A&A Update HFMA – New Jersey Chapter November 11, 2014 Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International.
Summary > Revenue recognition > Other issued ASUs > Exposure drafts > FASB projects > Conclusion 1
ASU 2014-09 – Revenue from Contracts with Customers (Topic 606) > Issued in May 2014 > Objective is to create a single revenue recognition model that can be used across industries > Entities have time to implement this standard − Public – annual periods beginning after December 15, 2016 > Fiscal years ending December 31, 2017 and June 30, 2018 − Nonpublic – annual periods beginning after December 15, 2017 > Fiscal years ending December 31, 2018 and June 30, 2019 > Public entities cannot early adopt this standard − Nonpublics can only adopt one year sooner (i.e. with publics) > FASB created a new Topic 606 that will replace Topic 605 when this standard is adopted − Will supersede most industry-specific guidance Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 2
ASU 2014-09 – Revenue from Contracts with Customers (Topic 606) > Five-step revenue recognition model 1. Identify the contract(s) with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation > Costs to obtain or fulfill a contract > Disclosures Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 3
Step 1 – Identify Contract with Customer > Entities shall account for a contract only when all five criteria are met 1. Parties to the contract have approved the contract 2. Each party’s rights to the goods/services can be identified 3. Payment terms for the goods/services can be identified 4. Contract has commercial substance 5. It is probable that the entity will collect the consideration > If the above criteria are not met, a contract has not been established and no revenue is to be recognized − However, entities can subsequently assess the contract to ascertain when all five criteria have been met Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 4
ASU 2014-09, Example 3 – Implicit Price Concession > Patient is presented to a hospital emergency room in poor medical condition > Hospital is required to provide medical services to patient prior to obtaining any information, including ability or intent of the patient to pay > Patient has not committed to his/her obligations under the contract and, therefore, a contract has not been established > Upon stabilizing the patient, the entity can obtain patient information and ascertain whether a contract exists to which revenue can be recognized Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 5
Step 2 – Identify Performance Obligation(s) > A promise in a contract with a customer to transfer to the customer either: − A good or service (or a bundle of goods or services) that is distinct − Series of distinct goods or services that are substantially the same and that have the same patter of transfer to the customer > Does not include activities unless those activities transfer goods/services to customer (i.e. admin tasks) > A good or service is distinct if both criteria are met − Good or service is capable of being distinct − Good or service is distinct within the context of the contract Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 6
Step 3 – Determine Transaction Price > Transaction price may include fixed amounts, variable amounts, or both > Variable amounts can be estimated in two ways − Expected value – sum of probability-weighted amounts; can be an appropriate estimate if an entity has large number of contracts with similar characteristics − Most likely amount – single most likely amount; can be appropriate if the variable amount has only two possible outcomes > In addition to contract terms, consideration can be variable if either apply: − It is expected that the entity will offer a price concession − Other facts and circumstances indicate that the entity will offer a price concession Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 7
ASU 2014-09, Example 3 – Implicit Price Concession (Continued) > ER patient stabilized > Hospital determines that patient does not qualify for charity care > Although standard rate for services is $10,000, the hospital expects to accept a lower amount of consideration − Therefore, promised consideration is considered variable > Based on historical cash collections from this customer class and other relevant patient information, the hospital expects to be entitled to $1,000 (i.e. probable) > Revenue amount to be recognized = $1,000 Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 8
What does this mean for hospitals? > Hospitals could recognize revenue based on amounts expected to be paid from both third-party payors and self pay patients > There will still be a provision for bad debt based on hospital’s assessment of outstanding accounts receivable; however, it would reflect truly bad debt − Insurance companies that go bankrupt − Self pay patients who do not pay > Does not change hospitals’ collection policies and practices Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 9
Step 4 – Allocating Transaction Price to Performance Obligations > If a contract contains multiple performance obligations, an entity allocates the transaction price to each performance obligation based on the relative standalone selling price of each distinct good or services > The standalone selling price is defined as “the price at which an entity would sell a promised good or service separately to as customer.” > Best evidence is an observable price > If price is not observable, it is estimated at an amount that reflects the overall objective of the standard − Adjusted market assessment approach − Expected cost plus a margin approach − Residual approach (total price less sum of observable prices) Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 10
Step 5 – Recognize Revenue When (or as) Performance Obligation is Satisfied > ASU 2014-09 states that “an entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer.” > Performance obligations may be satisfied over time if one of the following applies: − Customer simultaneously receives and consumes the benefits − Entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced − Entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date > If none of the above apply, then performance obligations are considered to be satisfied at a point in time Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 11
Costs to Obtain or Fulfill a Contract > Incremental costs – costs that are incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained − Should be recognized as an asset − Amortized “on a systematic basis that is consistent with the transfer…of the goods or services…” − Practical expedient to expense costs if amortization period is < 1 year > Costs to fulfill a contract – unless the cost should be capitalized as inventory or PP&E, the cost should be recognized as an asset if all criteria is met − Directly related to a contract or to an anticipated contract that an entity can specifically identify − Generate or enhance resources that will be used in satisfying obligation in the future − Expected to be recovered Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 12
Disclosures > Disaggregation of revenue into categories that depict how revenues and cash flows are impacted by economic factors > Opening and closing balances of receivables, contract assets, and contract liabilities, if not separately presented > Revenue recognized in the reporting period from performance obligations satisfied in previous periods > Information about performance obligations, including − When they’re typically satisfied − Significant payment terms − Obligations for returns, refunds, and other similar obligations > Concepts of this standard have been implemented with most hospitals under ASU 2011-07 − Probably not with CCRCs Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 13
AICPA Task Forces > AICPA has established sixteen industry task forces to evaluate the provisions of ASU 2014-09 > AICPA has a task force for healthcare, which consists of two subgroups − Hospitals − CCRCs > Stay tuned Revenue Recognition Issued ASUs Exposure Drafts FASB Projects Conclusion 14
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