3 Ways the New Revenue Recognition Will Impact Your Healthcare Organization’s Financial Statements
Looking back four years now, 2014 provided the accountants at Delap with some solid entertainment. My cherished Denver Broncos were clearly bought out by the Seattle Seahawks to lose Superbowl XLVIII in the most embarrassing match-up. Ever. might have lost the Superbowl to the PNW’s beloved Seattle Seahawks (I’m not bitter). HBO’s “True Detective” debuted (season 3 premiers in January 2019!!). AND, most exciting of all, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers.
Now that we are at the end of 2018, it’s time to start considering how this new revenue recognition standard is going to impact your healthcare organization’s financial statements.
Implementation will generally be required for:
- Fiscal years beginning after 12/15/2018
- Interim periods in fiscal years beginning after 12/15/2019.
#1 Change from Rules-Based to Principles-Based.
The core principle of the new revenue recognition standard is that a healthcare organization will recognize revenue for services performed in an amount that reflects what a healthcare organization actually expects to receive.
What this means to you: The previous revenue recognition model that we all know and love had three main rules, all of which were required to be satisfied to recognize revenue in accordance with GAAP:
- Delivery was substantially complete (a healthcare organization provided care).
- There was evidence of an arrangement (patient agreed that they needed care).
- Price was determinable (chargemaster anyone?!).
The new model has expanded to five primary principles:
- Identify contracts with customers (a healthcare organization and the patient recognize that a healthcare organization will provide care and the customer will pay for the care).
- Identify performance obligations (a healthcare organization will provide the care suitable to treat the patient’s ailment).
- Determine transaction price (this is different from determinable prices, as it represents the amount of consideration an entity expects to be entitled to and can be determined based on several variables).
- Allocate transaction price to performance obligations in the contract (what portion of the total consideration expected to be received can be allocated to surgical instruments, room rates, pharmacy, etc.).
- Recognize revenue when (or as) a healthcare organization satisfies a performance obligation (if the patient was in a car accident that required four different surgeries on four different days, recognize revenue in accordance with the completion of the related obligations).
Why you care: There are several reasons to care! Ultimately, do you find that the hustle and bustle of year-end and/or month-end close procedures make it tougher to take the time to consider the qualitative factors in determining what your healthcare organization actually expects to receive from payor groups? Then hit up your on-site pharmacy for a chill pill, enlist the help of your accounting team, IT team, administration team, AND your handy dandy auditors to discuss the best course of action.
#2 Self-pay contracts and bad debt expense.
In order to recognize revenue under the new model, it must be probable that a healthcare organization will collect substantially ALL of the amounts for which a healthcare organization is entitled in exchange for the care performed for the patient.
What this means to you: Identifying contracts with commercial insurance or government payors is generally easy. You have probably already negotiated certain rates’ with certain of these payor groups or they have dictated what they’ll pay! But what about self-pay…the uninsured? What a healthcare organization will actually receive from this particular group represents an unknown. Given the increasing cost of healthcare and the unusual nature of current unemployment and wage rates effect on healthcare, collectability in connection with self-pay payors continues to be a concern for healthcare organizations.
Why you care: If the collectability threshold is not met (i.e., a healthcare organization does not expect to receive substantially all of the amounts charged to the patient), then a contract with the patient does not exist within the scope of the new standard. Now, you’re probably thinking, “Jill, isn’t that what bad debt is for?” It used to be!
Bad debt expense will still exist when your organization checks the credit of a patient prior to providing care and expects to collect most of the discounted charges – but is it realistic to assume we’re checking the credit of a patient who is bleeding profusely from an unfortunate accident with a lawnmower? Probably not. Insert Step 3: determining the transaction price where we need to think about variable considerations, either through explicit or implicit price concessions. Stay tuned for THAT blog. I know. It’s a lot. Thanks, FASB!
#3 Portfolio Approach
The current standard for recognizing and disclosing revenue in healthcare organization financial statements is generally applied to an individual customer or contract. The new guidance suggests that a healthcare organization may recognize revenue for a portfolio of contracts with similar characteristics if the healthcare organization reasonably expects that the financial statement effects of applying the standard to the portfolio or to individual contracts within that portfolio would not differ materially.
What this means: Continue to recognize and disclose revenue by payor group…if you want to. Maybe try recognizing revenue by service (inpatient, surgical, home health)…if you want to. Geographic location?…if that makes the most sense for you – do it! A combination of the aforementioned items? You risk-taker you… totally fine. The key takeaway is to make sure that these groups truly do not materially differ in the recognition of the revenue and how it is disclosed in your statements.
Why you care: Depending on your organization, maybe recognizing revenue makes more sense on the basis of services performed versus the payor group… How empowering! Take control! Be bold!
Thank you for making 2014 such a memorable year for us, FASB! We can’t wait to start the implementation process with our clients!
It is our mission to share news about change that may affect our clients. Our healthcare team at Delap is committed to bringing you superior service and guidance that may impact your business. If you have any questions on the Revenue from Contracts with Customer rules and its impacts on healthcare, please contact our team today at (503) 697-4118.