ACCOUNTING AND AUDIT UPDATE€¦ · ASU 2014-09: Revenue from contracts with customers # Type...

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ACCOUNTING AND AUDIT UPDATEHFMA FL Regional Education Session

November 14, 2017


Presenter

[email protected]

Brandon Slauter

Senior Manager

2


Agenda – Accounting and Auditing Update

Topic Field of study Minutes

Accounting Update- Recent KEY Accounting Standards Updates

- Emerging Issues

Accounting 50


Objectives – Accounting and Auditing Update

By the end of this section, you will be able to:

• Identify recent accounting pronouncements and

reporting topics that directly affect the health care

industry

• Be aware of emerging issues in accounting and

auditing health care clients

• Apply the knowledge gained to your upcoming

engagements


ACCOUNTING UPDATE


FASB UPDATERECENT ASU’S


Final standards recently issued - Revenue

ASU 2014-09, Revenue from Contracts with Customers (Topic

606)


606): Principal versus Agent Considerations (Reporting Revenue

Gross versus Net)


606): Identifying Performance Obligations and Licensing


606): Narrow-Scope Improvements and Practical Expedients

ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives

and Hedging (Topic 815): Rescission of SEC Guidance Because

of Accounting Standards Updates 2014-09 and 2014-16 Pursuant

to Staff Announcements at the March 3, 2016 EITF Meeting (SEC

Update)


ASU 2014-09: Revenue from contracts with customers

• Principles based approach instead of a rules

based approach

• Align with International Accounting Standards

• Scope

• All Entities that enter into contracts with

customers – Public, private, not for profit

• Excludes –

• Lease contracts

• Insurance contracts

• Contributions

• Guarantees

• Collaborative agreements



• Much of the information in this presentation was

derived, or came directly, from the 2016 Revenue

Recognition Session (Parts 1 & 2) at the 2016 AICPA

Healthcare Conference held in November 2016

• In addition, the following URL is for the home page

for the AICPA Health Care Revenue Recognition

Task Force which contains the list of implementation

issues and exposure drafts of issue papers

− Copy and paste the following URL into your web browser:

http://www.aicpa.org/InterestAreas/FRC/AccountingFinanci

alReporting/RevenueRecognition/Pages/RRTF-

HealthCare.aspx

http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognition/Pages/RRTF-HealthCare.aspx



• Issued in May 2014 with intent of providing a principles-based framework for addressing revenue recognition

• 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

• Five-step model:



Effective date of ASC 606

Calendar year end

entities

September30

year end

entities

Public entities*, quarter and

year beginning…

January 1, 2018 October 1, 2018

Other entities, year ending… December 31, 2019 September 30,

2020

Early adoption of ASC 606

Allowed for both public entities

and other entities…

As early as

January 1, 2017

As early as

July 1, 2017

* Public entities include PBEs, not-for-profit entities that have issued, or are

conduit bond obligors for, securities that are traded, listed or quoted on an

exchange or an over-the-counter market and (c) employee benefit plans that

file or furnish financial statements to the SEC



FASB/IASB

TRG

- Advises the Boards

- Does not have standard-setting authority

AICPA

AICPA Financial Reporting Executive Committee (FinREC)

AICPA Revenue Recognition

Working Group (RRWG)

AICPA 16 Industry Task Forces (RRTF)

SEC staff

Focus on consistent application

Focus on accounting

questions that may require standard

setting

Focus on internal controls, systems,

and processes



1. Identified and prepared by industry

RRTF

2. Submitted to AICPA RRWG

3. Specific questions submitted to

FASB TRG (if applicable)

4. Submitted to FinREC

5. Exposed on AICPA website

6. Resubmitted to RRWG

7. Resubmitted to FinREC

8. Finalized for Accounting Guide on

Revenue Recognition

(nonauthoritative)



# Type Implementation Issue Step

1 General Application of step 1 (determine if there is a contract) and

step 3 (determine the transaction price) for healthcare

services provided to self-pay patients, including uninsured

patient balances and self-pay patient balances arising from

co-payments and deductibles

8 - Final

1a General Implicit price concessions 8 - Final

2 General Application of the portfolio approach to contracts with

patients

8 - Final

3 CCRC Identifying and satisfying the performance obligation(s)

and recognizing the monthly/periodic fees and

nonrefundable entrance fees under Type A or “life care”

contracts for continuing care retirement communities

2 - RRWG

4 CCRC Identifying the performance obligation(s) and recognizing

the performance obligation(s) to provide future services

and use of facilities

2 - RRWG



# Type Implementation Issue Step

5 General Significant financing component – CCRC contracts, and

patient and third-party payor amounts in arrears

2 - RRWG

6 General Disclosure and presentation requirements of ASU No. 2014-

09

2 - RRWG

7 General Accounting for contract costs 3 - FinREC

8 General Consideration of FASB ASC 606, Revenue from Contracts

with Customers, for third party settlement estimates

2 - RRWG

The following implementation issue was recently added and is in the very early stages of

consideration

9 General Capitation and risk-sharing arrangements 2 - RRWG

10 General Performance Obligations 2 - RRWG


SELF-PAY AND IMPLICIT PRICE CONCESSIONS


Step 1 – Identify the contract with a customer

• A contract is defined in ASC 606 as an agreement

between two or more parties that creates enforceable

rights and obligations

− Enforceability of rights and obligations in a contract is a matter of

law

− Contracts can be written, oral or implied by an entity’s customary

business practices

− Practices and processes for establishing contracts may vary

within a health care entity (patient classification, nature of

services, third-party payor)

