Norman Mosrie Accounting and Auditing Update

Report
west virginia chapter
Accounting and Auditing
Update
Winter Education Conference
January 23, 2014
Presenter: Norman Mosrie, CPA, CHFP, FHFMA
Partner, Dixon Hughes Goodman LLP, Charleston, WV
A certified healthcare financial professional, Norman serves as Partner-inCharge of Assurance for the West Virginia region. With his involvement with
the American Institute of Certified Public Accountants Healthcare Expert Panel
and FASB not-for-profit financial statement project resource group, Norman is
actively involved in accounting, financial reporting, and other matters
impacting the healthcare and not-for-profit industries.
His significant healthcare experience includes financial reporting, acquisition
due diligence, corporate compliance, and third party reimbursement for
various types of healthcare entities including academic medical centers,
community hospitals, nursing homes, home health agencies, physician
practices, and research organizations.
707 Virginia Street, East
Suite 1700
Charleston, WV 25301
304.414.3913 direct
[email protected]
Norman has developed and led healthcare training programs at the local,
area, and national levels. He is a member of various professional and civic
organizations that includes being a past Council Member and Healthcare
Conference Committee Chairman with the AICPA, Special Review Committee
Member with the GFOA, and Past Board Member of the HFMA.
Norman graduated summa cum laude from Marshall University where he
earned his BBA in Accounting. He is actively involved with his alma mater,
including currently serving as the College of Business Advisory Board
President.
2
Discuss recent accounting and auditing
standards as well as emerging issues and the
expected impact on health care entities
3
Health Care Accounting & Auditing Update
•
•
•
•
ASU 2011-07: “Presentation and
Disclosure of Patient Service
Revenue, Provision for Bad Debts,
and the Allowance for Doubtful
Accounts for Certain Health Care
Entities”
ASU 2012-01: “Continuing Care
Retirement Communities-Refundable
Advance Fees”
ASU 2013-04: “Liabilities: Obligation
Resulting from Joint and Several
Liability Arrangements for Which the
Total Amount of the Obligation is
Fixed at the Reporting Date”
ASU 2013-06: “Services Received
from Personnel of an Affiliate”
•
•
•
FASB Project: Discontinued
Operations
Accounting For Premier Transaction
Accounting Developments Impacting
Health Care
– New Revenue Recognition Standards
– Impact of New Revenue Recognition
Standards
– Impact of Other Accounting Proposals
•
•
•
Common Practice Issues – RAC
Audits
Accounting for EHR Incentive
Payments
Accounting for ICD-10 Costs
4
ASU 2011-07:
“PRESENTATION AND DISCLOSURE OF PATIENT SERVICE
REVENUE, PROVISION FOR BAD DEBTS, AND THE ALLOWANCE
FOR DOUBTFUL ACCOUNTS FOR CERTAIN HEALTH CARE
ENTITIES”
RECAP AND IMPLEMENTATION MATTERS
5
ASU 2011-07:
Background
• Provided relief for entities that “treat first” and then
assess a patient’s ability to pay
– Requested by hospitals with unusually high bad debt
expense associated with indigent patients that do not
qualify for charity care
– Bad debt expense was significantly distorting operating
metrics
• Misapplication noted in practice by HCOs that
assess ability prior to providing services
• Stay tuned - FASB revenue recognition project
proposed rules would change presentation
6
ASU 2011-07:
Highlights
• Primarily applies to acute-care hospitals that
operate emergency rooms
• ASU focuses on primary payor status (i.e.,
uninsured indigent patients that do not qualify for
charity), not deductibles & coinsurance
• If HCO has ability to “gate keep” on which patients
it accepts for treatment, ASU likely wouldn’t apply
• “Significance” language was included to eliminate
any notion of a “trip wire” (i.e., if you have a single
uninsured indigent patient, then you are in the
scope and must apply the guidance)
7
AICPA TPA 6400.47: “Application of ASU 2011-07 in
Consolidated Financial Statements”
• Facts
– Multi-entity HCO issues both consolidated and
subsidiary financial statements
• Question
– Should assessments of “significance” performed for
individual subsidiary statements be retained in
consolidation? Or should a separate assessment of
“significance” be made at the consolidated financial
reporting entity level?
