{FASB A&A Update}NOVEMBER 19 , 2015

OverviewHOT NEW AND PENDING ACCOUNTING STANDARDS

• Revenue Recognition

• Financial Statement Presentation for Not-for-Profit Entities

• Leases

2

3

Revenue Recognition

Overview:

• FASB and IASB have issued a new global revenue recognition standard.

• The standard replaces virtually all existing US GAAP and IFRS guidance on revenue recognition.

• Its effect on financial statements, business processes and internal controls will likely be significant for some entities.

• FASB-IASB transition resource group and other implementation resource groups have been created.

4

Revenue Recognition

Effective Date and Transition:• Public entities:

o Annual reporting periods beginning after December 15, 2017, including interim reporting periods therein.

o May be early adopted as of the original effective date (one year early)

• Nonpublic entities: o Annual reporting periods beginning after December 15, 2018, including interim reporting

periods thereafter.o May be adopted as early as the original public effective date

• Entities can choose to adopt the standard either a full retrospective approach or a modified retrospective approach.

Revenue Recognition

Step 1• Identify the contract with a customer

Step 2• Identify the separate performance obligations in the contract

Step 3• Determine the transaction price

Step 4• Allocate the transaction price to the separate performance obligations

Step 5• Recognize revenue when (or as) the entity satisfies a performance obligation

5

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

6

Health Care Issues IdentifiedThe Healthcare Revenue Recognition Task Force is analyzing the following issues as AICPA they relate to providers:

• Recognition of revenue for self-pay chargeso Enforceable contracto Patient commitment to payo Portfolio approacho Collectability/probability of collectiono Implicit price concessionso What is reported as bad debto Consideration received before contract is recognizedo Changes in estimate

• Variable consideration subject to payor contacts• Impact on CCRC revenue recognition patterns

7

Health Care Issues Identified

The AICPA Healthcare Revenue Recognition Task Force has been drafting several implementation issue whitepapers. The current issues being addressed in whitepapers include: Implementation Issue Whitepaper FocusApplication 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.

This implementation issue will discuss evaluating whether a contract exists and what the transaction price is to arrangements for health care services provided to self-pay patients and balances arising from co-payments and deductibles.

Implicit price concessions related to self-pay balances This implementation issue, being submitted to the TRG, provides two views over the initial accounting for implicit price concessions for services provided to uninsured patients and two views for the subsequent accounting for these types of contracts and whether changes in the estimates of variable consideration represent changes in price concessions or impairments.

Application of the portfolio approach to contracts with patients

This implementation issue will discuss how to apply the portfolio approach to revenue from self-pay patients and third party payors.

8

Health Care Issues Identified

The AICPA Healthcare Revenue Recognition Task Force has been drafting several implementation issue whitepapers. The current issues being addressed in whitepapers include:

Implementation Issue Whitepaper FocusCCRC: 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

This implementation issue will discuss the performance obligations under a typical Type A (life care) continuing care retirement community (CCRC) resident agreement and, given these performance obligations, how a Type A CCRC will estimate a transaction price and recognize nonrefundable entrance fees and monthly/periodic fees received from residents under the new model.

Accounting for contract costs This implementation issue will discuss how health care organizations will account for certain costs of acquiring and fulfilling contracts under the new model.

9

Revenue Recognition

Portfolio Approach:• Entities can apply the standard or aspects of it to a portfolio of contracts or performance obligations

with similar characteristics

• May segregate by payor class, type of service or other categories

o System-wide or tailored

o By Facility

o Whether patients are denied service based on ability to pay

o Large balance accounts

• A provider may apply the portfolio approach to one class of patients but not to another.

• A contract should be removed from a portfolio if the provider later determines that the contract does not have similar characteristics with others in the portfolio.

• Entities must reasonably expect that the financial statement impact from using the portfolio approach would not differ materially from applying the standard on a contract by contact basis.

10

Revenue Recognition

Self-Pay Revenue Stream• Identify the Contract (Step 1):

o Does an enforceable contract exist?

o Is the patient committed to performing obligations?

o Is it probable that the entity will collect the consideration to which it expects to be entitled?

• Determining the Transaction Price (Step 3):

o Does an implicit price concession exist?

o How are subsequent changes accounted for?

o What constitutes bad debt?