− Entity has to consider processes and practices when determining

whether an agreement creates enforceable rights and obligations



• Arrangement must meet all these criteria to be a contract

further evaluated for revenue recognition under the overall

model in ASC 606:

− Parties have approved the contract and are committed to perform

− The entity can identify each party’s rights regarding the goods or

services to be transferred

− The entity can identify the contract’s payment terms

− Contract has commercial substance

− It is probable that the entity will collect substantially all of the

consideration to which it will be entitled in exchange for the goods

or services that will be transferred to the customer. In evaluating

whether collectibility is probable, an entity shall consider only the

customer’s ability and intention to pay that amount when it is due



• Parties have approved the contract and are committed to perform:− Has the patient entered into a written contract by signing any

forms, such as patient responsibility form?

− Is there an oral or implied contract based on entity’s customary business terms?

− Has the patient scheduled health care services in advance (e.g. elective surgery) indicating there is an oral or implied contract?

− If a patient is unable to enter into the contract (e.g., an unconscious patient in the ER), do specific facts and circumstances indicate enforceability?

• EMTALA and Medicare require hospitals to provide emergency treatment regardless of ability to pay

• IRC 501(r) imposes certain requirements on hospitals

• Not-for-profit hospitals may provide services because of mission or tax-exempt status without assessing ability to pay



• It is probable that the entity will collect substantially all the consideration to which it will be entitled in exchange for the goods or services that will be transferred− If this collectibility threshold is not met, a contract with a

patient does not exist for purposes of applying the overall revenue recognition model in ASC 606

− A health care entity may make this determination based on past experience with that patient or class of similar patients

− Cannot default to a “cash basis” approach, the assessment must still be made

− If the patient qualifies for charity care, the services provided do not quality for revenue recognition (no change in accounting and reporting for charity care)



• Example 3, “Implicit Price Concession” (paras. 102–105 of ASC 606-10-55), illustrates that the health care entity may be unable to evaluate an uninsured patient’s commitment to perform his or her obligations until it obtains certain information about the patient

• In Example 3, a hospital provides medical services to an uninsured patient in the emergency room: − The entity has not previously provided medical services to this

patient but is required by law to provide medical services to all emergency room patients.

− Because of the patient’s condition upon arrival at the hospital, the entity provides the services immediately and, therefore, before the entity can determine whether the patient is committed to perform its obligations under the contract in exchange for the medical services provided

− Consequently, the contract does not meet the contract existence criteria in ASC 606

− Accordingly the entity will continue to reassess its conclusion based on updated facts and circumstances



• Example 3 (continued)− After providing services, the entity obtains additional

information about the patient, including a review of the services provided, standard rates for such services and the patient’s ability and intention to pay the entity for the services provided

− Based on the entity’s review of the additional information:

• The entity notes the standard rate for the services provided to the patient in the ER is $10,000

• Consistent with its policies, the entity designates the patient to a customer class based on the entity’s assessment of the patient’s ability and intention to pay

• The entity determines that the services do not qualify for charity care based on its internal policy and the patient’s income level

• The entity determines that the patient does not qualify for governmental subsidies



• Example 3 (continued)− Based on the patient’s designated customer class, the

entity expects to accept a lower amount of consideration in exchange for the services provided• As a result, the transaction price is not $10,000 and is

variable

− Based on the collection history for other patients in the patient’s customer class, the entity concludes it is probable that it will collect $1,000 of consideration

− In addition, on the basis of an assessment of the contract terms and other facts and circumstances, the entity:• Concludes the other criteria in ASC 606-10-25-1 also are met

• Accounts for the contract with the patient under ASC 606



• Example:

− Patient is admitted through ER and is unresponsive

− It’s subsequently determined the patient is uninsured and

attempts to qualify the patient for Medicaid coverage

(pending Medicaid)

− Health care entity has sufficient historical information for

pending Medicaid patients to determine the transaction

price based on the percentage of those contracts it

estimates will:

• Qualify for Medicaid

• Be uninsured self-pay

• Qualify for charity care

− The approach of using historical experience may provide a

basis for the entity to conclude there is a contract



• Example (continued):

