1. www.plantemoran.com {FASB A&A Update} Great Lakes HFMA Chapter January 30, 2015 Nicole Sulak

2. www.plantemoran.com Overview IssuedProposed Private Company Council Updates Going Concern Discontinued Operations Pushdown Accounting Extraordinary Items Revenue Recognition Simplification Project Financial Statement Presentation for Not-for Profits (NFP) Goodwill for NFP Leases 1

3. www.plantemoran.com Private Company Reporting PCC identifies, deliberates and proposes specific exceptions and modifications to US GAAP for private companies FASB considers the PCC proposals and, if approved, issues them for public comment Final standards are issued as FASB ASU’s, not as PCC Standards Not-for-Profit Organizations are not “private companies” 2

4. www.plantemoran.com 3 Old Approach “Public entity” (including NPO conduit obligators) “Nonpublic Entity” New Approach Public for-profit entity Nonpublic for- profit entity Special handling for NPOs Remains in effect for all standards previously issued Applies prospectively to new standards going forward Private Company Reporting

5. www.plantemoran.com Private Company Reporting 4 Issued Accounting for Goodwill (ASU 2014-02) Variable Interest Entity Guidance for Common Control Leasing Arrangements ( ASU 2014-07) Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps (ASU 2014-03) Business Combinations- Accounting for Identified Intangible Assets (ASU 2014-08)

6. www.plantemoran.com What’s changing under ASU 2014-15: Shifts responsibility to management to evaluate Requires management to consider if: o Probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. o Without taking into account management’s plans to alleviate doubt that have not been fully implemented by the date of the financial statements o Disclosures:  Conditions or events giving rise to doubt  Management’s evaluation of the significance of those conditions or events  Management’s plans that either alleviate or are intended to alleviate the doubt Effective for periods ending after December 15, 2016 5 Going Concern

7. www.plantemoran.com What’s changing under ASU 2014-08: Raises the bar for when disposals can be reported as discontinued operations Eliminates the concept of “continuing involvement” Extensive new disclosures, including disclosure of “significant dispositions” that do not qualify for discontinued operations Transition: Applied prospectively Early adoption permitted Public entities and NFP with conduit debt: adopt 1 st quarter of calendar year 2015/fiscal year 2016 All others: for annual financial statements with fiscal years beginning on or after December 15, 2015 Reporting Discontinued Operations 6

8. www.plantemoran.com Existing rulesRules under ASU 2014-08 Component of an entity that comprises operations and cash flows that can be clearly distinguished Major strategic shifts in an entity’s operations Significant continuing involvement and permitted Not applicable Disclosures required only for transactions that qualify as discontinued operations Disclosures also required for disposals of “individually significant components” that do not qualify for discontinued operations Neither requires or prohibits reclassification of assets and liabilities of discontinued operations for prior periods presented Assets and liabilities must be reclassified for all comparative periods presented Reporting Discontinued Operations 7

9. www.plantemoran.com ASU 2014-17 issued in November 2014 Should an acquiree’s standalone statements reflect historical basis of assets and liabilities, or “new basis” resulting from acquisition date re-measurement? No guidance available for private companies or NFP entities prior to the ASU The ASU provides all entities with an unrestricted OPTION to apply pushdown accounting Portions of the SEC guidance was rescinded The ASU is effective immediately for all future “change-in-control” events and for recent “change-in-control” events for which no statements have been issued or made available to be issued. If an Organization elects to change is application of pushdown accounting for a “change-in-control” event for which statements have already been issued it would be accounted for as a change in accounting principle. Pushdown Accounting 8

10. www.plantemoran.com Concept of Extraordinary Items ASU 2015-01 issued in January 2015 Objective of this proposed ASU: o Reduce the cost and complexity of income statement presentation by eliminating the concept of extraordinary items o Maintaining or improving the usefulness of the information provided to the users of the financial statements o Presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained Effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. 9 Extraordinary Items