• Response
– Determination is an accounting policy that should be
disclosed and consistently applied from period to period
8
AICPA TPA 6400.47: “Application of ASU 2011-07 in
Consolidated Financial Statements”
Stand-alone FS
Consolidated FS
Acute-care
hospital
Nursing home
Net Patient Service Revenue
Less: Provision for bad debts
$
200,000
$
460,000
(180,000)
NPSR less provision for bad debts
200,000
280,000
Operating expenses:
Specific expenses (listed)
(105,000)
(145,000)
Provision for bad debts
(80,000)
Total operating expenses
Excess of revenues over expenses
15,000
$
-
(185,000)
$
Using Policy
Election A
135,000
Retain subsidiary-level
assessment in consolidation
660,000 $
(180,000)
400,000
(250,000)
(250,000)
-
(330,000)
$
660,000
(260,000)
480,000
(80,000)
(145,000)
$
Using Policy
Election B
150,000
(250,000)
$
150,000
Make a separate assessment at
consolidated level
9
ASU 2012-01:
“CONTINUING CARE RETIREMENT
COMMUNITIES-REFUNDABLE
ADVANCE FEES”
10
ASU 2012-01:
Implications for CCRCs
What’s changing:
 Treating a refundable CCRC entrance fee as deferred revenue that is
amortized into income over the life of the facility would be
appropriate only if
• Resident agreement specifies that amount of refund payable is limited
to the proceeds of reoccupancy of the unit
• Entity’s policy/practice is to comply with the refund limitation
 Otherwise, refundable entrance fee should be reported as a refund
liability
11
CCRC Technical Corrections ASU
• Background
• SOP 90-8 was the original guidance for refundable fees
• Amortization of fees refundable through reoccupancy was
intended to be a narrow exception
• “In effect, the CCRC acts as if it were an agent for present
and future residents” (“risk” is with the resident)
• Diversity in practice developed due to misunderstanding of
the intent of the original SOP
• Contract terms changed as a result of changing economic
conditions and marketing approaches
• “Dangling Debit” Issue
12
ASU 2012-01:
Refundable Advance Fees
• Requires specific language in contract limiting
refunds to proceeds of reoccupancy
• Reported as cumulative effect adjustment to
beginning net assets or retained earnings of the
earliest year presented
• HOWEVER: FASB Revenue Recognition
Exposure Draft
– Expected to allow NO amortization of refundable fees
13
ASU 2012-01:
Refundable Advance Fees
• Effective Dates
– For public entities, fiscal periods beginning after
December 15, 2012
• If your organization has publicly traded debt or conduit debt, you
would be considered a public entity for reporting purposes
• (For example, tax exempt bonds issued through an issuing
authority would be conduit debt)
– For non-public entities, fiscal periods beginning after
December 15, 2013
• Early adoption permitted
– If not early adopted, disclosure consideration if material
– For many, will likely need to do the work to calculate
whether material or not for disclosure purposes
14
ASU 2012-01:
Refundable Advance Fees: FSO Calculation
• Current guidance requires deferred revenue from
entrance fees to be off-set against the Future
Service Obligation (FSO)
• No new specific guidance has been issued
• Adoption of ASU 2012-01 may result in recording
FSO
– Should record as component of cumulative effect
adjustment
– Impact needs to be considered
– Consult with Actuaries and Auditors
15
ASU 2013-04:
“LIABILITIES: OBLIGATION RESULTING FROM JOINT
AND SEVERAL LIABILITY ARRANGEMENTS FOR WHICH
THE TOTAL AMOUNT OF THE OBLIGATION IS FIXED AT
THE REPORTING DATE”
16
ASU 2013-04:
Joint & Several Liability
• Effective for fiscal years, and interim periods within those
years, beginning after December 15, 2013 for public
companies and for fiscal years ending after December 15,
2014, and interim periods and annual periods thereafter for
nonpublic entities
• Guidance should be applied retrospectively for all periods
presented
• Applies to separately issued financial statements of entities
that have joint & several liability for a fixed obligation (e.g.,
debt)
• Addresses question of reporting debt of Obligated Group
17
ASU 2013-04:
Joint & Several Liability
• Obligations should be measured as the sum of the
following:
– The amount the reporting entity agreed to pay under
the arrangement with its co-obligors
– Any additional amount the reporting entity expects to
pay on behalf of the co-obligors
• Disclosures should include:
– The nature of the arrangement and relationship with
other co-obligors
– Total amount outstanding under the arrangement
– The reporting entities recorded liability and any
receivable recognized
– The nature of any recourse provisions with other entities
18
ASU 2013-06:
“SERVICES RECEIVED FROM PERSONNEL OF
AN AFFILIATE”
19
Main Provisions
• Recipient NFP entity recognizes services received from
personnel of an affiliate that directly benefits the recipient NFP
entity
• Services measured at the cost recognized by the affiliate for the
