1. Revenue recognition for health care providers
Bill Leachman, CPA, FHFMA
Director - Louisville

2. Revenue Recognition asu 2014-09

3. Revenue Recognition for Healthcare Providers
ASU – Background and Overview
FASB and IASB Convergence Project
Current U.S. GAAP has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries
In contrast, IFRS provided limited guidance in two primary standards making the application of the standards difficult
FASB’s mission is to improve U.S. financial accounting standards for the benefit of investors, lenders, donors, creditors and other users of financial statements.

4. FASB/IASB ORIGINAL Revenue Recognition Timeline

5. Effective DATE Delayed one year

6. Who’s Impacted All entities that enter into contracts with customers
Public, private, not-for-profit
Regardless of industry
Contracts with customers, except
Lease contracts
Insurance contracts
Financial instruments
Certain guarantees (other than product warranties)
Certain nonmonetary exchanges

7. Reasons for the Change Remove inconsistencies in existing requirements
Provide more robust framework
Improve comparability across companies, industries & capital markets
Enhance disclosure
Simplify financial statement preparation
Provide guidance for transactions that did not previously have authoritative guidance

8. ASU 2014-09 Summary Principle based approach versus rule based
Core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
Guidance specifies the accounting for an individual contract with a customer; however, as a practical expedient, an entity may apply guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements would not differ materially from applying guidance to individual contracts

9. Five-Step Model Identify contract(s) with customer
Identify performance obligations
Step 3
Determine transaction price
Step 4
Allocate transaction price to performance obligations
Step 5
Recognize revenue when (or as) performance obligation is satisfied

10. Step 1 – Identify Contract(s) with Customer
Contract = “agreement between two or more parties that creates enforceable rights & obligations” & meets following criteria
Commercial substance
Approval & commitment by all parties
Identifiable rights, obligations & payment terms
Collectibility threshold
Step 1: Identify Contract(s) with Customer
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4: Allocate Transaction Price
Step 5: Recognize Revenue
Commercial substance - Defined as the expectation that the entity’s future cash flows will change as a result of the contract
Approval by all parties - In writing, verbal or implied by an entity’s customary business practices
Commitment by all parties to perform their obligations under the contract
Identifiable rights and obligations and payment terms for each party to the contract
Collectibility - It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer
A contract would not exist if each party has the unilateral right to terminate a wholly unperformed contract without compensation. A customer is “a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities.”

11. Step 1 – Identify Contract(s) with Customer
Commercial substance
Approval & commitment
Identifiable rights, obligations & payment terms
Collectibility
Commercial substance - Defined as the expectation that the entity’s future cash flows will change as a result of the contract
Approval by all parties - In writing, verbal or implied by an entity’s customary business practices
Identifiable rights and obligations and payment terms for each party to the contract
Collectibility - It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer
A contract would not exist if each party has the unilateral right to terminate a wholly unperformed contract without compensation. A customer is “a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities.”

12. Collectibility
Collectibility will be explicit threshold that must be assessed before applying revenue recognition model to contract. Entity must evaluate customer credit risk & conclude that it is “probable” that it will collect amount of consideration due in exchange for goods or services
Assessment is based on both customer’s ability & intent to pay as amounts become due

13. Step 2 – Identify Performance Obligations
Promise to transfer goods/services to customer
Can be explicitly identified in contract or implied by customary business practices
One contract could equal one or many performance obligations
Significant judgment may be required
Step 1: Identify Contract(s) with Customer
Step 5: Recognize Revenue
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4: Allocate Transaction Price
Delivery of goods or the performance of services is an indicator that control over contractually promised goods or services has transferred to the customer and that revenue may be recognized. Delivery or performance may occur at a point in time or over time.
Indicators of the transfer of control include, but are not limited to, the following:
• Right to payment
• Passage of legal title
• Physical possession
• Significant risks and rewards
• Customer acceptance