11. www.plantemoran.com 10 Finally issued! Effective Date: for periods beginning after 12/15/2016 (Public) and December 15, 2017 (nonpublic) Revenue Recognition

12. www.plantemoran.com Revenue Recognition Project Contracts with customers Joint project with IASB (Convergence) One common model across industries Principles vs. rules based 11 Revenue Recognition

13. www.plantemoran.com Scope All contracts with customers, except o Lease contracts o Insurance contracts o Financial instruments o Guarantees o Non-monetary exchanges between entities in the same line of business to facilitate sales to customers Also exclude: contributions and collaborative arrangements Costs to obtain or fulfill a contract Disclosures 12

14. www.plantemoran.com Overview Step 1 Identify the contract with a customer Step 2 Identify the separate performance obligations in the contract Step 3 Determine the transaction price Step 4 Allocate the transaction price to the separate performance obligations Step 5 Recognize revenue when (or as) the entity satisfies a performance obligation 13

15. www.plantemoran.com Identifying Contracts with Customers The definition of contract and customer establish the scope of the model Contract: An agreement between two or more parties that creates enforceable rights and obligations. Can be written, oral or implied by an entity’s customary business practice Customer: A party has contracted with an entity to obtain goods or services 14

16. www.plantemoran.com An entity shall account for a contract with a customer that is within the scope of this Topic only when the following criteria are met Parties have approved the contract in writing, orally, or in accordance with other customary business practices Both parties have enforceable rights and obligations Parties can identify the payments terms Contract has commercial substance Probable that the entity will collect the consideration to which it is entitled 15 Identifying Contracts with Customers

17. www.plantemoran.com If contract does not meet the previous criteria in ASC 606-10-25-1 16 Identifying Contracts with Customers Recognize revenue when either of the following events has occurred: 1) No remaining obligations to transfer goods or services and all substantially consideration is collected and is non-refundable or 2) The contract is terminated and the consideration is non-refundable Continually reassess the arrangement…if Step 1 criteria are met, begin applying the revenue model, otherwise: Record the consideration received from the customer as a contract liability until conditions below are met

18. www.plantemoran.com Determine the Transaction Price Transaction price: The amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer (excluding amounts collected on behalf of third parties) Includes amounts to which entity has rights under the contract paid by any party o Payments from the patient, insurance companies, and/or Medicare/Medicaid Includes variable consideration o Examples: discounts, price concessions Use probability-weighted estimate or most likely amount expected, whichever is the best predictor Constraints- prevent future revenue reversals 17

19. www.plantemoran.com Some Healthcare Issues Multi-payor System: Who’s the customer? Prepaid Healthcare Services: Contract acquisition costs now capitalized if recoverable Self-Pay Patient Revenue: How much recognized, in light of reinstated collectibility threshold? Bad debts an operating expense Medicare/Medicaid Contract Audits: How does the ASU’s constraint on variable considerations affect recognition here? Pattern of recognition of revenue under CCRC contracts 18

20. www.plantemoran.com Revenue Recognition… Common Questions For healthcare entities, who is the customer (patient or the third party payor)? The healthcare entity’s customer is the patient. The healthcare entity’s contract with the third party payor is relevant in determining the transaction price (Step 3). What happens to bad debt expense as a result of the new ASU? All previous ASU will be superseded. Therefore, entities that applied ASU 2011- 07 will no longer present bad debts on patient revenue as a component of net patient revenue. What happens to charity care? The rules associated with the recognition and disclosure of charity care remain the same under the new ASU. 19

21. www.plantemoran.com Resources available: FASB Joint Transition Resource Group o Will consider issues that apply to common transactions that could reasonably create diversity in practice AICPA Revenue Guide Project o 16 chapters for specific industries, including healthcare o Healthcare task force are already considering implementation issues such as  Self-pay revenue recognition  Pattern of revenue recognition that would apply to CCRC entrance fees 20 Revenue Recognition