personnel providing services
– If it will significantly overstate or understate the value of
the service received, the recipient NFP entity may elect
to recognize that services received at either
• The cost recognized by the affiliate for the personnel providing
that service, or
• The fair value of that service
• Does not apply when the affiliate charges at least the
approximate amount of direct personnel costs or the
approximate fair value of services provided
20
Main Provisions:
Presentation & Disclosure
• Recipient NFP Health Care Entities should report as an
equity transfer the increase in net assets associated with
services received
• Other recipient NFP entities:
– Update does not prescribe presentation guidance other than
prohibits reporting as a contra-expense or contra-asset
• Corresponding decrease in net assets or creation or
enhancement of an asset resulting from the use of services
received from personnel of an affiliate that directly benefit
the recipient NFP and for which the affiliate does not
charge the recipient NFP shall be presented similar to how
other such expenses or assets are presented
• Subtopic 850-10, Related Party Disclosures, applies to
services received from personnel of an affiliate
21
Effective Date
• Prospectively for fiscal years beginning after
June 15, 2014
• Early adoption is permitted
• Use a modified retrospective approach under
which all prior periods presented upon the date of
adoption should be adjusted, but no adjustment
should be made to the beginning balance of net
assets of the earliest period presented
22
Initial Measurement
• Cost varies from entity to entity
• Cost should include direct personnel costs
incurred
– Compensation
– Payroll-related fringe benefits
23
FASB PROJECT:
REPORTING DISCONTINUED OPERATIONS
24
Definition of “Discontinued Operation”
Current GAAP

Component of an entity
that comprise operations
and cash flows that can
be clearly distinguished

“Component” could range
from an asset group to a
reportable segment

Significant continuing
involvement not permitted

Operations and cash
flows that have not been
eliminated from ongoing
operations - not disc ops
Qualifying
threshold
Additional
requirements
Proposed revised GAAP

Component that has been disposed of
(or is classified as held for sale) that
- represents a separate major line of
business/geographic area of
operations or
- is part of a single coordinated
disposal plan or
- is an acquiree that meets “held for
sale” criteria upon acquisition
Not applicable
25
Illustration #1
• Assume ABC Health System operates a nursing home. ABC agrees to
sell the nursing home in a transaction that will close subsequent to
year-end. After the sale, ABC will continue to be involved in managing
some of the nursing home’s administrative functions
• May ABC present the nursing home as a discontinued operation in its
current year financial statements?
Current
GAAP
Proposed
GAAP
No
“Significant continuing involvement”
precludes discontinued operations
treatment
Assuming the following criteria are met:
Perhaps
•
•
•
Major line of business/geographical area
Single coordinated plan to dispose
Held for sale
26
Illustration #2
• Same facts, but assume ABC operated five
nursing homes and was planning to sell only one
• May ABC present the sold nursing home as a
discontinued operation?
Current
GAAP
Proposed
GAAP
No
“Significant continuing involvement”
precludes discontinued operations
treatment
Probably
not
• Would likely fail the “major line of
business” criterion
• One entity out of five may not be
considered “major”
27
Discontinued Operations:
Proposed Disclosures
For individually material components classified as discontinued operations

Reconciliation of component’s major income and expense items to aftertax income or loss from discontinued operations reported on face of
income statement

Reconciliation of component’s major classes of assets and liabilities to
amounts presented on the face of balance sheet

Disclosure of cash flows by category
For continuing ownership interest post-disposal

Entity’s ownership interest before and after disposal transaction

Income/loss from entity’s ongoing noncontrolling interest and the line item
in which it is presented
28
Discontinued Operations:
Proposed Disclosures
Individually material components NOT classified as discontinued ops
 Pre-tax profit of loss attributable to the disposed component
 Profit or loss attributable to the parent (if noncontrolling interest)
 Reconciliation of component’s major classes of assets and liabilities
classified as “held for sale” to amounts presented on the face of the
balance sheet
29
ACCOUNTING FOR PREMIER TRANSACTION
30
Accounting for Premier Transaction
• Premier is a supplier of surgical and medical supplies to
healthcare providers and was owned by approximately 181
U.S. hospitals, health systems and other health-care
organizations.