14. Step 2 – Identify Performance Obligations
Separate performance obligations should be identified if good or services meet both of following
Customer can benefit from good/service on its own or with other readily available resources; &
Distinct within context of contract, i.e., not highly dependent on, or highly interrelated with, other promised goods/services in contract
Step 1: Identify Contract(s) with Customer
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4: Allocate Transaction Price
Step 5: Recognize Revenue
For example, if a contractor is hired to build a house, each nail, board, etc., would not be distinct within the context of the contract because they were hired to build a house; and therefore, the arrangement would be considered one performance obligation.
The proposal includes indicators of when a good or service is distinct. For example, the following indicators would be used to evaluate if a good or service is distinct:
Significant integration services are not provided
The customer was able to purchase, or not purchase, the good or service without significantly affecting the other promised goods or services in the contract
The good or service does not significantly modify or customize another good or service promised in the contract
The good or service is not a part of a series of consecutively delivered goods or services promised in the contract that meets both of the following conditions:
Those goods or services transfer to the customer over time
The entity uses the same method for measuring progress to depict the transfer of those goods or services to the customer

15. Step 3 – Determine Transaction Price
Transaction price = amount of consideration entity expects to be entitled to (after collectibility threshold is met)
Contract terms
Customary business practices
Time value of money (if significant financing component)
Variable consideration (including consideration of constraint)
Cash & noncash consideration
Step 1: Identify Contract(s) with Customer
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4:
Allocate Transaction Price
Step 5: Recognize Revenue
The transaction price is the amount of consideration that an entity is entitled to receive in exchange for transferring goods or services. To determine the transaction price, an entity would consider the terms of the contract, its customary business practices and the effects of all of the following:
Time Value of Money
The promised amount of consideration is adjusted to reflect the time value of money if the contract has a significant financing component. Under a practical expedient, entities are allowed to disregard the time value of money if the period between the transfer of goods or services and the payment is less than one year.
Noncash Consideration (Or Promise of Noncash Consideration)
Noncash consideration or the promise of noncash consideration would be measured at fair value. This is consistent with current U.S. generally accepted accounting principles (GAAP).
Consideration Payable to the Customer
Consideration payable to the customer would be accounted for as a reduction of the transaction price unless it is for a distinct good or service. This also is consistent with current U.S. GAAP.

16. Step 3 – Determine Transaction Price
Revenue from variable consideration constrained unless
Entity has experience with similar contracts & is able to estimate cumulative amount of revenue
Based on experience, significant reversal of revenue previously recorded is not probable
Step 1: Identify Contract(s) with Customer
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4: Allocate Transaction Price
Step 5: Recognize Revenue
Variable Consideration and Constraint
Consideration received under a contract may vary due to discounts, rebates, refunds, performance bonuses, etc. If a contract includes variable consideration, the transaction price would be estimated using either the expected value (i.e., probability-weighted amount) or the most likely amount, depending on which is a better indicator.
An estimate of variable consideration is included in the transaction price if it is “probable” the amount would not result in a significant revenue reversal. The estimate recorded will be a portion of the total variable consideration (i.e., a minimum amount) when only that portion is probable of not being reversed. Companies must reassess this each reporting period.

17. Step 4 – Allocate Transaction Price to Separate Performance Obligations
Allocate based on relative standalone selling prices of separate performance obligations
Observable price when sold separately (best evidence)
Otherwise, estimate based on
Adjusted market assessment
Cost plus margin
Residual value - Only if highly variable or uncertain
Other
Step 4 – Allocate the Transaction Price to the Separate Performance Obligations
The transaction price would be allocated to the separate performance obligations based on relative standalone selling price. The best evidence of standalone selling price would be the observable price for which the entity sells goods or services separately. In the absence of separate observable sales, the standalone selling price could be estimated using several approaches, including the adjusted market-assessment, cost plus margin or residual value approach. The use of the residual value approach is more limited than under current accounting guidelines and only would be appropriate to use when the selling price is highly variable or uncertain.
Step 1: Identify Contract(s) with Customer
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4:
Allocate Transaction Price
Step 5: Recognize Revenue

18. Step 5 – Recognize Revenue When (or as) Performance Obligations Are Satisfied
Revenue recognized when (or as) control of good/service is transferred to customer
Transfer of control occurs when customer has ability to direct use of, & receive benefits from, good/service
Can be recognized over time or at a point in time, depending on how performance obligations are satisfied
Step 1: Identify Contract(s) with Customer
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4:
Allocate Transaction Price
Step 5:
Recognize Revenue
Revenue is recognized when (or as) performance obligations are satisfied, which occurs when control of the underlying good or service is transferred to the customer. For some industries, like real estate, this is a significant departure from the current risk and rewards criteria. Transfer of control to the customer occurs when the customer has the ability to direct the use of, and receive the benefits from, the transferred good or service. Revenue can be recognized over time or at a point in time, depending on how performance obligations are satisfied. If performance obligations are satisfied over time, an entity would recognize revenue by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The standard allows the use of both input and output methods to measure progress.

