Insights: Article

Revenue Recognition Changes Part 2: Revenue Streams

By Tyler Bernier

August 01, 2018

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 Dec. 15, 2017.

This means Jan. 1, 2018, for organizations with a Dec. 31 year-end and July 1, 2018, for organizations with a June 30 year-end. For all other entities, the guidance is effective for fiscal years beginning after Dec. 15, 2018.

There are four key matters considered to have the greatest potential impact to the health care industry:

In this article, we will focus on revenue streams.

Revenue Streams
Revenue streams should be identified and tracked to determine the potential for differences in implicit price concessions versus credit losses (bad debt expense). For example, emergency room self-pay patients commonly pay significantly less than billed. However, elective procedures are normally expected to be paid timely, unless there’s an adverse change in the patient’s ability to pay.

Under historical guidance, a primary determination of whether write offs were considered deductions from revenue versus operating expenses was an entity’s determination of a patient’s ability to pay prior to providing services. Most health care entities, particularly hospitals, provide services to patients regardless of ability or intent to pay, and bad debts were recorded as deductions from revenue. There was also a provision that if the majority of revenue was treated this way, all amounts could be treated similarly as a deduction from revenue. New revenue guidance requires a review at the contract level or using the portfolio approach. It is likely that most entities will have a combination of implicit price concessions (adjustments to revenue) and bad debt expense (credit losses) depending on the revenue source. This could be a significant change upon implementation, even if it has limited impacts on the ultimate bottom line. Decisions will need to be made within design processes and IT systems to track and analyze this data.

Timing of Recognition of Revenue Streams
The timing of recognition of revenue streams needs to be split between:

  • those recognized at the time services are performed (i.e. certain outpatient procedures)
  • services performed over time (i.e. inpatient hospital stays)

It is often difficult to make this distinction for certain services. Services recognized at a point in time are generally easier to measure because the performance obligation is satisfied immediately. Services performed over time are viewed as a “bundle of goods and services” and as one performance obligation.

Accordingly, an entity needs to determine the method of measuring progress regarding satisfaction of this performance obligation. For example, inpatient hospital stays may be based on charges incurred during the stay as this is considered a reasonable depiction of the use of services and satisfaction of the performance obligation. For a skilled nursing facility resident, services are normally transferred over a period of time; however, performance obligations may be considered satisfied daily or monthly depending on contract terms with recognition of revenue ratably over that period.

For public entities (as defined in the first paragraph), this will need to be considered in connection with the disaggregated presentation of revenue, which we discussed in our last article. For nonpublic entities, a quantitative disclosure of amounts is still required at the aggregate level. Therefore, it is important to understand the differences in services performed, service lines, etc. in making this split. If an entity has services transferred over time and the contract has an expected duration in excess of one-year, additional recognition and disclosure matters may need to be considered.

The full guidance should be reviewed to determine if there are any other potential impacts specific to your organization.

Do you have questions about revenue recognition changes and how they affect your organization? Contact an Eide Bailly professional today.

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