• On August 23, 2013, Premier filed a registration statement
with the SEC for an initial public offering of its common
stock.
• On September 25, 2013, the Pricing Committee for Premier
approved the final terms of the initial public offering and the
newly issued Class A common shares of Premier, Inc.
began trading on September 26, 2013.
31
Accounting for Premier Transaction
• The public offering will change the investment structure for the holdings
of its owners
• Prior to the restructuring, the owners held equity ownership in two legal
entities: a services company and an operating company
• As part of the transaction, the owners exchanged their ownership
interest in these two entities for class B shares in newly formed Premier
Inc (which also provides class B unit ownership in a newly established
LLP that is wholly owned by Premier, Inc)
• The class B shares become convertible, at the option of the holder, into
cash or class A shares, in various tranches, over a period of 7 years
• In connection with the reorganization, Premier entered into a tax
receivable agreement with the member owners to pay certain tax
receivable benefits over a 15 year period.
32
Accounting for Premier Transaction
• Accounting issue considerations:
– Does the exchange of equity ownership in the old entities for class
B shares in Premier Inc. require any new accounting for the holders
of these shares?
– As the class B shares become convertible into class A shares, is
there any accounting prior to the conversion options being
exercised (i.e. equity method)?
– What is the amount of gain that should be recognized for the shares
that were sold in October 2013?
– Should the transaction be evaluated under the nonmonetary
exchange guidance in ASC 845, the vendor relationship guidance in
ASC 605 or some other guidance?
– Should a value be assigned to the tax receivable agreement?
33
Accounting for Premier Transaction
• Due to the focused attention regarding the accounting
treatment for this transaction, it is suggested that entities
consult with their auditors regarding the appropriateness of
the accounting treatment based on their own facts and
circumstances
• Stay tuned for accounting guidance on this matter
34
ACCOUNTING DEVELOPMENTS IMPACTING
HEALTH CARE
35
New Revenue Recognition Standards
• Background - The FASB and IASB are in the final
stages of issuing revenue recognition that will
supersede all existing guidance
• The core principles of revenue recognition are:
1.
2.
3.
4.
Identify the contract
Identify separate performance obligations
Determine the transaction price
Allocate the transaction price to the separate
performance obligations
5. Recognize revenue when (or as) the entity satisfies a
performance obligation
36
Impact of New Revenue Recognition Standards
• Revenue recognition for indigent and self-pay
patients
– The exposure draft was not clear whether or how health
care entities should recognize revenue associated with
indigent and self-pay patients
– Recently, the boards tentatively decided to include a
“collectability” threshold for recognition
• Contracts with Medicare/Medicaid:
– Can use either “most likely amount” or “expected value”
in estimating variable consideration, whichever is best
predictor
37
Impact of New Revenue Recognition Standards
• Revenue transactions involving multiple
contractual relationships
– As many as four different parties may be associated
with a revenue transaction involving a hospital
– Under the proposal, the “customer” is the patient
• Third-party payor makes payment on the patient’s behalf; it is
not a separate “contract with a customer”
38
Impact of New Revenue Recognition Standards
• Scope of prepaid health service contracts
– Currently, these contracts are within the scope of ASC 954 – Health
Care Entities
– Uncertainty exists with respect to whether these contracts are
within the scope of the new exposure draft related to Insurance
contracts
• Prepaid health services contracts – contract acquisition
costs
– Under ASC 954 acquisition costs related to prepaid health services
contracts are expensed
– Under the new exposure draft incremental costs are capitalized if
the entity expects to recover those costs
– As a practical expedient, these costs can be expensed if the
amortization period is less than one year
39
Impact of Other Accounting Proposals
• Not-for-profit financial reporting project –
– Operating indicator
• Should there be a defined operating indicator for non-health
care NPOs?
