As discussed previously, revenue recognition guidance under FASB is effective for public business entities and not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or an over-the-counter market for fiscal years beginning after December 15, 2017.
There are four key matters to consider that may have the greatest impact to the health care industry:
In this article, we will focus on initial implementation consideration.
Initial Implementation Considerations
After patient and third-party payor arrangements are identified and the appropriate accounting is determined, the implementation methodology needs to be selected. The revenue recognition guidance can either be implemented using a full retrospective methodology with up to four practical expedients available, or a retrospective method can be used with the cumulative effect adjusted at the date of implementation.
Full Retrospective Methodology
Under the full retrospective approach, all periods presented are adjusted for any recognition changes under the new guidance, and any cumulative effects from periods prior are applied to the opening balance of the first period presented. If this implementation method is selected, there are four potential practical expedients that may be selected to assist in implementation as follows:
The practical expedients may be applied to the prior periods presented, but not to the current period. In addition, a disclosure is required if any of the practical expedients selected are expected to have a material impact on the amounts presented or disclosed.
Cumulative Effect Methodology
Under the cumulative effect, at the date of adoption methodology, the current period is reported using new guidance, while the prior year is reported based on legacy guidance. The amount by which each financial statement line item is affected in the year of adoption requires a disclosure and explanation of the reason for the significant change. Consequently, under the cumulative effect approach, the year of adoption needs to be tracked under both legacy guidance and new guidance.
Determining the Contract Transaction Price
In addition to the practical expedients provided during implementation, there are certain other practical expedients to consider upon initial application of the guidance. In determining the transaction price of a contract, an entity needs to consider the time value of money in the timing of payments received. If a financing component is incorporated into these payment terms (e.g. a self-pay patient on a payment plan), there is a potential adjustment necessary to the transaction price. This should be broken up and condensed a bit. “There is a practical expedient that can result in revenue not being adjusted upon recognition for the effects of a significant financing component. This is only applicable if, upon contact inception, the entity expects that the period between provided services and patient payment will be one year or less.”
Most health care entities require payment of amounts billed at the time of billing unless a separate arrangement is reached. As such, most health care entities should be able to take advantage of this practical expedient.
Contracts with Customers
The revenue recognition guidance provides accounting treatment for the incremental costs incurred when obtaining a contract with a customer. While most contracts have minimal incremental costs, some may have a significant amount of direct and indirect costs, such as those related to shared saving programs, accountable care organizations (if a related contract exists), etc. The guidance requires that these costs be accumulated and capitalized as an asset with amortization recorded over the contract term. Except for very specific contracts, this may be a very onerous process for a health care entity, given that every patient encounter is considered at least one contract with the patient (written, oral, implied, etc.). A practical expedient exists that allows an entity to expense incremental costs of obtaining a contract if the entity would otherwise recognize the amortization within one year or less. Public health care entities, as defined above, are required to disclose which practical expedients are elected.
The full guidance should be reviewed to determine if there are any other potential impacts specific to your organization.
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