Navigating the New Revenue Recognition Standard for Health Care Organizations

With implementations underway for new revenue recognition guidance, our Health Care Practice professionals recently hosted a webcast examining the new standard for health care entities. While the webcast can still be viewed for free, below are useful highlights from the session.

Revenue Recognition Background

In 2014, the Financial Accounting Standards Board (FASB) issued accounting standards update 2014-09, Revenue from Contracts with Customers, Topic 606, which eliminated industry-specific revenue recognition guidance and replaced it with a single principles-based revenue recognition model that applies to most industries, with limited exceptions. Much of the revenue recognition guidance developed specifically for the health care industry over decades is being replaced by this one new model. Calendar year 2018 marked the first implementation period for the FASB standard update.

Webcast Highlights

The webcast reviewed the principles-based model in Topic 606 and also explored some practical implementation and operational considerations, examples from recently published interpretive guidance, and interim disclosures made by public health care entities, including hospital systems and senior living organizations.

Some tips and insights from the webcast include:

  • Standard applications. This new standard applies to transactions with customers of business and not-for-profit entities that aren’t accounted for as leases in Topics 840 and 842, or insurance contracts in Topic 944, among a few other exceptions. It’s not applicable to governmental entities, although the concepts may be relevant.
  • Financial statements. It’s possible that Topic 606 won’t significantly impact the timing and amount of revenue recognition, and thus the bottom line of your health care organization. However, it will certainly change some components of your financial statements and disclosures and the systems and processes under which you accumulate information for those statements.
  • Revised language. Contractual allowances, provisions for uncollectible accounts, and payer classes will be replaced or superseded with terms such as explicit price concessions, implicit price concessions, and contract portfolios. Bad debt expense will likely be reduced and shown as an operating expense.
  • Adapting operations. Systems and processes will need to be adjusted to capture the elements of the new model while considering the processing of information under the old revenue recognition standard that might still be applicable for other reporting regimes, such as cost reports or state Office of Statewide Health Planning and Development (OSHPD) reports.
  • New methods for senior living. Continuing Care Retirement Communities (CCRCs) will have two options for recognizing nonrefundable entrance fees over the life of the contracts. The first is the straight-line method over the life expectancy of the resident, which is the current practice for most CCRCs. The second option is the matching method based on timing of cost of services being provided. The straight-line method would approximate the current revenue recognition methodology, whereas the matching method would delay revenue recognition compared to current practice.
  • Capitalizing costs. Only incremental costs directly related to obtaining new contracts should be capitalized, which will likely be a change from current practice. Most costs of acquiring continuing care contracts will be required to be expensed as incurred under Topic 606.
  • Disclosures. Public entities, including not-for-profit organizations that are conduit bond obligors, may need to present additional disaggregated revenue stream disclosures along with other quantitative and qualitative disclosures.
  • Further instruction. Chapter seven in the American Institute of Certified Public Accountants’ (AICPA) Audit and Accounting Guide on Revenue Recognition provides a wealth of interpretive guidance for health care organizations, including sample policy notes and other required disclosures.

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To learn more about the new revenue recognition standard or complex challenges your business may face, contact your Moss Adams professional.