• If so, what are the implications of that decision on HCO
“performance” indicator?
– FASB has tentatively decided that net assets should be
classified as either those with donor-imposed
restrictions or those without donor-imposed restrictions
• i.e., eliminate distinction between temporary and permanent
restrictions on face of financial statements
40
COMMON PRACTICE ISSUES: RAC AUDITS
41
Common Practice Issues:
RAC Audits
• Under the Tax Relief and Health Care Act of 2006, there is
a permanent nationwide Recovery Audit Contractor (RAC)
program
• The objective of RAC audits is to detect and recoup
improper payments in the Medicare fee for service program
• RAC audits have resulted in significant payment reductions
– However, audit activities in many states are still slow
42
Common Practice Issues:
RAC Audits
Question: Is it appropriate for an HCO to record a revenue
reserve at the date the services are rendered for Medicare
revenue that it believes CMS will “take back” as a result of
future adjustments and/or findings?
• HCOs should make a reasonable estimate of the amounts
it expects to receive from third-party payers and such
estimates shall be recorded in the period that the related
services are rendered
– ASC 954-605-25-6 states “Estimates of contractual adjustments,
other adjustments, and the allowance for uncollectibles shall be
reported in the period during which the services are provided
even though the actual amounts may become known at a later
date
43
Common Practice Issues:
RAC Audits
• There is significant diversity in practice on how
health care entities are estimating and recording
recoveries for claims under appeal
• When an entity receives notification from CMS of
the payment reduction it means that the revenue
criteria has not been met – so the company must
evaluate whether this is
– a change in estimate, or
– a correction of a prior period error
44
Common Practice Issues:
RAC Audits
• Error versus Changes to Estimates
– Due to the complexities involved in billing medical services, such
conclusions will likely require a significant amount of judgment
– The audit findings should be carefully reviewed and management
should assess whether the findings were:
• Errors: Mathematical mistakes, systemic input errors, oversight or
misuse of available information, misapplication of known contract
terms, etc.
• Changes in estimates: Changes due to variances in the interpretations
of regulations and contracts, clarification provided through new
information, and experience provided for improved judgment, etc.
– Management should also review its accounting and reporting
policies and processes to determine if such policies and processes
did consider, or should have considered, the need for an allowance
at the date of service for such audit findings
45
Common Practice Issues:
RAC Audits
• If this is considered to be a change in estimate
then
– an accrual for RAC adjustment should be recorded
– this is generally a contra revenue adjustment along with
the set up of a corresponding liability
• There is a diversity of practice on when to record a
receivable for recoveries on appealed claims
• There are two alternate views on this topic
46
Common Practice Issues:
RAC Audits
• View 1:
– This view is based on ASC 450-30, Contingencies
– Since it not certain that the provider’s appeal will be
successful, no receivable or related gain should be
recorded until the appeals process is complete
47
Common Practice Issues:
RAC Audits
• View 2:
– This view is based on SOP 00-1,“Auditing Health Care
Third-Party Revenues and Related Receivables,” which
states that “The fact that information related to the
effects of future program audits, administrative reviews,
regulatory investigations, or other actions does not exist
does not lead to a conclusion that the evidence
supporting management's assertions is not sufficient to
support management's estimates”
– Under this view, estimating recoveries for the successful
appeal of denied RAC claims would be appropriate
48
Common Practice Issues:
RAC Audits
– However, this estimate should be based on provider
specific facts and circumstances and the success rate of
the organization during prior appeals process related to
similar claims
– While industry data can be used to corroborate
company estimates, many believe that can’t be the sole
support for recording claims recoveries
– Some Firm’s have taken the position that View 1 is the
only acceptable response in absence of provider
specific data as described above so need to discuss
with your auditor early in the estimation process
49
Common Practice Issues:
RAC Audits
• If an entity suspects that it may have billed for services that
are potentially not reimbursable then they should:
– implement changes to billing practices and/or clinical operations on
a prospective basis and
– evaluate whether revenue recognition criteria were met related to
services previously billed and record adjustments based on whether
it was a change in estimate or error correction
• If the entity is concerned about potential RAC adjustments
that have not yet been identified they should record
estimated contractual adjustments based on specifically
identified issues and a general reserve should not be