19. Step 5 – Recognize Revenue When (or as) Performance Obligations Are Satisfied
Control is transferred over time if any of following criteria are met
Customer controls asset as it is created/enhanced
Customer receives & consumes benefits of entity’s performance as entity performs
Entity’s performance doesn’t create asset with alternative use to entity & customer doesn’t control asset created; however, entity has right to payment for performance completed to date & expects to fulfill contract
Step 1: Identify Contract(s) with Customer
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4:
Allocate Transaction Price
Step 5:
Recognize Revenue
To determine if an asset has an alternative use, the entity considers at contract inception the effects of contractual and practical limitations on its ability to readily direct the asset to another customer. An asset would not have an alternative use if an entity is prohibited from transferring the asset to another customer or would incur significant costs to redirect.
An entity has an enforceable right to payment for performance to date, if an entity is allowed to recover cost plus margin on goods and services transferred to date. The right to payment should be enforceable and management should consider the contractual terms as well as any legislation or legal precedent that could override those contractual terms. The right to payment for performance completed to date does not need to be for a fixed amount.

20. Step 5 – Recognize Revenue When (or as) Performance Obligations Are Satisfied
Control transferred at a point in time indicated by following
Present right to payment from customer
Customer has legal title
Customer has physical possession
Customer has significant risks/rewards of ownership
Customer has accepted asset
Step 1: Identify Contract(s) with Customer
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4:
Allocate Transaction Price
Step 5:
Recognize Revenue

21. Step 5 – Recognize Revenue
Control transferred at a point in time
Present right to payment
Legal title
Physical possession
Significant risk & rewards of ownership
Customer acceptance

22. Transition Approaches
2017
2018
Date of Cumulative
Effect Adjustment
Full Retrospective
Restate for all contracts
Apply to all contracts
January 1, 2017
Retrospective Using One or More Practical Expedients
Restate for all contracts except contracts covered by practical expedients
Cumulative Effect at Date of Adoption
No contracts restated; reported based on legacy guidance
January 1, 2018

23. AICPA Revenue Recognition Task Forces
Aerospace and Defense Hospitality
Airlines Insurance
Asset Management Not-for-profit
Broker-Dealers Oil and Gas
Construction Contractors Power and Utility
Depository Institutions Software
Gaming Telecommunications
Health Care Timeshare

24. AICPA Revenue Recognition Task Forces
Develop a new Accounting Guide on Revenue Recognition
Guide to provide helpful hints and Illustrative examples on how to apply the standard
Guidance will not be prescriptive but instead intended to be a resource
Full implementation issues will be posted for comment after review from the overall Revenue Recognition Working Group and FinREC
List of issues by industry is posted on the AICPA website

25. REVENUE RECOGNITION GUIDE IMPLEMENTATION PROCESS
RRWG
AICPA RRTF
FASB Staff
Fin REC
TRG

26. Health Care Issues Identified
Revenue recognition for self-pay patients
Application of Steps 1 and 3
Application of the portfolio approach
Identifying the performance obligation and recognition of refundable and non-refundable entrance fees for CCRC’s
Significant Financing Components
Disclosure requirements as compared to ASU
Contract acquisition costs
Determination of the transaction price as it relates to third-party estimates

27. Health care implementation issues Self-pay revenue
Current practice
Gross charges, net of self-pay discounts recorded as contractual adjustments
Bad debt expense recorded and presented separately as a reduction to net patient service revenue if an entity does not assess collectability
New guidance
Record revenue at amount entity expects to be entitled to
Bad debt expense presented as operating expense
Use of judgment in determining what constitutes bad debt versus implicit price concessions
No change in charity care guidance

28. Step 1 – Identify Contract(s) with a Customer
Commercial substance - Defined as the expectation that the entity’s future cash flows will change as a result of the contract
Approval by all parties - In writing, verbal or implied by an entity’s customary business practices
Commitment by all parties to perform their obligations under the contract
Identifiable rights and obligations and payment terms for each party to the contract
Collectability - It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer
A contract would not exist if each party has the unilateral right to terminate a wholly unperformed contract without compensation. A customer is “a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities.”