11

Revenue Recognition

Does an Enforceable Contract Exist?• Enforceability is a matter of law

• Contracts may be written, oral or implied by an entity’s customary business practice

o Unconscious patient admitted through ER?

o Patients admitted against their will?

Does a contract exist?• The parties have approved and are committed to performing their obligations.

• Each party’s rights regarding services can be identified.

• Payment terms can be identified.

• The contract has commercial substance.

• It is probable that the entity will collect the consideration to which it will be entitled.

o Consider customer’s ability and intent.

o Consideration may be less than price if the consideration is variable.

Revenue Recognition If contract does not meet the criteria in ASC 606-10-25-1

12

Recognize revenue when either of the following events has occurred:

1) No remaining obligations to transfer goods or services and substantially all consideration is collected and is non-refundable or2) The contract is terminated and the consideration is non-refundable

Continually reassess the arrangement…if Step 1 criteria are met, begin applying the revenue model, otherwise:

Record the consideration received from the customer as a contract liability until conditions below are met

13

Revenue Recognition

Determining the transaction price- variable consideration: • Consideration may be variable due to contractual allowances, charity, prompt pay discounts, uninsured

discounts, incentives, penalties, etc.

o The patient may have a valid expectation based on published policies, specific statements, or customary business practices OR

o Facts and circumstances may indicate an entity’s intention when entering into a contract to offer a price concession.

• Recognize revenue only to the extent that a significant reversal is not probable.

• Reassess at the end of each reporting period.

14

Revenue Recognition

Assessing for Implicit Price Concession• Does the patient expect a price concession?

• Do facts indicate that the provider’s intention is to provide a price concession?

• Is a credit assessment performed prior to providing services?

• Does the provider continue to provide services to patients even if historical collections are less than the stated transaction price?

• Must implicit price concessions be communicated to the patient?

• In estimating the variable revenue, it should be probable that there will not be a significant reversal.

15

Revenue Recognition

Subsequent Changes in Transaction Price• If an implicit price concession is provided the entity must:

o Determine how to account for subsequent changes

o Update the estimated price at the end of each reporting period

• In general, subsequent changes to estimated variable consideration should be accounted for as increases or decreases in the implicit price concession- adjustments to net patient service revenue.

• If a healthcare entity does not grant price concessions:

o It may conclude there is no contract (and no revenue, initially) OR

o It may conclude there is a contract. Revenue would be recognized, and subsequent AR allowance/write off would be bad debt expense

• Bad debt expense may include:

o Write off of a patient bill, when credit risk was evaluated and credit extended

o Third party payor files bankruptcy

16

Revenue Recognition

Example: Impact of Contract and Price Conclusions:• Background: Service is provided to an uninsured patient. Charges total $10,000. Uninsured patient

class generally pays 10% of charges. This patient eventually pays $900, and the remaining balance is written off.

o Scenario 1: Hospital determines that no contract exists.

o Scenario 2: Hospital determines that contract does exist, and the hospital is entitled to receive full charges.

o Scenario 3: Hospital determines that a contract exists, but that an implicit price concession for 90% of charges will be provided.

17

Revenue Recognition

Example: Impact of Contract and Price Conclusions:

Scenario 1 Scenario 2 Scenario 3Revenue Bad

DebtLiability Revenue Bad

DebtRevenue Bad

DebtService Provided

$10,000 $1,000

Cash Received

$900

AR deemed uncollectible

$9,100 ($100)

Contract terminated

$900 ($900)

Total $900 $0 $0 $10,000 $9,100 $900 $0

18

Financial Statement Presentation for Not-for-Profit Entities (NFP’s)

Overview• FASB re-examining existing standards for financial statement presentation for NFP’s with the goal to enable

NFP’s to tell their financial story better

• Areas of focus:

o Net Asset Classification

o Liquidity

o Financial Performance: Operating Measures

o Financial Performance: Cash Flow Statement

o Reporting of Expenses

o NFP Note Disclosures

19

Implications for Business- Oriented Healthcare Entities

Key Considerations for NFP Healthcare Entities:

• Classified balance sheet no longer required presentation

• Current performance indicator measure (excess of revenue over expenses) is no longer required

• Present the net amount for operating cash flows using the direct method of reporting

