A&A Update HFMA New Jersey Chapter November 11, 2014 Baker - - PowerPoint PPT Presentation

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A&A Update

HFMA – New Jersey Chapter

November 11, 2014

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Summary

> Revenue recognition > Other issued ASUs > Exposure drafts > FASB projects > Conclusion

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ASU 2014-09 – Revenue from Contracts with Customers (Topic 606)

> Issued in May 2014 > Objective is to create a single revenue recognition model that can be used across industries > Entities have time to implement this standard

− Public – annual periods beginning after December 15, 2016

> Fiscal years ending December 31, 2017 and June 30, 2018

− Nonpublic – annual periods beginning after December 15, 2017

> Fiscal years ending December 31, 2018 and June 30, 2019 > Public entities cannot early adopt this standard

− Nonpublics can only adopt one year sooner (i.e. with publics)

> FASB created a new Topic 606 that will replace Topic 605 when this standard is adopted

− Will supersede most industry-specific guidance

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-09 – Revenue from Contracts with Customers (Topic 606)

> Five-step revenue recognition model

• 1. Identify the contract(s) with a customer
• 2. Identify the performance obligations in the contract
• 3. Determine the transaction price
• 4. Allocate the transaction price to the performance
• bligations in the contract
• 5. Recognize revenue when (or as) the entity satisfies

a performance obligation

> Costs to obtain or fulfill a contract > Disclosures

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Step 1 – Identify Contract with Customer > Entities shall account for a contract only when all five criteria are met

1. Parties to the contract have approved the contract 2. Each party’s rights to the goods/services can be identified 3. Payment terms for the goods/services can be identified 4. Contract has commercial substance 5. It is probable that the entity will collect the consideration

> If the above criteria are not met, a contract has not been established and no revenue is to be recognized

− However, entities can subsequently assess the contract to ascertain when all five criteria have been met

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-09, Example 3 – Implicit Price Concession > Patient is presented to a hospital emergency room in poor medical condition > Hospital is required to provide medical services to patient prior to obtaining any information, including ability or intent of the patient to pay > Patient has not committed to his/her obligations under the contract and, therefore, a contract has not been established > Upon stabilizing the patient, the entity can obtain patient information and ascertain whether a contract exists to which revenue can be recognized

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Step 2 – Identify Performance Obligation(s) > A promise in a contract with a customer to transfer to the customer either:

− A good or service (or a bundle of goods or services) that is distinct − Series of distinct goods or services that are substantially the same and that have the same patter of transfer to the customer

> Does not include activities unless those activities transfer goods/services to customer (i.e. admin tasks) > A good or service is distinct if both criteria are met

− Good or service is capable of being distinct − Good or service is distinct within the context of the contract

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Step 3 – Determine Transaction Price

> Transaction price may include fixed amounts, variable amounts, or both > Variable amounts can be estimated in two ways

− Expected value – sum of probability-weighted amounts; can be an appropriate estimate if an entity has large number of contracts with similar characteristics − Most likely amount – single most likely amount; can be appropriate if the variable amount has only two possible outcomes

> In addition to contract terms, consideration can be variable if either apply:

− It is expected that the entity will offer a price concession − Other facts and circumstances indicate that the entity will offer a price concession

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-09, Example 3 – Implicit Price Concession (Continued) > ER patient stabilized > Hospital determines that patient does not qualify for charity care > Although standard rate for services is $10,000, the hospital expects to accept a lower amount of consideration

− Therefore, promised consideration is considered variable

> Based on historical cash collections from this customer class and other relevant patient information, the hospital expects to be entitled to $1,000 (i.e. probable) > Revenue amount to be recognized = $1,000

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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What does this mean for hospitals? > Hospitals could recognize revenue based on amounts expected to be paid from both third-party payors and self pay patients > There will still be a provision for bad debt based on hospital’s assessment of outstanding accounts receivable; however, it would reflect truly bad debt

− Insurance companies that go bankrupt − Self pay patients who do not pay

> Does not change hospitals’ collection policies and practices

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Step 4 – Allocating Transaction Price to Performance Obligations

> If a contract contains multiple performance obligations, an entity allocates the transaction price to each performance

• bligation based on the relative standalone selling price of

each distinct good or services > The standalone selling price is defined as “the price at which an entity would sell a promised good or service separately to as customer.” > Best evidence is an observable price > If price is not observable, it is estimated at an amount that reflects the overall objective of the standard

− Adjusted market assessment approach − Expected cost plus a margin approach − Residual approach (total price less sum of observable prices)

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Step 5 – Recognize Revenue When (or as) Performance Obligation is Satisfied

> ASU 2014-09 states that “an entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer.” > Performance obligations may be satisfied over time if one of the following applies:

− Customer simultaneously receives and consumes the benefits − Entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced − Entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date