− Based on the historical information, the contract with

the patient is within the scope of the standard

− Entity estimates the transaction price for the contract

with the patient considering the likelihood of each

outcome for the contract (for example, Medicaid, self

pay and charity care) and the expected

reimbursement rate for each

FinREC believes this approach may be applied to an

individual contract or a portfolio of similar contracts

although in practice will generally be applied to a

portfolio of similar contracts


Step 3 – Determine the transaction price

• Defined as the amount of consideration to which

an entity expects to be entitled

• For health care entities, the transaction price will

often be less than the stated price in the contract

• Transaction price includes the effects of variable

consideration due to:

− Discounts

− Price concessions

− Other similar items



• Entity should consider the historical cash collections from

the customer class identified (for example, self-pay) to

estimate the transaction price

• Entity should consider all information that is reasonably

available, including historical, current, and forecasted

information

• In accordance with the discussion at the July 2015 TRG

meeting, a health care entity is required to consider all

information that is reasonably available to the entity to

estimate variable consideration whether the guidance is

applied on a portfolio or contract by contract basis



• Variable consideration may be explicitly stated

− Contractual allowances

− Self-pay discounts

• Variable consideration may also be an implicit

price concession

− Patient has a valid expectation from the entity’s

customary business practices, published policies or

specific statements that they will accept less

− Facts and circumstances indicate the entity’s intention

to accept less



• A health care entity may consider the following factors to determine if

it intends to provide an implicit price concession:

− The health care entity has a customary business practice of not

performing a credit assessment before providing services (required by

law or regulation or by its mission to provide medically necessary or

emergency services prior to assessing the patient’s ability to pay)

− The health care entity continues to provide services to a patient, or

patient class, even when historical experience indicates that it is not

probable that the entity will collect substantially all of the discounted

charges (gross or standard charges less any contractual adjustments or

discounts) in the contract (explicit concession)

If one of those factors are present, FinREC believes that the health

care entity has implicitly provided a price concession to the patient (or

patients in the patient class), even if it will continue to attempt to

collect the full amount of discounted charges.


Example

Example 2 – Implicit price concession – Uninsured patient with

uninsured discount

• Self-pay patient charges: $40,000

• Provider has a self-pay discount policy that provides a 75% discount

off charges to uninsured patients

• Expected collections based on historical experience: 10% ($1,000)

Charges $ 40,000

Discount (30,000)

NPSR before

bad debt 10,000

Bad debt (9,000)

NPSR $ 1,000

Current Accounting Accounting Under Issue 8-1

No change in reporting of charity care – Does not qualify as revenue

Gross Patient Revenue 40,000$

Discount (30,000)

NPR Before Bad Debt 10,000

Bad Debt (9,000)

Net Patient Revenue 1,000$

Gross Patient Revenue 40,000$

Explicit Price Concession (30,000)

Implicit Price Concession (9,000)

Net Patient Revenue 1,000$

Bad Debt Expense $0



• Reassessment of variable consideration -

subsequent changes in the estimate of the

transaction price

− Health care entities are required to update the

estimated transaction price, including the assessment

of whether the estimate of variable consideration is

constrained, at the end of each reporting period

When a health care entity determines it has provided an implicit price

concession, FinREC believes that subsequent changes to the estimate of

variable consideration should generally be accounted for as increases or

decreases in the implicit price concession (adjustments to patient service

revenue).



• Reassessment of variable consideration - subsequent

changes in the estimate of the transaction price

− If an entity experiences frequent subsequent adjustments that

result in decreases to patient revenue, the entity should re-

assess whether its estimation process, including the constraint,

is appropriate

Because the assessment of the implicit price concession inherently

considers the amount the entity expects to collect from the patient (or

patient class), FinREC believes that changes in the entity’s expectation of

the amount it will receive from the patient (or patient class) will be

recorded in revenue unless there is a patient-specific event that is known

to the entity that suggests that the patient no longer has the ability and

intent to pay the amount due and therefore the changes in its estimate of

variable consideration better represent an impairment (bad debt).


Consideration of impairment

• There may be facts and circumstances that indicate there has been an adverse change in the patient’s creditworthiness (for example, the patient filed for bankruptcy or lost their job), and the difference may be better classified as an impairment loss (bad debt) rather than a change in the transaction price

• In estimating the transaction price, a health care entity may determine that it has not provided an implicit price concession but rather that it has chosen to accept the risk of default by the patient, and that uncollectible amounts better represent impairment losses



• A health care entity may assess the patient’s intent and ability to pay prior to providing services− Determination could be made that it’s probable it will

collect substantially all of the consideration to which it is entitled

− May then determine that it has not provided an implicit price concession

− After collection is considered probable (and the other contract existence criteria are met):

• Amounts not collected would be deemed an impairment loss (bad debts)

• In determining what is an impairment loss, the entity would consider the effects of customer credit risk

• Collection experience could still be used to estimate the provision for bad debts for a patient class



• Example:

− A health care entity has a business practice of

assessing patients’ ability to pay prior to providing

services

− Entity has collection experience with a customer class

that indicates it collects 98% (substantially all) of the

amount it bills to that customer class

− The contracts with those patients meet the criteria of a

contract within the scope of the standard

− Entity should recognize revenue and receivables for

the amount it bills (100%) and a provision for bad

debts (2%) based on valuation of the receivables


Charity care

• No change in charity care guidance

− Does not qualify as revenue

− Same disclosures of cost


PORTFOLIO APPROACH


Application of the portfolio approach to contracts with patients

• The core principles and 5 step approach are generally to be applied to an individual contract with a customer− Criteria are provided to determine whether individual

contracts with the same customer (or parties related to the customer) should be combined for accounting purposes

• As a practical expedient an entity may apply the revenue guidance to a portfolio of contracts

• Entity must reasonably expect that the effects of applying the standard to the portfolio of contracts would not differ materially from the application to individual contracts


Portfolio approach

• Contracts must have “similar characteristics” in

order to be grouped together:

− Type of service – e.g., inpatient, outpatient, skilled

nursing, elective, non-elective

− Type of payor – e.g., insurance/managed care,

governmental program, self-pay

− Type of patient responsibility – e.g., uninsured self-

pay, co-pay/deductible after insurance, high

deductible/coinsurance

− Whether contracts are entered into at or near the

same time – e.g., the same quarter


Portfolio approach

• Other considerations− Entity should consider both the sufficiency of the data and the

homogeneity of the data

− Consider whether contracts from different billing systems can be included in the same portfolio

− Portfolio approach may be appropriate for some, but not all, of a health care provider’s patient population

− An entity is not required to apply the portfolio practical expedient to all of its contracts

− A contract can be added to a portfolio when the health care entity determines that the contract has similar characteristics with the other contracts in the portfolio

− A contract should be removed from a portfolio if the health care entity subsequently identifies that the contract no longer has similar characteristics• Medicaid pending/Medicaid/Self-pay/Charity care

• Portion that patient is responsible for after payment by insurance


Portfolio approach - example

• Scenario:− Health care entity provides services to patients covered by insurance

carrier B

− Each patient has a patient responsibility portion (co-pay)

− No credit assessment of patients is made prior to providing services

− The entity identifies these patients as a portfolio of contracts based on qualitative and quantitative factors and applies the portfolio approach

• Includes an analysis that shows the portfolio shares similar collection patterns based on historical information (i.e., variances from reporting period to reporting period in the percentage of collections have been insignificant in the aggregate)

− Gross charges for the period for these patients, including insurance and co-pay amounts = $1,000,000

− Entity has a contract with insurance carrier B that results in a 50% contractual allowance

− After applying the contractual allowance, remaining charges include $475,000 due from insurance and $25,000 due from patients (co-pay)

− Entity expects, based on historical experience, to collect 100% of the insurance balances and 40% of the co-pay balances


Portfolio approach - example

• Evaluation:− The contractual adjustment of $500,000 is a reduction of

the transaction price – explicit price concession

− The $15,000 ($25,000 x 60%) of patient co-pays the entity does not expect to collect is recorded as a reduction of the transaction price – implicit price concession

− Total transaction price for this portfolio is $485,000 ($475,000 insurance payments and $10,000 from patient co-pays)

− The entity would include the estimate of variable consideration for services provided of $485,000 after consideration of the variable consideration constraint

− The health care entity would make sure it has gone through the 5 steps of the model and assuming it has, would recognize $485,000 of net patient revenue and accounts receivable when the underlying performance obligation has been satisfied


Tentative conclusions

• The remaining slides in this presentation include tentative conclusions reached by the AICPA’s Health Care Entities Revenue Recognition Task Force

• None of these conclusions have been exposed for comment

• Many of these conclusions have not yet been reviewed and approved by the AICPA’s Revenue Recognition Working Group and (or) the AICPA’s Financial Reporting Executive Committee (FinREC), both of which must happen before the conclusions are exposed for comment

• As such, these slides are subject to change

Subject to

change!!!


THIRD-PARTY SETTLEMENTS


Third-party settlements

• Arrangements with third-party payors should be

considered in determining the transaction price

for services provided to a patient

• The Revenue Recognition Task Force is

considering a view that the “contract with the

customer” refers to the arrangement between the

health care provider and the patient


Third-party settlements

The Revenue Recognition Task Force is considering a view that a health care

entity may apply the most likely amount approach to estimate third-party

settlements as long as the entity believes that approach will better predict the

amount of consideration to which it is entitled

• Determination (estimation) of transaction price (expected value vs.

most likely) as it relates to third-party estimates

• The standard indicates, “An entity shall estimate an amount of

variable consideration by using either of the following methods,

depending on which method the entity expects to better predict

the amount of consideration to which it will be entitled.”