• Interest expense would not be classified as operating expense

20

Project Timeline

Exposure Draft Released for Public

Comment4/22/2015

Comment Period Ended

8/20/2015

Public Roundtables9/21 and 10/6/2015

Redeliberations Plan Phase I

Redeliberations PlanPhase II

21

Net Assets

Unrestricted Temp. Restricted Perm Restricted

With Donor Restrictions

Amount and purpose of

board designations

Without Donor Restrictions

Nature and amount of donor restrictions

Current GAAP

Proposed GAAP

Disclosures

+

22

Feedback – Net Assets

• Overall support for combining two classes of restricted net assets

• Overall support for requiring disclosure of board designations, and for the changes regarding reporting of underwater endowments

• Healthcare specific feedback: In agreement with overall feedback

23

Liquidity

The Board decided that an entity should define the time horizon it uses to manage its liquidity (for example 30, 60, or 90 days) and disclose the following information:

• Quantitative Informationo The total amount of financial assets

o Amounts that are not available to meet cash needs within the time horizon because of (1) external limits and (2) internal actions of a governing board

o The total amount of financial liabilities that are due within that time horizon

• Qualitative information about how the entity manages its liquidity. For example, an entity might disclose:o Its strategy for addressing entity-wide risks that may affect liquidity, including its use of lines of

credit

o Its policy for establishing liquidity reserves

o Its basis for determining the time horizon used for managing liquidity

Liquid: Asset type/debt maturityAvailable: Donor/other external restrictions and internal limits

24

Feedback – Liquidity

• Mixed feedback for proposed disclosures of information about liquidity

• Common suggested alternatives (common with current practice for healthcare entities)

o Require classified balance sheet for all Not-for-Profits

o Require separate presentation on balance sheet of assets whose use is limited

o Healthcare Feedback – Would want to retain a classified balance sheet

25

Financial Performance: Operating Measures

Defined a required intermediate operating measure for all NFPs – based on two dimensions:

• Mission (Business and Charitable Activity): based on whether resources are from or directed at carrying out an NFP’s purpose for existence (vs. investing and financing)

• Availability: based on whether resources are available for current period activities and reflecting limits of both:

o External donor-imposed limitations and

o Internal actions of an NFP’s governing board

Presentation of Transfers, to depict internal actions:

• Separate section within operating measure, after revenue and expense subtotal

• Includes gifts of/for capital items when placed in service

26

Feedback – Operating Measures

• Much pushback on the required intermediate measures of operations

o Many agree with requiring intermediate measures of operations, but disagree with the measures proposed

o Others are in favor of waiting until similar changes are required for business entities

• Healthcare Feedback:

o Significant contention with proposed treatment of transfers

o Keep current performance indicator, as long as net income is still required for business entities

27

Required Performance Indicator

RevenueNet patient service/revenue 1,000

ExpensesSalareis/supplies/benefits 500 Depreciation 10 Interest expense 5

Operating income (loss) 485

Other IncomeInvestment income 500 Contributions 50

Excess of revenues over expenses 1,035

OCI and other changeUnrealized gains on marketable securities 100 Effective portion of heading derivative 50 Net assets released from restriction for PP&E 50 Loss from discontinued operations (10)

Chage in unrestricted net assets 1,225

NFP Health Care, IncConsolidated Statement of Operations

BUSINESS AND CHARITABLE ACTIVITIES

RevenueNet patient service revenue 1,000 Contributions 50 Net assets released from restrtions for PP&E 50

ExpensesSalaries/supplies/benefits 500 Depreciation 10 Loss from discontinued operations 10

520

Operating excess (deficit), before transfers 580

Transfer to nonoperating activitiesNet assets released from restriction for PP&E (50)

Operating excess (deficit), after transfers 530

NONOPERATING ACTIVITIES

Investment income, net 600 Effective portion of hedging derivative 50 Interest expense (5)

Transfers from business/charitable activitiesNet assets relaesed from restriction for PP&E 50

Change in net assets without donor restrictions 1,225

NFP Healthcare, IncConsolidated Statement of Operatins

Today’s Model Proposed New Model

28

Reporting Expenses

Program Activities Supporting ActivitiesTotal Operating

Expenses Non-Operating Total Expenses Program A Program B M&G Fundraising

Salareis & Benefits

Grants to Others

Equipment Rental & Maintenance

Occupany Cost

Depreciation

Information Technology

Professional Service Fees

Supplies

Travel

Printeing and Publication

Interest

Other

Total

Expense by nature and function one place in the F/S (statements of activities, separate statement, or schedule in notes)

Function*

N*ATURE

*Either (or both) on face of Statement of Activities• Qualitative disclosure on cost allocation among program and support functions required• Also, will provide better guidance on ‘Management and General’ activities

Not Functionalized

29

Feedback – Reporting of Expenses by Nature and Function

• Overall support for all NFPs to report analysis of operating expenses by both function and nature in single location (generally in notes)

• Those who disagree, including most healthcare NFPs, generally express concern that cost of requiring such analysis for all NFPs would exceed benefits

30

Reporting of Investment Expenses

• Net presentation of investment expenses against investment return on the face of the statement of activities

• Netting limited to external and direct internal expenses

How to Present?