22. www.plantemoran.com Potential impact of Revenue Recognition standard: Administrative burden o Possible limitations of IT systems o Time involved in analyzing each contract o Retrospective implementation (even limited) Contract terms o Might see a change in how contracts are negotiated, designed or worded as companies try to get to a desired accounting result 21 Revenue Recognition

23. www.plantemoran.com Proposed Pronouncements and Projects Proposed Simplification Project Financial Statement Presentation for Not-for Profits (NFP) Goodwill Accounting for NFP and Public Entities Leases Note: These are not final/issued yet and in various stages in approval process. 22 Proposed Pronouncements and Projects

24. www.plantemoran.com FASB Simplification Initiative - Objective To reduce narrow sources of unnecessary complexity in current standards, while maintaining or improving the usefulness of the information Projects include narrow-scope items that the Board (including EITF) can complete in the short term Welcome input on items 23

25. www.plantemoran.com Simplification Initiative – Types of Complexity to be Addressed Complicated, dense standard obscures its meaning Accounting treatment is clear, but applying it is lengthy, convoluted, and expensive 24

26. www.plantemoran.com In Progress Inventory measurement (ED) Cloud computing arrangements (ED) Debt issuance costs (ED) Pension measurement date (ED) FV measures using NAV (EITF 14-02; pending ED) Income taxes (pending EDs) Debt classification Many other issues currently being researched 25

27. www.plantemoran.com Financial Statements of NFPs - Topic Financial Performance: Operating Measure Financial Performance: Cash Flow Statement Net Asset Classification Liquidity Reporting of Expenses NFP Note Disclosures 26

28. www.plantemoran.com Financial Performance: Operating Performance Defined a required intermediate operating measure for all NFPs – based on two dimensions: Mission (Business and Charitable Activity): based on whether resources are from or directed at carrying out an NFP’s purpose for existence (vs. investing and financing) Availability: based on whether resources are available for current period activities and reflecting limits of both: External donor-imposed limitations and Internal actions of an NFP’s governing board Presentation of Transfers, to depict internal actions: Separate section within operating measure, after revenue and expense subtotal Includes gifts of/for capital items when placed in service 27

29. www.plantemoran.com Required Performance Indicator 28 Today’s Model Proposed New Model

30. www.plantemoran.com Operating Measure NFP business-oriented health care entities no longer required to present the performance indicator Remove req. that if an operating measure is presented, then the charge in unrestricted net assets must be shown (ASC 958-45-10) 29

31. www.plantemoran.com Financial Performance: Cash Flow Statement Require Direct Method for operating cash flows o No long require Indirect Method Re-categorize certain items to better align “operating” with activities statement and operating measure o Purchases and proceeds on sales of PP&E o Cash restricted for PP&E o Cash from interest and dividends o Interest paid on long-term debt 30

32. www.plantemoran.com Cash Flow Statement 31

33. www.plantemoran.com Net Assets Unrestricted Temp. Restricted Perm Restricted With Donor Restrictions Amount and purpose of board designations Without Donor Restrictions Nature and amount of donor restrictions 32 Current GAAP Proposed GAAP Disclosures +

34. www.plantemoran.com Liquidity The Board decided that an entity should define the time horizon it uses to manage its liquidity (for example, 30, 60, or 90 days) and disclose the following information: 1.Quantitative Information a)The total amount of financial assets b)Amounts that are not available to meet cash needs within the time horizon because of (1) external limits and (2) internal actions of a governing board c)The total amount of financial liabilities that are due within that time horizon 2.Qualitative information about how the entity manages its liquidity. For example, an entity might disclose: a)Its strategy for addressing entity-wide risks that may affect liquidity, including its use of lines of credit b)Its policy for establishing liquidity reserves c)Its basis for determining the time horizon used for managing liquidity 33 Liquid: Asset type/debt maturity Available: Donor/other external restrictions and internal limits Liquid: Asset type/debt maturity Available: Donor/other external restrictions and internal limits

