossup” 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
32
Impact Of Adoption Of ASU 2011-07
Presentation
Before
After
Statement of Operations
Statement of Operations
Net patient service revenue
$200,000
Net patient service revenue
$200,000
(115,000)
Provision for bad debts
(80,000)
(80,000)
Net revenue
$120,000
Operating expenses:
Specific expenses (listed)
Provision for bad debts
Total operating expenses
Excess of revenues over expenses
(195,000)
5,000
Operating expenses (list)
Excess of revenues over expenses
(115,000)
5,000
33
Impact Of Adoption Of ASU 2011-07
Disclosures
 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
34
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
35
Miscellaneous Debt
Topics
37
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
38
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
39
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
40
GASB Developments
GAS 61: The Financial Reporting Entity
Comprehensive reconsideration of
GAS 14
Effective for periods beginning after
June 15, 2012
Key aspects to consider:
• Component unit criteria
• Blending
• Disclosures
42
GAS 61: The Financial Reporting Entity
 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
43
GAS 61: The Financial Reporting Entity
 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
44
GAS 61: The Financial Reporting Entity
 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
45
GAS 62: Codification of Pre-1989 FASB
Standards
Effective for periods beginning after
December 15, 2011
Key aspects to consider:
• Leasing
• Business combinations
• Goodwill
• Elimination of “paragraph 7” option
46
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)
47
GAS 62:
Specific Topics Addressed
Accounting changes and
error corrections
Investments in common stock
Leases
Capitalization of interest
costs
Regulated operations
Contingencies
Special and extraordinary
items
Extinguishments of debt
Imputation of interest costs
Statement of net assets
classification
48
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
49
Question & Answer
Session
Disclaimer
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.
51