– Expected value method – sum of probability weighted

amounts in a range of possible consideration amounts

– Most likely amount method – single most likely amount in a

range of possible consideration amounts (the single most

likely outcome of the contract)


Third-party settlements - Example

Expected value

• Illustration of a Medicare cost report settlement liability

• Total Medicare transaction price is $50 million before any adjustment

for third-party settlements

Possible

settlement

amounts

Probability

Probability-

weighted

amounts

$ - 20% $ -

1,000,000 60% 600,000

3,000,000 15% 450,000

5,000,000 5% 250,000

$1,300,000


Third-party settlements – Example (continued)

• Amounts associated with the likelihood of each outcome are aggregated to arrive at the estimated third-party settlement of $1.3 million− Decreases the transaction price from $50 million to $48.7

million

• Because there is an 80% likelihood that the transaction price will be $49 million or more, it is probable that there will not be a significant reversal of cumulative revenue recognized when the transaction price (including the variable consideration estimated using the expected value method) is $48.7 million


DISCLOSURES


Disclosures

• Understand nature, amount, timing and uncertainty of

revenue and cash flows

− Disaggregation of revenue

− Contract balances

− Performance obligations

− Significant judgments

− Costs to obtain or fulfill a contract


Disclosures

• Potential categories for disaggregation of revenue

Net

Patient

Revenue

Type of service

(I/P, O/P, SNF,

Clinic)

Geographical

location

Payor

(T-18, T-19, Mgd.

care, self-pay)

Type of contract

(fixed, cost,

capitation, risk

share)

Timing of

transfer of goods

or services


Disclosures

201X

Medicare $ 16,000

Medicaid 6,000

Managed care 11,000

Other insurance 4,000

Self-pay deductibles and co-pays 1,800

Uninsured 1,000

$39,800

• Revenue disaggregated by payor:


Disclosures

Southeast Central Total

Hospital:

Inpatient $7,000 $2,000 $9,000

Outpatient 6,000 2,000 8,000

Physician clinics 8,000 4,000 12,000

Skilled nursing facility 4,000 2,000 6,000

Other 3,800 1,000 4,800

$28,800 $11,000 $39,800

Timing of revenue recognition:

At time services are provided $15,000 $7,500 $22,500

Service provided over time 13,800 3,500 17,300

$28,800 $11,000 $39,800

• Revenue disaggregated by location, type of service and timing:


TRANSITION


Transition options

Transition Approach Implications

Full retrospective with the

option to elect one or more

of four practical expedients

Restate all contracts;

cumulative effect presented as

of beginning of earliest period

presented

Modified retrospective with

the option to elect one

practical expedient

Do not restate contracts;

cumulative effect presented as

of date of initial application;

disclosure of effects on current

reporting period, which

essentially requires double-

bookkeeping in the year of

adoption


Transition considerations

• In-house patients and discharged not final billed

− Contract assets vs. accounts receivable

• Treatment of changes in implicit price

concessions (bad debt write-offs/recoveries) for

patients with dates of service prior to adoption

• Availability of data for disclosures


ASU 2016-14:

Not-For-Profit Entities (Topic 958):

Presentation of Financial Statements of Not-For-

Profit Entities

Effective Date: For fiscal years beginning after

12/15/2017, early adoption allowed


ASU 2016-14: Not for Profit Entities (TOPIC 958)

• Summary Of Decisions Reached to

Date

− Net asset classification

− Expenses

− Investment return

− Statement of cash flows

− Liquidity disclosures


NFP Financials

Net asset classification

Liquidity: improving

disclosuresReporting of expenses / Investment

return

Operating measure: improving

disclosures when

reported

Cash flow statement: methods of presenting operating cash flow

Phase I – ASU 2016-14 Phase II

Cash flow statement:

realignment of certain

items

Operating measure: all

other elements, including

intermediate measures

Pending decision whether to wait to

deliberate at same time as Financial

Performance Reporting project for

business entities


ASU 2016-14: NFP Financials – Net Assets

Current

GAAP Unrestricted

Amount, purpose,

and type of board

designations (new)

Without Donor

Restrictions

Temp.

Restricted

Perm.

Restricted

With Donor Restrictions

Nature and amount

of donor restrictions

Revised

GAAP

Disclosures


ASU 2016-14: NFP Financials – Expenses

• Requires all NFP’s to present information about its expenses by their

nature and function either:

– In the statement of activities

– As a separate statement or

– In the notes to the financial statements

• NFPs required to provide qualitative disclosures about methods used

to allocate costs among program and support functions

• As part of Phase II, the FASB may explore whether to require

business-oriented health care NFP’s to provide this information by

segment instead


Expenses Disclosure Example 1

The financial statements report certain expense categories that are attributable to more

than one health care service or support function. Therefore, these expenses require an

allocation on a reasonable basis that is consistently applied. Costs not directly

attributable to a function, including depreciation, amortization, interest and other

occupancy costs, are allocated to a function based on a square footage or units of service

basis. Allocated health care services cost not allocated on a units of service basis are

otherwise allocated based on revenue.


