The New Revenue Recognition Disclosure Requirements for the Healthcare Industry
By Christopher Jackson, Partner, Assurance Services
The effective date of Financial Accounting Standards Board (“FASB”) Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASC 606”), is quickly approaching. The new standard will become effective for public entities for fiscal years beginning after December 15, 2017. For other entities, the effective date will be for fiscal years beginning after December 15, 2018.
For purposes of ASC 606 described herein, public entities include (1) public business entities and (2) not-for-profit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market (entity with public debt). Certain quantitative disclosures will be optional for non-public entities.
The American Institute of Certified Public Accountants (“AICPA”) created the Healthcare Entities Revenue Recognition Task Force (the “Task Force”) to provide guidance on significant revenue recognition adoption issues. Healthcare entities should monitor the developments of the Task Force in order to keep current on implementation issues and to identify additional resource tools.
The AICPA issued the Accounting & Audit Guide on Revenue Recognition (the “Guide”) to assist entities to understand, implement, and audit the new revenue recognition rules. Chapter Seven of the Guide focuses on implementation issues that are specific to the healthcare industry. The Guide will continue to be updated to reflect the current developments of the Task Force.
The core principle of the new standard is to depict the transfer of goods or services to the customer in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services.
Healthcare providers will face new challenges regarding judgments to assess collectability and to estimate variable consideration under the new revenue recognition standard. ASC 606 supersedes current guidance on presenting the provision for bad debts as a deduction from patient service revenue, as bad debt expense will now be presented as an operating expense. It is expected that the amount of bad debts reported will greatly diminish under ASC 606, as revenue will not be recorded at the onset if consideration is not expected to be received.
This article focuses on the Task Force’s exposure draft related to the new presentation and disclosure requirements of ASC 606. It is expected that the disclosure implementation guidance described herein will be incorporated into the Guide after any comments to the exposure draft are analyzed and addressed by the Task Force.
Presentation and Disclosure Requirements of ASC 606
The key disclosure requirements of ASC 606 are summarized below. Refer to the AICPA’s website for a more comprehensive description of the disclosure requirements, including illustrative disclosures for both public and nonpublic entities.
Contracts with Customers
Entities will be required to disclose information that will allow the users of financial statements to understand the nature, timing, amount, and uncertainty of revenue and cash flows arising from contracts. An entity will be required to disclose qualitative and quantitative information about the following:
- Contracts with customers (disclosed separately from other sources of revenue).
- Significant judgments made in applying the guidance in ASC 606.
- Any assets recognized from the costs to obtain or fulfill a contract.
An entity will be required to disclose disaggregate revenue in meaningful categories. For example, an entity should disclose revenue by major payor (for example, Medicare, Medicaid, commercial insurance, self-pay, etc.).
An entity should also consider whether revenue is impacted by the following factors and make the relevant disclosures: geographical considerations, market or type of customer (for example, government and nongovernment customers), type of contract (for example, percent of charges, cost, fixed and capitated), timing of transfer of goods or services (for example, over time such as inpatient services vs. at a point in time such as outpatient services), and operating segments or service lines (for example, hospital, nursing home, etc.).
Contract assets represent unbilled amounts for services provided to patients. Amounts billed that have not been collected represent patient receivables rather than contract assets.
An entity will be required to present opening and closing balances of receivables, contract assets, and contract liabilities on the balance sheet or in the notes to the financial statements.
An entity will also be required to provide an explanation of the significant changes in the contract asset and liability balances during the reporting period. The explanation will be required to include both qualitative and quantitative information.
The amounts due from third-party payors for retroactive adjustments (such as final settlements or appeals) will be reported separately in the financial statements. An entity should disclose how it estimates retroactive settlements with third-party payors and whether those amounts are constrained.
If an entity determined that the revenue estimated in a previous period has changed, it will need to disclose the impact on revenue in the current period.
Entities should disclose credit balances that represent refunds owed to patients and third-party payors.
Continuing Care Retirement Communities (“CCRCs”) will need to disclose details regarding nonrefundable advance fees and how they are recognized. A CCRC will also need to disclose whether there is a financing component included in its payment arrangements and how it is estimated.
An entity should disclose how it satisfies its performance obligations (i.e., at the time of service or over time). The significant payment terms should be disclosed such as when payment is due, whether the consideration amount is variable, and whether the estimate of variable consideration is constrained.
An entity will provide disclosure of the judgments, methods, inputs, and assumptions that it makes in the determination of the amount and timing of revenue recognized. This will include how the entity determines price concessions for uninsured self-pay patients and insured patients with co-payments and deductibles, and any constraints on revenue. An entity will disclose if estimates of transaction price are based on historical experience.
Transaction Price Allocated to the Remaining Performance Obligations
Certain types of healthcare providers may have remaining performance obligations at the end of the reporting period, including hospitals with in-house patients, CCRCs, providers with multi-visit procedures, entities that offer prepaid services, and those with bundled payments. The following disclosures are required for public entities:
- The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied as of the end of the reporting period.
- An explanation of when the entity expects to recognize such revenue in either of the following ways:
– On a quantitative basis using the time bands based on the duration of the remaining performance obligations, or
– Disclosing qualitative information.
An entity will not need to disclose the aforementioned information for a performance obligation if either of the following conditions is met:
- The contract has an original expected duration of one year or less, or
- The entity recognizes revenue in an amount that corresponds directly with the value of the performance completed to date (for example, an entity bills a fixed amount for each hour of service provided).
If an entity has performance obligations that are satisfied over time, the entity should disclose the following:
- The methods used to recognize revenue. For example, costs incurred relative to the total expected costs or charges incurred relative to the total expected charges.
- For public entities, an explanation of why the methods used provide an accurate depiction of the transfer of goods or services.
Assets Recognized from the Costs to Obtain or Fulfill a Contract with a Customer
If a public entity capitalized costs to obtain or fulfill a contract (for example, a CCRC), it will be required to make the following disclosures:
- Description of the judgments made in determining the amount of the costs incurred to obtain or fulfill a contract.
- Description of the method to determine the amortization for each reporting period.
- The closing balances of assets recognized from the costs incurred by main category of asset (for example, costs to obtain contracts, pre-contract costs, and setup costs).
- The amount of amortization and any impairment losses recognized in the reporting period.
Healthcare entities will be required to expand disclosures regarding revenue from contracts with customers. Public entities (including not-for-profit entities with public debt) will be required to provide both qualitative and quantitative information about: (1) contracts with customers and the related account balances; (2) performance obligations; (3) significant judgments made in applying ASC 606; and (4) assets recognized from the costs to obtain or fulfill a contract. Non-public entities will have the option to provide the same or more streamlined disclosures with less of a focus on quantitative disclosures.
When determining how to disaggregate revenue for disclosure purposes, an entity should consider how the information will be utilized by investors, regulators, lenders, and others to evaluate the entity’s financial performance, in order to present meaningful information.
The new disclosures focus on the estimation process and the judgments that play an integral role in the determination of the amount of revenue to be recognized.
The disclosure requirements under ASC 606 significantly exceed the current GAAP requirements. Healthcare entities should ensure that they have systems, internal controls, and procedures in place to accumulate the information required to satisfy these new presentation and disclosure requirements.