Insights: Article

Revenue Recognition Changes Part 4: Initial Implementation Considerations

By Tyler Bernier

November 05, 2018

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:

  • Patient accounting system.
  • Revenue streams.
  • Third-party payor settlements.
  • Initial implementation consideration.

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:

  • An entity need not restate contracts that begin and are completed within the same annual reporting period.
  • For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
  • An entity need not disclose the amount of the transaction price allocated to the remaining performance obligations for prior periods, including the explanation of when the entity expects to recognize that amount as revenue.
  • For contracts modified before the earliest period presented, an entity need not retrospectively restate the contract for those contract modifications. Instead, an entity shall reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when recording amounts under the guidance.

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.

Questions about revenue recognition changes and how they affect your organization? Contact an Eide Bailly professional today.

Catch up on this series!

Revenue Recognition Changes and the Impact of the Health Care Industry: What To Do Now  

Revenue Recognition Changes Part 2: Revenue Streams

Revenue Recognition Changes Part 3: Third-Payor Settlements

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