• Disclosure of investment expense no longer required, except for the disclosure of the amount of internal salaries and benefits that have been netted (if any) against investment return

• No longer required disclosure of investment income components

What to disclose?

31

Feedback – Reporting of Investment Expenses

• Overall support to report investment income net of external and direct internal investment expense

o Healthcare: general agreement, but some concern about interplay with current ASC Topic 320: presentation requirements regarding unrealized gains/losses on AFS securities

• Overall agreement that disclosure of all investment expenses is unnecessary, including disclosures of internal salaries and benefits netted against investment return

o Healthcare: similar feedback

32

Financial Performance: Cash Flow Statement

• Require Direct Method for operating cash flows

o No long require Indirect Method

• Re-categorize certain items to better align “operating” with activities statement and operating measure

o Purchases and proceeds on sales of PP&E

o Cash restricted for PP&E

o Cash from interest and dividends

o Interest paid on long-term debt

33

Cash Flow Statement

Cash received from service recipientsCash received from donorsCash paid to employeesCash paid to vendorsPurchase of property and equipmentProceeds on sale of property and equipmentContributions restricted for property and equipmentNet cash from operating activities

Cash received from interest and dividendsPurchase of investment assets Proceeds from sale of investments Net cash from investing activities

Payments of principle on long-term debt Interest paid on long-term debt Net Cash from financing activtiesNet increase in cashCash at the beginning of year

Cash Flows from Operating Activities

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Cash at end of year

34

Feedback – Cash Flow Statement

• Mixed feedback for requiring direct method of presenting operating cash flows

• Mixed feedback on whether to retain indirect method

• Most acknowledge that direct method is more understandable

• Healthcare feedback:

o Most healthcare NFPs disagree with requiring the direct method at this time

o Many have also indicated that the cash flow statement is largely, if not entirely, unutilized

35

Lease Accounting

Overview:

• Objective of the lease accounting standard was to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet.

• Final standard expected to be issued by early next year

• Effective dates:o Public Entities – Fiscal years and interim periods within those fiscal years, beginning after

December 15, 2018o Nonpublic entities- Fiscal years and interim periods within those fiscal years, beginning after

December 15, 2019

• Retrospective application

• Early adoption permitted

36

Proposed Right-of-Use Model

A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration

Right-of-use asset

Lease payments

LessorLessee

37

Lessee Accounting Overview

Lease assetLease liability

Amortization expense

Interest expense

Cash paid for principal and

interest payments

Right-of-use assetLease liability

Single lease expense on a

straight-line basis

Cash paid for lease payments

Balance Sheet Cash Flow Statement

Income Statement

Type

A

Type

B

38

Short –Term Leases Exemption

Balance Sheet Recognition and Measurement Exemption

Lessor

For leases with a term of 12 months or less

No longer based on maximum possible term, now aligned with definition of lease term

39

Lessor Accounting Overview

Net Investment in the lease

Interest income and any profit on

the lease

Cash received for lease payments

Continue to recognize

underlying asset

Lease income, typically on a

straight-line basis

Cash received for lease payments

Balance Sheet Cash Flow Statement

Income Statement

Type

A

Type

B

40

Standards Effective 2015 and 2016

• Disclosure for Investments in Certain Entities that Calculate Net Assets per Share (2016/FY 2017)

• Presentation of Debt Issuance Costs (2016/FY 2017)

• Going Concern (2016/FY 2017)

• Extraordinary items (2016/FY 2017)

• Discontinued Operations (2015/FY 2016)

Any Questions?

Thank you!!

Devin Dempsey, Associate614-222-9028

Devin.Dempsey@plantemoran.com

Dawn Stark, Senior Associate614-222-9066

Dawn.Stark@plantemoran.com