Expenses Disclosure Example 2

The financial statements report certain expense categories that are attributable to

more than one health care service or support function. Therefore, these expenses

require an allocation on a reasonable basis that is consistently applied. Costs not

directly attributable to a function, including depreciation, amortization, interest and

other occupancy costs, are allocated to a function based on a square footage or units

of service basis. Allocated health care services cost not allocated on a units of service

basis are otherwise allocated based on revenue.


ASU 2016-14: NFP Financials – Investment Returns

Investment Returns

• Presented net of external and direct internal investment expenses

• Permitted but not required to disclose investment expenses that are

netted against returns

• Permitted to present net investment return managed differently or

from different services on multiple line items

• No longer required to display the investment return components in

the endowment net asset rollforward

• Precluded from including investment expenses that have been netted

against returns in the functional expenses

• FASB staff is working on implementation guidance for the reporting of

net investment return for entities that present a performance indicator


ASU 2016-14 NFP Financials – Liquidity

Information Useful in Assessing Liquidity

• Qualitative information (in the notes) on how the entity

manages its liquid resources to meet cash needs for

general expenditures within one year of the balance

sheet date

• Quantitative information that communicates the

availability of current financial assets at the balance sheet

date to meet cash needs

• Availability affected by:

− Nature of financial asset

− External limits imposed (donors, laws, contracts)

− Internal limits imposed by governing board

• Example illustrations are included in the ASU


Liquidity Disclosure Example


ASU 2016-14: NFP Financials – Cash Flows

Cash Flow Statement

• Allowed to use either the direct or indirect

method of presenting operating cash flows

• If using the direct method, no longer required to

provide the indirect reconciliation of operating

cash flows


ASU 2016-14: NFP Financials

• Phase II (What will be coming)

− Whether to require a measure of operations; how to

define a measure of operations

− Potential realignment within the statement of cash

flows

− Segment reporting as an alternative for NFP

healthcare entities


ASU 2016-14: NFP Financials

• Effective date: Years beginning after 12/15/2017

• Early adoption: Permitted, but subject to

transition provisions

• Transition:

• For year of adoption, apply all provisions

• For comparative years, apply all provisions on a

retrospective basis, except:

− Analysis of expenses by nature and function

− Disclosures around liquidity and availability of

resources


ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities

• Under current investment accounting guidance, investments may be

classified as:

− For-profit: held-to-maturity, available-for-sale, or trading

− Not-for-profit: other-than-trading or trading

• For investments classified as something other than trading,

unrealized gains and losses are excluded from the performance

indicator of a health care entity, unless an unrealized loss is

considered other-than-temporary (OTT)

• ASU 2016-01 requires all investments in equity securities (other than

those that qualify for equity method accounting or that are

consolidated), to be reported at fair value, with changes in fair value

reported through income

− Concept of OTT impairment goes away for equity securities


ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities

• ASU 2016-01 also removes, for entities other than public business

entities, required disclosures of fair value of financial instruments

measured at amortized cost (e.g., debt)

• Effective for fiscal years beginning after

− Public business entities: fiscal years beginning after 12/15/17 and

interim periods within those years

− Other than public business entities: fiscal years beginning after 12/15/18

and interim periods within fiscal years beginning after 12/15/19

• Early adoption is not permitted, except for:

− Elimination of disclosure requirement of fair value of financial

instruments measured at amortized cost

− Certain changes in presentation within OCI the change in the fair value

of certain liabilities resulting from a change in credit risk


ASU 2016-02: Leases

• Effective date:

• Fiscal years beginning after 12/15/2018

− Public business entity

− Not-for-profit entities with conduit bonds that are traded

− An employee benefit plan that files financial statements with the

SEC

• Fiscal years beginning after 12/15/2019 for all other organizations

• A lease contract conveys the right to use an asset (the underlying

asset) for a period of time in exchange for consideration

• Short-term leases with a term of less than 12 months are exempt and

no longer based on maximum possible term, now aligned with

definition of lease term


Lessee Accounting Model – Comparison to Existing GAAP

Capital lease ─ reflected as an

asset and a liability in the

balance sheet Operating

lease ─ no balance sheet

recognition

Exception for short-term leases,

which are treated as “rentals”

Classification as “capital” or

“operating” determines whether

lease is capitalized on balance

sheet or expensed

Recognize an asset and

obligation for all leases

Similar provision

Short-term = 12 months or less

Classification as “financing”

or “operating” determines

pattern of expense

recognition to be used in the

income statement, and

financial statement

classifications

FAS 13/ASC 840 ASC 842


ASU 2016-02: Leases

Current* U.S. GAAP (IFRS) IASB FASB

Capital (Finance)

LeasesType A Type A

Operating Leases Type A Type B

All leases are the

same.