29. Collectibility
Collectibility will be explicit threshold that must be assessed before applying revenue recognition model to contract. Entity must evaluate customer credit risk & conclude that it is “probable” that it will collect amount of consideration due in exchange for goods or services
Assessment is based on both customer’s ability & intent to pay as amounts become due
Difficult for health care entities to assess

30. Consideration Received before Step 1 is met

31. Health care implementation issues Step 3 of the model
Transaction price is the amount of consideration an entity expects to be entitled to
Transaction price reflects the effects of the following:
Variable consideration
Significant financing component
Consideration payable to a customer
Noncash consideration
Consideration is variable if explicitly stated, or if
Customer has valid expectation arising from entity’s customary business practices that entity will accept an amount that is less than the stated contract price
Other facts and circumstances indicate that the entity’s intention is to offer a price concession to the customer

32. Health care implementation issues Portfolio approach
Entities can apply the standard or aspects of it to a portfolio of contracts or performance obligations with similar characteristics (i.e., portfolio approach)
Entities must reasonably expect that the financial statement effect of using the portfolio approach will not differ materially from applying the standard on a contract-by-contract basis
Key considerations
How to apply a portfolio approach
How to establish portfolios
How to determine effect would not differ materially

33. Health care implementation issues Portfolio approach (cont.)
Portfolio approach may be applied to all aspects of the model or only to certain steps
If establishing portfolios, an entity will need to use judgment to determine the size, composition and number of portfolios
Health care entities may consider segregating by payor class, type of service and other categories
An entity also will need to consider materiality and documentation requirements

34. Health care implementation issues Portfolio approach (cont.)
AICPA Working Drafts issued July 1, 2016
Considerations for HC entities
Type of service
Type of payors
Type of patient responsibility
Contracts entered into during a similar time period
The Portfolio Approach may be adopted on a system-wide basis or for each individual health care facility

35. Identifying the contract – example
Background
Hospital provides services to uninsured (self pay) patient in emergency room
Hospital has not previously provided medical services to this patient
After providing services to patient, Hospital obtains information about the patient’s ability and intention to pay
Hospital designates the patient to a customer class
The standard rate for the services provided are $10,000
Hospital expects to accept a lower amount of consideration for the services provided as such the promised consideration is variable
Based on historical cash collections from this customer class and other relevant information about the patient, Hospital determines that it expects to be entitled to $1,000

36. Identifying the contract - example
Evaluation
On the basis of its collection history from patients in this customer class, Hospital concludes it is probable it will collect $1,000 (estimate of variable consideration)
Therefore, the contract with the patient has met the requirements of Step 1 and will be accounted for under the model

37. Self Pay revenue recognition issues
HC entities need to consider specific facts and circumstances to determine if an enforceable contract exists
AICPA Working Drafts issued July 1, 2016
Approval and commitment of all parties
Identifiable rights, obligations and payment terms
Contract has commercial substance
Collectible
Currently, there is no concept of cash basis in the standard
Medicaid pending status patients
Use of historical information
Use of portfolio approach

38. Self Pay revenue recognition issues
Bad debt versus Implicit price concessions
AICPA Working Drafts issued July 1, 2016
Implicit price concessions may include:
Customary business practice on not performing credit assessment
Continues to provide service even though historically services to the patient indicate payment is not probable
Day 1 versus Day 2 accounting
Where do subsequent changes to variable consideration get reported?
AICPA Working Drafts issued July 1, 2016 believes it will be accounted for in Net Patient Service Revenue
Practical implementation

39. Continuing care Retirement Communities

40. CCRC Considerations Type A, or Lifecare Contract
Includes housing and healthcare services at little or no increase in the monthly fee; these contracts typically provide for the highest entrance and monthly fees as the CCRC absorbs the “healthcare risk”
Type B, or Modified Lifecare Contract
Limits the amount of healthcare services that may be accessed without an increase in the monthly fee, e.g., resident may be allowed to access healthcare services at little or no increase in the monthly fee for 60 days, after which the resident would be required to pay a higher fee for healthcare services
Type C, or Fee-for-service Contract
Requires resident to pay market rates for healthcare services; these contracts typically provide for the lowest entrance and monthly fees as the resident absorbs the “healthcare risk”
Type D, or Rental Contract
No entrance fee requirement