recorded if it is not supported by entity-specific data
50
Common Practice Issues:
RAC Audits
For more information on this topic,
please refer to the HFMA white paper at:
http://www.hfma.org/RACAccounting/
51
HFMA Issue Analysis
• The issue analysis includes information on the accounting
for RAC audit adjustments, as well as an appendix with
questions and responses that were used to develop the
issue analysis
• The issue analysis provides guidance on:
– When a health care entity receives a notification of a RAC audit
adjustment
– When a health care entity suspects it may have billed for and/or
been paid for services that are potentially nonreimbursable
– When a health care entity is concerned about potential RAC
adjustments for issues that have not yet been identified
– When a health care entity receives notification of a RAC audit
adjustment recovery
52
ACCOUNTING FOR ELECTRONIC HEALTH
RECORD (EHR) INCENTIVE PAYMENTS
53
Medicare Acute Care EHR
Accounting & Reporting: PPS
• HFMA Issue Analysis Paper December 2011
www.hfma.org/EHRPayments
• Overview of Accounting Models for acute-care
inpatient hospitals that are paid under the inpatient
prospective payment system – Two Alternatives
– Contingency
– Grant
• SEC registrants vs. Non-registrants
• Provides practical assistance on this issue but is
not authoritative
54
Medicare Acute Care EHR
Accounting & Reporting: PPS
• Contingency Accounting Model
– Contingencies must be resolved prior to recognizing
revenue
• Compliance with meaningful use for full reporting period (i.e.,
any continuous 90 days in FFY in first year and full FFY after
that)
• 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
55
Medicare Acute Care EHR
Accounting & Reporting: PPS
• Contingency Accounting Model (continued)
– Incentive payment income recorded entirely in period
last contingency resolved
– Careful consideration should be given to all potential
contingencies and entities should support and document
how any such contingencies were considered and/or
resolved
– SEC has informally indicated that registrants should
follow this model
56
Medicare Acute Care EHR
Accounting & Reporting: PPS
• IAS 20 Grant Accounting Model (1)
– 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
(1)
International Accounting Standard 20, Accounting for Government
Grants and Disclosure of Government Assistance
57
Medicare Acute Care EHR
Accounting & Reporting: PPS
• 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 EHR reporting 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,
with remaining income recognized ratably over remainder of
compliance period
– If reasonable assurance is no longer met, previously recognized
income should be reversed and treated as a change in accounting
estimate
58
Medicare Acute Care EHR
Accounting & Reporting: PPS
• Reasonable assurance is judgmental
– How long has the hospital been operating an 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)?
NOTE: Management should be able to adequately support,
through appropriate documentation, the point at which the
hospital met or will meet the applicable requirements
59
Medicare Acute Care EHR
Accounting & Reporting: PPS
• Use of estimates in income recognition
– Incentive payments are based on statutory formula
– If compliance with other requirements is reasonably
assured, hospital may estimate inputs (e.g., total
discharges, charity charges) to formula to determine
income to be recognized
– Need to make estimates should not delay recognition of
income
– As estimated inputs are later replaced by actual inputs,
management will revise estimates as necessary and
account for as a “change in accounting estimate
resulting from new information”, similar to current
accounting for third party settlements
60
Medicare Acute Care EHR
Accounting & Reporting: PPS
• Statement of operations presentation
– Private and not-for-profit hospitals
• Operating or non-operating on a facility basis that complies with
existing GAAP
• Regardless, should be presented separately from patient
revenues
– 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
(but separate from patient revenues)
61
Medicare Acute Care EHR
Accounting & Reporting: PPS
• Disclosures
– Accounting policy including financial statement
presentation, method of income recognition, and
location in statement if not apparent on face of the
statement
– 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
62
Medicaid EHR Incentive Payments: PPS
• State Medicaid programs may also establish their
own EHR meaningful use incentive programs;
each state is unique—carefully consider specific
state facts and circumstances
• Concepts in the HFMA Medicare issues paper may
be helpful in determining accounting policy
• Acute care hospitals may receive EHR incentive
payments from both Medicare and Medicaid, if
eligible for both programs
63
Critical Access Hospitals (CAH):
Revenue From Meaningful-use Incentive Payments
• Because CAHs are otherwise reimbursed on a reasonable
cost basis and not pursuant to a prospective payment
system (PPS), the incentive payment methodology for
CAHs is different than it is for PPS hospitals
• Incentive payments are in lieu of amount CAH would have