Not all leases are the

same. Classification is

based on existing U.S.

GAAP/IFRS.

All leases (more than 12 months) are recognized on the lessee’s

balance sheet

Lessee Model Approaches

* Current is prior to adoption of ASU 2016-02


ASU 2016-02: Leases

• Impacts to Health Care Entities:

− Debt covenants (debt to equity covenant ratios)

− Bonus calculations

− Perception by potential lenders, partners, or others

• Start thinking about

− Inventory of leases

− Pro-forma effects of adoption of ASU 2016-02

− Conversations with lenders to negotiate covenants

− Discussions with your board and other key

stakeholders


ASU 2016-15: Statement of Cash Flows

• Classification of Certain Cash Receipts and Cash

Payments

• Effective date:

− Public entities – Years beginning after 12/15/17

− All other entities – Years beginning after 12/15/18 (no

carve out for conduit bond obligors to be early

adopters)

• Early adoption:

− Permitted

− Must then adopt all amendments in same period

• Retrospective transition method


ASU 2016-15: Statement of cash flows

Cash Flow Issue Summary of Amendments

Debt Prepayment or Debt

Extinguishment Costs

Cash payments for debt prepayment or debt

extinguishment costs should be classified as

cash outflows for financing activities

Settlement of Zero-Coupon

Debt Instruments or Other

Debt Instruments with

Coupon Interest Rates That

Are Insignificant in Relation

to the Effective Interest Rate

of the Borrowing

The issuer should classify the portion of the

cash payment attributable to the accreted

interest related to the debt discount as cash

outflows for operating activities, and the portion

of the cash payment attributable to the

principal as cash outflows for financing

activities




Contingent Consideration

Payments Made after a

Business Combination

Cash payments not made soon after the acquisition

date of a business combination by an acquirer to settle

a contingent consideration liability should be separated

and classified as cash outflows for financing activities

and operating activities.

Cash payments up to the amount of the contingent

consideration liability recognized at the acquisition date

(including measurement-period adjustments) should

be classified as financing activities; any excess should

be classified as operating activities.

Cash payments made soon after the acquisition date

of a business combination by an acquirer to settle a

contingent consideration liability should be classified

as cash outflows for investing activities.




Proceeds from the

Settlement of Insurance

Claims

Cash proceeds received from the settlement of

insurance claims should be classified on the basis of

the related insurance coverage (that is, the nature of

the loss). For insurance proceeds that are received in

a lump sum settlement, an entity should determine the

classification on the basis of the nature of each loss

included in the settlement.

Proceeds from the

Settlement of Corporate-

Owned Life Insurance

Policies, including Bank-

Owned Life Insurance

Policies

Cash proceeds received from the settlement of

corporate-owned life insurance policies should be

classified as cash inflows from investing

activities

The cash payments for premiums on corporate-owned

policies may be classified as cash outflows for

investing activities, operating activities, or a

combination of investing and operating activities




Distributions Received from

Equity Method Investees

When a reporting entity applies the equity method, it should

make an accounting policy election to classify distributions

received from equity method investees using either of the

following approaches:

Cumulative earnings approach: Distributions received are

considered returns on investment and classified as cash

inflows from operating activities, unless the investor’s

cumulative distributions received less distributions received in

prior periods that were determined to be returns of investment

exceed cumulative equity in earnings recognized by the

investor. When such an excess occurs, the current-period

distribution up to this excess should be considered a return of

investment and classified as cash inflows from investing

activities.

Nature of the distribution approach: Distributions received

should be classified on the basis of the nature of the activity or

activities of the investee that generated the distribution as

either a return on investment (classified as cash inflows from

operating activities) or a return of investment (classified as

cash inflows from investing activities) when such information is

available to the investor.




Beneficial Interests in

Securitization Transactions

A transferor’s beneficial interest obtained in a

securitization of financial assets should be disclosed

as a noncash activity, and cash receipts from

payments on a transferor’s beneficial interests in

securitized trade receivables should be classified as

cash inflows from investing activities.

Separately Identifiable Cash

Flows and Application of the

Predominance Principle

The classification of cash receipts and payments that

have aspects of more than one class of cash flows

should be determined first by applying specific

guidance in GAAP. In the absence of specific

guidance, an entity should determine each separately

identifiable source or use within the cash receipts and

cash payments on the basis of the nature of the

underlying cash flows. An entity should then classify

each separately identifiable source or use within the

cash receipts and payments on the basis of their

nature in financing, investing, or operating activities.