> If none of the above apply, then performance obligations are considered to be satisfied at a point in time

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Costs to Obtain or Fulfill a Contract

> Incremental costs – costs that are incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained

− Should be recognized as an asset − Amortized “on a systematic basis that is consistent with the transfer…of the goods or services…” − Practical expedient to expense costs if amortization period is < 1 year

> Costs to fulfill a contract – unless the cost should be capitalized as inventory or PP&E, the cost should be recognized as an asset if all criteria is met

− Directly related to a contract or to an anticipated contract that an entity can specifically identify − Generate or enhance resources that will be used in satisfying obligation in the future − Expected to be recovered

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Disclosures

> Disaggregation of revenue into categories that depict how revenues and cash flows are impacted by economic factors > Opening and closing balances of receivables, contract assets, and contract liabilities, if not separately presented > Revenue recognized in the reporting period from performance

• bligations satisfied in previous periods

> Information about performance obligations, including

− When they’re typically satisfied − Significant payment terms − Obligations for returns, refunds, and other similar obligations

> Concepts of this standard have been implemented with most hospitals under ASU 2011-07

− Probably not with CCRCs

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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AICPA Task Forces

> AICPA has established sixteen industry task forces to evaluate the provisions of ASU 2014-09 > AICPA has a task force for healthcare, which consists of two subgroups

− Hospitals − CCRCs

> Stay tuned

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2013-12 – Definition of a Public Business Entity

> Defines a “public business entity” as a business entity that meets any one of the following criteria

− Files or furnishes financial statements with the SEC − Required to file or furnish financial statements to a regulatory agency other than SEC − Required to file or furnish financial statements with a regulatory agency in preparation for the sale of or for purposes of issuing securities − It has issued, or is a conduit bond obligor for, securities that are traded on an exchange or market − It has securities that are not subject to contractual restrictions on transfer, and is required to prepare US GAAP financial statements and make them publicly available on a periodic basis

> Does not apply to not-for-profit entities

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-08 – Reporting Discontinued Operations and Disclosures of Components of an Entity > Effective for

− All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 − All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014

> Addresses constituent concerns that there are too many disposals of small groups of assets that qualify for discontinued operations under current US GAAP > Also enhances convergence with IASB reporting requirements for discontinued operations

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-08 – Reporting Discontinued Operations and Disclosures of Components of an Entity > Does not change the definition of a “component of an entity”

− Comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity

> A disposal of a component of an entity (or group of components) is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the entity’s

• perations and financial results and one of the following occurs

− Criteria is met to classify as held for sale − Disposal by sale − Disposal by other than sale (ex. abandonment)

> Discontinued operations are presented in the financial statements for all periods presented

− Related assets and liabilities are separately stated

> If discontinued operations does not apply, entity follows guidance within ASC Topic 360-10-45 for disposals and assets classified as held for sale

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-08 – Reporting Discontinued Operations and Disclosures of Components of an Entity

> Examples of a strategic shift that has (or will have) a major effect on the entity’s operations and financial results

− Disposal of a major geographical area − Disposal of a major line of business − Disposal of a major equity method investment − Disposal of other major parts of an entity

> Five examples noted within ASC 205-20-55 noting strategic shifts that have a major effect on the entity’s operations and financial results

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-08 – Reporting Discontinued Operations and Disclosures of Components of an Entity

> Required disclosures

− Description of facts and circumstances leading to the disposal or expected disposal, including the expected manner and timing − Gain or loss on disposal, if not separately stated − Information about significant continuing involvement with a discontinued

• peration after the disposal date

− Major classes of line items constituting pretax profit or loss (or change in net assets) − Carrying amounts of major classes of assets and liabilities included as part

• f the discontinued operations

− Either total operating and investing cash flows of the discontinued operation

• r depreciation, amortization, capital expenditures, and significant operating

and investing noncash items of the discontinued operations

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-15 – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern > ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures > Prior to ASU 2014-15, there was no such guidance in US GAAP > Effective for annual periods ending after December 15, 2016

− Early application is permitted

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-15 – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern > When preparing financial statements, management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued)

− Substantial doubt exists when the conditions or events indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued)

> Previously, US GAAS required auditors to evaluate the entity’s ability to continue as a going concern for a reasonable period of time (“not to exceed

• ne year beyond the date of the financial statements being audited”)

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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ASU 2014-15 – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern > If substantial doubt potentially exists based on identified conditions or events, management should evaluate whether its plans that are intended to mitigate those conditions or events alleviate the substantial doubt > If substantial doubt is alleviated, management should disclose information that enables users to understand all of the following:

− Principal conditions or events that raised substantial doubt − Management’s evaluation of the significance of those conditions or events − Management’s plans

> If substantial doubt is not alleviated, the disclosures above are required along with a statement in the notes that there is “substantial doubt about the entity’s ability to continue as a going concern” within one year after the financial statements are issues (or available to be issued)

