Healthcare Professionals: Prepare for Major Accounting ChangesOctober 12, 2018
Attention, healthcare companies: Are you ready to implement changes to your accounting processes over the next few years? Learn more about changes to revenue recognition rules and lease reporting standards.
Editor’s Note: On July 17th, 2019 the FASB proposed delaying effective dates for four key accounting standards (accounting for leases, credit losses, hedging and long duration insurance contracts). Check out our blog, FASB Proposes Delay in Major Accounting Standards for more information.
Finance departments of healthcare companies are abuzz about all the extra work it’s going to take to implement changes to the accounting and tax rules over the next few years. The extent to which the changes will affect a particular company depends on its subsector and the nature of its operations. Here are some accounting issues to consider.
In 2014, the Financial Accounting Standards Board (FASB) overhauled the rules for recognizing revenue from contracts under U.S. Generally Accepted Accounting Principles (GAAP). Effective in 2018 for public companies and 2019 for private ones, Accounting Standards Update No. 2014-09 will replace almost all of the healthcare industry-specific guidance on revenue recognition.
The American Institute of CPAs subsequently created a task force to address how to apply the principles-based framework to healthcare organizations. The task force identified several implementation issues related to such issues as self-pay balances, collaborative arrangements and the disclosure requirements for disaggregating revenue.
Before applying the standard’s model to a contract, an entity must expect to collect substantially all of the money it’s owed under the contract. A practical expedient allows companies to apply the revenue recognition guidance to a portfolio of contracts with similar characteristics, rather than on a contract-by-contract basis. Examples of characteristics to consider when grouping healthcare contracts into portfolios include:
- Services (for example, inpatient vs. outpatient; skilled nursing vs. home health),
- Payers (for example, insurance contract, government program or uninsured), and
- Inception date.
In addition, the stated contract price may need to be adjusted for variable consideration, such as discounts and price concessions from third-party payer settlements. Healthcare organizations also must evaluate whether it makes sense to apply the standard retrospectively to all reporting periods or to apply it in the year of initial application without restating the prior year’s financial statements.
In 2016, the FASB revised its rules for reporting leases. Under ASU 2016-02, companies that follow U.S. GAAP must report all leases (both capital and operating) on their balance sheets. The changes go into effect in 2019 for public companies and 2020 for private ones.
Although the new lease standard is generally more straightforward than the revenue recognition guidance, it’s expected to have a major impact on healthcare organizations because they tend to be asset intensive, and many of the assets used in healthcare — such as outpatient facilities, specialized equipment (like MRI and lithotripsy devices) and embedded leases in diagnostic equipment — are leased, rather than owned, by healthcare providers. Leases of high-tech devices can help keep practices on the cutting edge of medical technology, often for a fraction of the cost of buying the equipment outright.
Implementing the new lease standard requires a review of all lease contracts, which may need to be tracked down and identified. Larger healthcare organizations may find compliance with the new standard especially challenging, because lease contracts may not be centrally managed. And some accounting programs haven’t been updated to accommodate the new leasing standard, so companies may have to update their systems manually.
Ready, Set, Implement
Accounting personnel may feel overwhelmed with all of the major accounting rule changes in the pipeline, not to mention, the tax changes that will impact them, too. Check out our blog for more on what’s changed on the tax front for healthcare companies— Healthcare Industry Prepares for Major Tax Changes.
Our healthcare services group is on top of the latest developments and can help your organization implement the changes in a timely manner.