In August 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-24: Health Care Entities (Topic 954) Presentation of Insurance Claims and Related Insurance Recoveries.
Accounting Standards Update
The ASU addresses the diversity in accounting for insurance claims and recoveries, primarily relating to medical malpractice insurance. Most health care entities have netted the claim liability against the estimated recovery. However, some have presented the liability and receivable on a gross basis, causing a difference in practice among the industry. Based on this, the FASB has determined that netting is not appropriate for insurance claims and related anticipated insurance recoveries. The claim liability should be considered separately from the insurance recovery.
Who does the ASU apply to?
The ASU applies to all health care entities with exposure to risk of a malpractice claim, regardless of insurance coverage. When the incidents that give rise to a claim occur, an entity is required to evaluate its exposure to losses and potentially recognize a liability. The evaluation of exposure includes the ultimate cost of malpractice claims or similar contingent liabilities, which include costs associated with litigating or settling claims. An entity that has insurance coverage for the claim should recognize a receivable for insurance recoveries at the same time as the liability is recognized. It should be measured on the same basis as the liability. Receivables recorded for insurance recoveries are subject to a valuation allowance for uncollectible accounts.
For what periods is the ASU effective?
The effective date of ASU No. 2010-24 is for periods, including interim reporting periods, beginning after Dec. 15, 2010. Early application of these provisions is permitted. An entity will record a cumulative-effect adjustment to the opening net asset balance in the year of adoption if a difference exists between the liability and receivable recorded. The provisions of this ASU should be reviewed to determine the potential effect on financial reporting.