ASU 2016-18: Restricted Cash

• ASU 2016-18 eliminates diversity in practice in classification and

presentation of restricted cash in statement of cash flows

• Requires amounts generally described as restricted cash and cash

equivalents to be included with cash and cash equivalents when

reconciling beginning and ending cash and cash equivalents in the

statement of cash flows

• Requires disclosure of information about nature of restrictions on

cash, cash equivalents and amounts generally described as

restricted cash and cash equivalents

• When cash, cash equivalents and amounts generally described as

restricted cash and cash equivalents are presented in more than one

line in the statement of financial position, requires presentation on

face of statement of cash flows (or footnote disclosure) where such

amounts are reported in the statement of financial position


ASU 2016-18: Restricted Cash

• Effective for fiscal years beginning after

− Public business entities: fiscal years beginning after

12/15/17 and interim periods within those years

− Other than public business entities: fiscal years

beginning after 12/15/18 and interim periods within

fiscal years beginning after 12/15/19

• Retrospective application required

• Early adoption is permitted. If early adopted in an

interim period, adjustments should be reflected

as of the beginning of the fiscal year that

includes the interim period


ASU 2015-05: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

• Provides guidance to customers about whether a

cloud computing arrangement includes a

software license

Account for the software license element

of the arrangement consistent with the

acquisition of other software licenses (ASC

350-40)

Account for the arrangement as a

service contract (other GAAP)

Includes

software

license?

No

Yes


ASU 2015-07: Fair Value Hierarchy Disclosures for Investments Measured at NAV

• ASC 820 provides a practical expedient to measure the

fair value of certain investments using net asset value

(NAV) per share

• Under existing guidance:

− Investments are either categorized as Level 2 or Level 3

− All entities eligible to elect the practical expedient are required to

provide certain disclosures (regardless of whether they actually

make the election)

• ASU 2015-07 removes requirement to categorize within

the fair value hierarchy all investments for which fair

value is measured using the net asset value per share

practical expedient



• ASU 2015-07 also removes requirement to make certain disclosures

for all investments that are eligible to be measured at fair value using

the net asset value per share practical expedient

− Required disclosures are limited to investments for which the entity has

elected to measure the fair value using that practical expedient

• Requires disclosure of amounts of excluded investments so that

financial statement user can reconcile amounts in the fair value table

to the balance sheet

• Effective retrospectively for fiscal years beginning after

− Public business entities: fiscal years beginning after 12/15/15 and

interim periods within those years

− Other than public business entities: fiscal years beginning after 12/15/16

and interim periods within those years

• Early adoption is permitted



Description Level 1 Level 2 Level 3 Total

Money market fund 7,135,423 $ -$ -$ 7,135,423 $

Fixed income securities

U.S. Treasuries 29,387,239 - - 29,387,239

Corporate bonds 13,164,205 - - 13,164,205

Developing markets 13,220,167 - - 13,220,167

Equities

U.S. large cap 74,011,034 - - 74,011,034

U.S. small cap 13,094,930 - - 13,094,930

International 72,285,211 - - 72,285,211

Emerging markets 52,407,323 - - 52,407,323

Energy - 29,984,285 - 29,984,285

Global REIT 17,761,881 - - 17,761,881

Alternative investments

Private (Opportunistic) - - 17,542,917 17,542,917

Absolute return - 2,766,399 49,618,087 52,384,486

Long short - - 34,141,225 34,141,225

Commodities - - 18,203,124 18,203,124

292,467,413 $ 32,750,684 $ 119,505,353 $ 444,723,450 $

2014

Before After

Description Level 1 Level 2 Level 3 Total

Money market fund 7,135,423 $ -$ -$ 7,135,423 $

Fixed income securities

U.S. Treasuries 29,387,239 - - 29,387,239

Corporate bonds 13,164,205 - - 13,164,205

Developing markets 13,220,167 - - 13,220,167

Equities

U.S. large cap 74,011,034 - - 74,011,034

U.S. small cap 6,369,670 - - 6,369,670

International 62,285,211 - - 62,285,211

Emerging markets 43,838,384 - - 43,838,384

249,411,333 $ -$ -$ 249,411,333

Investments measured at NAV:

Equity funds:

U.S. small cap 6,725,260

International 10,000,000

Emerging markets 8,568,939

Energy 29,984,285

Global REIT 17,761,881

Alternative investments:

Private (Opportunistic) 17,542,917

Absolute return 52,384,486

Long short 34,141,225

Commodities 18,203,124

195,312,117

Total Investments 444,723,450 $

2014


ASU 2015-11: Inventory

• Intended to simplify the measurement of inventory

• Currently, under FIFO and Average Cost methods, valued at the lower of

cost or market

Problem: Market could be replacement cost, net realizable value, or net

realizable value less an approximately normal profit margin

• Entity should measure inventory at the lower of cost or net realizable value

• Net realizable value is the estimated selling price in the ordinary course of

business, less reasonably predictable costs of completion, disposal, and

transportation

• Does not apply to inventory that is measured at last-in, first-out (LIFO) or the

retail inventory method

• In reality, this conforms GAAP to actual practice

• Effective for periods beginning after 12/15/16

• Applied prospectively


QUESTIONSAND ANSWERS


THANK YOU FORYOUR TIME AND ATTENTION

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