35. www.plantemoran.com Reporting Expenses Program ActivitiesSupporting Activities Total Operating ExpensesNon-OperatingTotal Expenses Program AProgram BM&GFundraising Salareis & Benefits Grants to Others Equipment Rental & Maintenance Occupany Cost Depreciation Information Technology Professional Service Fees Supplies Travel Printeing and Publication Interest Other Total 34 Expense by nature and function one place in the F/S (statements of activities, separate statement, or schedule in notes) Function* N*ATUREN*ATURE *Either (or both) on face of Statement of Activities Qualitative disclosure on cost allocation among program and support functions required Also, will provide better guidance on ‘Management and General’ activities Not Functionalized

36. www.plantemoran.com Reporting of Investment Expenses Net presentation of investment expenses against investment return on the face of the statement of activities Netting limited to external and direct internal expenses How to Present? Disclosure of investment expense no longer required, except for the disclosure of the amount of internal salaries and benefits that have been netted (if any) against investment return What to disclose? 35

37. www.plantemoran.com NFP Financial Statement: Next Steps Exposure Draft (ED) – proposed ASU exposed for comments (estimated: Q1 2015) o Board to have final cost-benefit discussion prior to issuance Comment period (Q1-Q2 2015): more outreach, field visits/workshops, roundtables, etc. Begin re-deliberations in Q3 2015 36

38. www.plantemoran.com What could be changing: Added to agenda in November 2013 FASB staff is performing outreach and research on four possible alternatives: o Private company alternative (ASU 2014-02) o APB 17 approach (amortize over useful life, capped at maximum) o Direct write-off of goodwill o Simplified impairment test Different conclusions might be reached for public business entities than for NPO’s Goodwill Accounting NFP and Public Entities 37

39. www.plantemoran.com Proposed Right-of-Use Model A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration 38 Right-of-use asset Lease payments Lessor Lessee

40. www.plantemoran.com Lessee Accounting Overview Lease asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments 39 Right-of-use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments Balance Sheet Cash Flow Statement Income Statement Type A Type B

41. www.plantemoran.com Lessor Accounting Overview Net Investment in the lease Interest income and any profit on the lease Cash received for lease payments 40 Continue to recognize underlying asset Lease income, typically on a straight-line basis Cash received for lease payments Balance Sheet Cash Flow Statement Income Statement Type A Type B

42. www.plantemoran.com Why a Leases Project Lessee o Most lease assets and liabilities are off-balance sheet o Limited information about operating leases Lessor o Lack of transparency about residual values o Consistency with lessee proposal and revenue recognition proposal 41

43. www.plantemoran.com Leases – Areas Still Being Redeliberated “Small ticket” leases Lessee model o Any additional convergence still possible here? Disclosures Transition and effective date o Incremental delay for private companies, NFPs? 42

44. www.plantemoran.com Joint and Several Liability Arrangements (ASU 2013-04) Services Received from Personnel of Affiliate (ASU 2013-06) Liquidation Basis of Accounting (ASU 2013-07) Other ASU’s Effective Calendar Year 2014/Fiscal Year 2015 43

45. www.plantemoran.com Audit Update Circular A-133 In December 2013, OMH issued significant grant reforms Goals are to reduce administrative burden, and risk of waste, fraud, and abuse Main areas of reform o Administrative Requirements o Cost Principles o Audit Requirements o Single audit threshold will rise to $750,000 for December 31, 2015 year-ends Considerations Changes to processes/controls/documentation Changes to written policies and procedures How to most efficiently administer grants operating under different rules 44

46. www.plantemoran.com Circular A-133 Guidance OMB Website - www.whitehouse.gov/omb/grants_docswww.whitehouse.gov/omb/grants_docs Plante Moran Website - www.plantemoran.comwww.plantemoran.com Services -> A-133 Single Audit Perspectives -> Webinars Extreme Makeover: OMH Remodels Grant Management Guidance Part 1 – April 2, 2014 Part 2 – June 17, 2014 45

47. www.plantemoran.com Any Questions?