Revenue Recognition: Portfolio Approach Scenario 1

April 16, 2019 | Article

Revenue recognition guidance under FASB is effective for public businesses and nonprofits 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 (that’s now!). 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.

If you find yourself in the first wave of implementors, you’ve likely read the standard and the published implementation guidance. If you haven’t, you can start with four key matters considered to have the greatest potential impact.

As you move from the theoretical world of accounting standards to your financial reporting system, we’ve created four scenarios to illustrate common applications of a few healthcare-specific nuances of the standard and implementation guidance.

Springfield General Hospital provides emergency health care services to John Cull, who is an uninsured, self-pay patient potentially eligible for Medicaid. The standard rate for the services provided is $10,000, based on the hospital’s chargemaster. Upon gathering the necessary information from John, the hospital determines that John should be placed in a “Medicaid Pending” category. The hospital will first bill Medicaid, pending approval of eligibility.

The hospital’s patient accounting system is able to track transfers of payor classes.* For all “Medicaid Pending” patients, the Hospital’s historical resolution rate for emergency patients is: 60 percent qualify for Medicaid, 10 percent qualify for charity care, and the remaining 30 percent end up as self-pay.

The hospital has historically collected 40 percent of gross charges for Medicaid patients. The hospital’s policy is to discount its standard rates for self-pay patients 40 percent, which means if John’s Medicaid application is denied, he will receive a $4,000 discount ($10,000 x 40 percent) in accordance with this policy. The hospital has historically collected 10 percent of the discounted amount, which means the hospital estimates that it will collect $600 from John.

  • Step 1*: The contract with John was considered to be implicit (unwritten) in providing emergency health services.
  • Step 2: The performance obligations were considered to be the procedures performed totaling $10,000.
  • Step 3*: The hospital estimates the transaction price (and net patient service revenue) for its contract with John in this situation as follows
Gross charges   Historical resolutions Collection rate Revenue
 $10,000.00 Medicaid 60% 40% $2,400
  Self-pay 30% 6% 180
  Charity care 10% 0% -

  • Step 4: The hospital considers the performance obligation to be the procedures performed and billed as one gross charge as noted in step two. Accordingly, the transaction price is recognized as revenue as the care is provided.
  • Step 5: The performance obligation is considered satisfied upon discharge of the patient and completion of the medical record.

Based upon the above assessments applied in accordance with Topic 606, revenue recorded upon the completion of care is $2,580, which is the probable outcome based on historical adjudication results. The contractual adjustment recorded is $3,600, the implicit price concession is $2,820, and charity care adjustment is $1,000.

The hospital applies the portfolio approach to similar accounts. Therefore, it reviews the “Medicaid Pending” accounts to determine if the ultimate resolution of similar accounts in total is significantly different than historical experience and adjusts its revenue recognition accordingly.


* If the hospital does not have historical experience to estimate the outcome for a “Medicaid Pending” account prior to receiving the Medicaid qualification determination, it may determine that a contract does not exist, as it has not met the requirements in FASB ASC 606-10-25-1, and a transaction price cannot be calculated. Therefore, the hospital may not be able to record revenue until a determination is made.

Implementation guidance related to these two issues are included in the May 1 online edition of the AICPA Audit and Accounting Guide, “Revenue Recognition.” For more information on this guidance, including details not addressed in detail within the scope of this article, please contact Tyler Bernier or your local Eide Bailly representative.

Learn more about how revenue recognition will impact the health care industry.

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