received under reasonable cost principles
– Increased reimbursement (20%)
– Acceleration of other amounts
• CAH can expense reasonable costs incurred for purchase
of depreciable assets in a single year cost report upon
meeting 90 day meaningful use requirement
64
CAHs:
Revenue From Meaningful-use Incentive Payments
• A diversity in practice has been observed with respect to
how critical access hospitals (CAHs) recognize revenue
from meaningful-use incentive payments
• Journal of Accountancy article August 2013 at:
http://www.journalofaccountancy.com/News/20138275.htm
65
CAHs:
Revenue From Meaningful-use Incentive Payments
• The following are the different view points related to
revenue recognition:
– Under the first view earnings process is complete in the period
when the meaningful use criteria is met and the entire payment is
recognized as net patient revenue at that time
– Under the second view defer the payment upon receipt and
amortize it into income as net patient revenue during the periods
over which the technology is depreciated
– Under the third view treat the incentive payment as a government
grant and recognize as deferred income (grant income or grant
income and net patient revenue for normal depreciation
component) over the useful life of the asset acquired or deduct the
payment in calculating the carrying amount of the asset thus
recognizing a reduced depreciation expense
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CAH Incentive Payments
• Medicare payments to CAHs are based on actual
reasonable costs incurred associated with qualified EHR
technology (i.e. cost reimbursed)
• Incentive payments are in lieu of amount CAH would have
received under reasonable cost principles
– Increased reimbursement (20%)
– Acceleration of other amounts
• CAH can expense reasonable costs incurred for purchase
of depreciable assets in a single year cost report upon
meeting 90 day meaningful use requirement
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CAH EHR Accounting
• Entities should consider your particular facts and
circumstances
• ASC 235-10 provides general guidance regarding
disclosure related to accounting policies including
that entities should disclose any principles
involving “a selection from existing acceptable
alternatives”
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ACCOUNTING FOR ICD-10 COSTS
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Accounting for System Upgrades – ICD-10
Implementation
ASC 350-40 – Internal Use Software Costs
Preliminary stage
Application
development stage
Post-implementation
stage
New system installation
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ICD-10 System Upgrades
• System upgrade = modification of existing system
• Generally, costs of modifying existing systems are
expensed
• Only certain costs of changes that result in “additional
functionality” can be capitalized
– Additional functionality: modifications that enable the software to
perform tasks that it was previously incapable of performing
• Specific facts and circumstances should be considered in
evaluating whether any modifications result in additional
functionality
– Each entity’s project is unique
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Helpful Chart from ASC 720-45-55
Legend:
a = Expense as incurred
per ASC 720-45
b = Expense as incurred
per ASC 350-40
c = Capitalize per ASC
350-40
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Assessing “additional functionality”:
Some Factors to Consider
Factor
Pointer towards “additional functionality”
Extent and types of changes made to
software design
More changes/more complicated changes
Extent of additional coding required,
additional software processes
developed
More extensive coding required; more
software processes added
Ability to use additional coding
capabilities beyond submitting claims
System changes that harness the more
detailed billing code data for other
purposes
How changes are billed by vendor
Separately billed
Past history of system upgrades
Significant time since last upgrade; history
of modifications that were capitalized
Complexity of interfaces between billing
system and downstream systems
More/higher complex interfaces will involve
more significant changes
Professional judgment should be applied in evaluating preponderance of evidence provided
by these and other factors.
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ICD-10 System Upgrades:
Key Takeaways
• Applicable guidance
– ASC 350-40 (Internal Use Software Costs)
– ASC 720-45 (Business Project Reengineering)
• Much of the cost will likely be expensed
• Some costs associated with “upgrades/ enhancements”
may be capitalizable
– But only applies to certain costs incurred during application
development stage
– Must enable system to perform functions it previously was not
capable of performing (“additional functionality”)
– “Additional functionality” is assessed based on analysis of each
entity’s facts and circumstances
– How does the entity plan to utilize the additional information?
• EP issued a TPA on these matters in June 2012
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Question & Answer Session
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