41. CCRC Specific Considerations
The AICPA Healthcare Revenue Recognition Task Force is analyzing the following primary issues as they relate to CCRCs
Accounting for monthly / periodic fees and nonrefundable entrance fees under the different contract types (A, B, C, D), including portfolio versus individual contract approach to revenue recognition
Significant financing component considerations for refundable and nonrefundable entrance fees
Obligation to provide future services and use of facilities
Contract acquisition costs

42. CCRC Specific Considerations
Entrance Fees
Determining the performance obligations
Allocating the transaction price to multiple performance obligations
Consideration of the variable consideration for maintenance fees
Satisfying the performance obligation
Amortization over the pattern of transfer of goods and services
Consideration of Significant Financing component

43. Other Matters

44. Disclosures
Disclosures to enable the users to understand the nature, amount, timing and uncertainty of revenue and cash flows from customers
An entity shall disaggregate revenue recognized from contracts with customers depending on the nature of that revenue
Aggregated amount of the transaction price allocated to performance obligations that are unsatisfied, including methods, inputs and assumptions
Timing and satisfaction of performance obligations
Entity to disclose both qualitative and quantitative information

45. Disclosures Per ASC 606-10-50 entities to disclose:
Revenue from contracts with customers, including the disaggregation of revenue into appropriate categories
Contract balances, including the opening and closing balances of receivables, contract assets and contract liabilities
Revenue recognized in the reporting period that was included in the contract liability at the beginning of the period
Revenue recognized in the reporting period from performance obligations satisfied
Significant judgments and changes in judgments, made in applying the requirements to those contracts

46. Financial Reporting

47. Contract Acquisition Costs
Incremental costs of obtaining a contract
Costs the entity incurs that would have not been incurred if the contract was not obtained - Recognize as an asset if the entity to expects to recover those costs
Costs that would have been incurred regardless of whether the contract was obtained – Expense as incurred
Costs to fulfill a contract
Costs related directly to a contract (i.e. costs of renewal of an existing contract) – Recognize as an asset if costs are expected to be recovered
Direct labor, Direct materials, costs charged under a contract

48. Contract Acquisition Costs
Costs to fulfill a contract
Costs to be expensed as incurred
Administrative and General costs unless explicitly chargeable to the customer under the contract
Costs of wasted materials, labor or other resources to fulfill the contract
Costs related to past performance
Costs for which an entity cannot distinguish whether it relates to a performance obligation
Practical Expedient – recognize as an expense when incurred if the amortization period of the asset is one year or less

49. Contract Acquisition Costs
Amortization and Impairment
Asset should be amortized consistent with the pattern of transfer of the customer services
Entity shall update the amortization for significant changes in the pattern of transfer
Asset should be evaluated for impairment

50. Third Party Settlements
Determination of the transaction price for third party settlements
Medicare/Medicaid cost report settlements
RAC accruals
Risk adjustments for Prepaid Health plans
Other
Use method which entity expects to better predict the amount of consideration to which it will be entitled
Use of Expected Value (probability-weighted amount)
Use of Most Likely Amount (single most likely amount in a range of possible considerations)

51. Step 3 of the model (continued)
Required to evaluate whether to “constrain” amounts of variable consideration included in transaction price
Objective of the constraint – include variable consideration in the transaction price only to the extent it is “probable” that a significant revenue reversal will not occur
Estimates must be updated each reporting period
Expected value
Most likely amount
Sum of the probability-weighted amounts in a range of possible outcomes
Most predictive when the transaction has a large number of possible outcomes
The single most likely amount in a range of possible outcomes
Most predictive when the transaction has two possible outcomes
06 December 2017
Revenue recognition

52. OTHER FACTORS TO CONSIDER
New standard’s effect on revenue and trends in key performance indicators
Effect on internal control over financial reporting
Effect on tax filings
Approach taken by industry and other peers
Cost of implementation
Business effect
Magnitude of required changes

53. OTHER FACTORS TO CONSIDER
Availability of personnel with necessary skills
Ability of systems and processes to provide comparative historical results
Access to data and underlying support for new accounting estimates
Timely conclusion of unresolved interpretations
Entity’s overall ability to manage potentially significant change across the organization

54. Thank you Bill Leachman Director Louisville, Kentucky
FOR MORE INFORMATION // For a complete list of our offices and subsidiaries, visit bkd.com or contact:
Bill Leachman
Director
Louisville, Kentucky