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.
John Cull is a resident of Silver Acres, a senior living facility. Services provided to John are covered by Medicaid, up to its approved rates. The facility’s rate is higher than the Medicaid rate, and John is responsible for the remainder. As part of the admission process, Silver Acres assesses each resident’s ability and intent to pay. Silver Acre’s rate for the room occupied by John is $1,400 a month, and Medicaid rates cover $1,200. The facility provides other care services, as needed, and those are billed separately based on the goods or services provided.
After collection efforts have been exhausted, John has not paid $100 of his $200 responsibility. The facility decides to write off the balance. This is recognized as bad debt expense.
While this example relates to a senior living facility, it could be applied to any facility that assesses a patient’s ability and intent to pay in advance of providing care, such as an ambulatory surgery center. Assessment of ability to pay can be exhibited through a variety of methods, such as a signed contract with a resident acknowledging their responsibility combined with a history of similar residents, a formal process which might include credit checks or review of the resident’s financial documents.
Learn more about how revenue recognition will impact the health care industry.
*The facility considered if the room provided included a lease component. The facility concluded that control of the room did not transfer to the resident for a specified period. Had that not been the case, the component considered a lease would be accounted for in accordance with the applicable leases standards.