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Leases

> Proposed as part of FASB/IASB joint project > Capitalizing most leases as a right-of-use asset on balance sheet > Dual approach for lessee accounting

− Type A (similar to existing capital leases) – recognize amortization of ROU asset separate from interest on lease liability − Type B (similar to existing operating leases) – recognize a single total lease expense

> Continued deliberations > No final date noted on FASB website

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Financial Instruments > Two projects with exposure drafts

− Classification and measurement

> Based on the asset’s cash flow characteristics and the entity’s business

model for managing the asset, financial assets would be classified into one of three categories

– Amortized cost – Fair value through other comprehensive income – Fair value through net income

> All equity investments (except equity method investments) would be

measured at fair value through net income

> Financial liabilities would be generally measured at amortized cost, with few

certain exceptions

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Financial Instruments > Two projects with exposure drafts (continued)

− Impairment

> Proposed ASU would create a single current expected credit loss (“CECL”)

model

> CECL model must reflect both the possibility that a credit loss results and the

possibility that no credit loss results

> Takes into consideration reasonable forecasts in addition to past events > CECL model differs from IASB’s proposed three-bucket impairment model

– Main difference is the use of a triggering event under the IASB approach

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Extraordinary Items

> Proposed as part of Simplification Initiative > Current guidance requires extraordinary items treatment when the event or transaction is unusual in nature and infrequent of

• ccurrence

> Concerns over current guidance

− Unclear as to when an item should be both unusual and infrequent − Presentation not as useful as the disclosures − Extremely rare in current practice

> Proposed ASU would eliminate the concept of extraordinary items

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Pushdown Accounting

> Limited guidance in current US GAAP > Establishes guidance on when and how an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements > Comment period ended July 31, 2014 > Expected to draft final standard in 4Q 2014

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Pushdown Accounting

> Upon acquisition, an acquired entity will have the option to apply pushdown accounting in its separate financial statements

− Option can be evaluated for each individual change-in-control event

> When pushdown accounting is elected, the new basis of accounting is reflected in the separate financial statements of the acquired entity under Topic 805 (Business Combinations), including goodwill

− If a bargain purchase gain occurs, it is not recognized in acquired entity’s income statement

> Acquisition-related debt can be pushed down only if acquired entity is required to recognize a liability for that debt > Apply the disclosure requirements from Topic 805 > If pushdown accounting is not elected, the acquired entity discloses it has

− Undergone a change-in-control event − Elected to prepare its financial statements using its historical basis that existed prior to the acquisition

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Debt Issuance Costs > Proposed as part of Simplification Initiative > Debt issuance costs would be a reduction in debt for balance sheet presentation

− Aligning its presentation with debt premium/discount

> Amortization of debt issuance costs would be reported as interest expense > Would be applied retrospectively

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Financial Statements for Not-for- Profit Entities

> Objective is to reexamine existing standards for financial statement presentation, focusing on improving

− Net asset classification requirements − Information provided in financial statements and notes about liquidity, financial performance, and cash flows

> Currently in initial deliberations

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Financial Statements for Not-for- Profit Entities

> Statement of financial position

− Three net asset classes will be replaced with two

> With donor-imposed restrictions > Without donor-imposed restrictions

− Placed-in-service approach will be used to determine expiration of restrictions related to long-lived assets − Related disclosures would be revised to reflect the new classes of net assets − Underwater endowments

> Defined as “the amount by which the fair value of an individual donor-

restricted endowment fund is less than the original gift amount or level required by donor stipulations or law”

> Underwater amounts will be reported as “with donor restrictions”

– Currently “unrestricted net assets”

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Financial Statements for Not-for- Profit Entities > Statement of cash flows

− Direct method will be required − Revised classifications

> Cash gifts for long-lived assets – from financing to operating > Cash payments for long-lived assets – from investing to operating > Cash proceeds from sale of long-lived assets – from investing to

• perating

> Cash dividends and interest income – from operating to investing > Cash payments of interest – from operating to financing

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Financial Statements for Not-for- Profit Entities > Statement of activities

− Intermediate measure of operations that is defined by two key dimensions

> Mission – based on whether resources are from or directed at carrying

• ut an entity’s purpose for existence

> Availability – based on whether resources are available for current period

activities that reflect both external and internal limitations

− Health care entities would be permitted, but no longer required, to present the performance indicator − Requirement to report expenses by nature and function in one location

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Disclosures by Business Entities about Government Assistance > Added to FASB agenda in January 2014 > There is no explicit US GAAP guidance for the accounting

• f government assistance

> FASB staff is currently performing additional research and

• utreach efforts (very early stages)

Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion

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Questions?

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Conclusion

> Although the international convergence project is winding down, FASB is still pretty busy > Significant changes are coming; not here yet > Deep breaths

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Thank you.