ASU 2014-09, Revenue from Contracts with Customers – Implementation Issues for Healthcare Entities

By Jeremy Veilleux February 9, 2017

On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The standard will eliminate recognition guidance under current U.S. Generally Accepted Accounting Standards, and replace it with a principles-based approach for determining revenue recognition.

In a previous white paper, we addressed general principles, likely implementation issues and the implementation dates of ASU 2014-09.  This article addresses certain issues specific to the health care industry.

The American Institute of Certified Public Accountants (AICPA) has formed sixteen industry task forces to develop a guide that will provide direction and illustrative examples when applying ASU 2014-09. Below is a list of potential revenue recognition implementation issues identified by the FASB and/or the Health Care Industry Task Force as of the date of this article. The list contains the status of each implementation issue, and will be updated as the issues make their way through the due diligence process. This process includes a thorough review by the AICPA’s Revenue Recognition Working Group (RRWG) and Financial Reporting Executive Committee (FinREC), as well as FASB’s Transition Resource Group (TRG), where applicable.

As can be seen from the table below, as of February 2017, only two of the potential eight issues identified have been finalized to be incorporated as part of the final guide. Various other issues are in process of being assessed, or are subject to final review and approval as part of the diligence process. Further, it is likely that this list will expand as additional issues surface.

ISSUE NUMBER	DESCRIPTION OF IMPLEMENTATION ISSUE	STATUS
1	Consideration of the following regarding self-pay balances:
	Application of step 1 (determine if there is a contract) and step 3 (determine the transaction price) for healthcare services provided to self-pay patients, including uninsured patient balances and self-pay patient balances arising from co-payments and deductibles. This implementation issue will discuss evaluating whether a contract exists and what (including consideration of implicit price concessions) the transaction price is to arrangements for health care services provided to self-pay patients and balances arising from co-payments and deductibles.	Finalized to be included in a future edition of the AICPA Guide Revenue Recognition
1A.	Implicit price concessions This implementation issue, being submitted to the TRG, provides two views over the initial accounting for implicit price concessions for services provided to uninsured patients and two views for the subsequent accounting for these types of contracts and whether changes in the estimates of variable consideration represent changes in price concessions or impairments.	Submitted to FASB TRG
2	Application of the portfolio approach to contracts with patients This implementation issue will discuss how to apply the portfolio approach to revenue from self-pay patients and third party payors.	Finalized to be included in a future edition of the AICPA Guide Revenue Recognition
3	CCRC: Identifying and satisfying the performance obligation(s) and recognizing the monthly/periodic fees and nonrefundable entrance fees under Type A or “life care” contracts for continuing care retirement communities This implementation issue will discuss the performance obligations under a typical Type A (life care) continuing care retirement community (CCRC) resident agreement and, given these performance obligations, how a Type A CCRC will estimate a transaction price and recognize nonrefundable entrance fees and monthly/periodic fees received from residents under the new model.	Re-submitted to AICPA RRWG
4	CCRC: Identifying the performance obligation(s) and recognizing the performance obligation(s) to provide future services and use of facilities This implementation issue will describe the changes to a continuing care retirement community’s calculation of the obligation to provide future services and use of facilities as a result of the new model.	Submitted to AICPA RRWG
5	Significant financing component – CCRC contracts, and patient and third-party payor amounts in arrears This implementation issue will discuss how CCRCs assess whether a significant financing component exists in determining the transaction price for its resident contracts, as well as how CCRCs and other healthcare entities will assess whether a significant financing component is applicable to patient and third-party payor amounts in arrears.	Submitted to AICPA RRWG
6	Disclosure requirements of ASU No. 2014-09 This implementation issue will discuss judgements related to disclosure requirements under ASC 606 for health care entities.	Submitted to AICPA RRWG
7	Accounting for contract costs This implementation issue will discuss how health care organizations will account for certain costs of acquiring and fulfilling contracts under the new model.	Submitted to FinREC – September 2015
8	Consideration of FASB ASC 606, Revenue from Contracts with Customers, for third party settlement estimates

Let’s discuss the two issues that the Health Care Industry Task Force has resolved to date.

Issue #8-1:  Application of step 1 (determine if there is a contract) and step 3 (determine the transaction price) for healthcare services provided to self-pay patients, including uninsured patient balances and self-pay patient balances arising from co-payments and deductibles

Many health care entities are required by law or regulation to treat patients in emergency situations, regardless of ability to pay, and certain nonprofit health care entities have requirements for dealing with patients under IRC Section 501(r), and may provide services to patients regardless of their ability to pay because of the health care entity’s charitable status and/or mission.

In identifying the contract with the patient, the health care entity will consider whether the patient signed any forms (e.g. the patient responsibility form). In absence of a written contract, the health care entity may consider whether an oral contract exists (e.g. implied contract based on the entity’s customary business practices, or, perhaps more clear, a patient that schedules services in advance).

Once an enforceable contract is concluded, the health care entity will need to determine if the patient is committed to perform, and that the entity will collect substantially all consideration to which it expects to be entitled. This may not be possible until additional information is obtained about the patient. If the entity determines that the patient, or other payor, is not committed to perform, and/or that it is not probable that the entity will collect the consideration to which it is entitled, a contract with the patient does not exist under ASU 2014-09.

The above concepts become more complex when different scenarios common to health care organizations are contemplated. For example, consider a situation where an unresponsive patient is admitted to the ER. After providing services, the entity may subsequently determine that the patient is uninsured and otherwise unable to pay for the services rendered. In this particular case, it may be possible for the entity to try to qualify the patient for Medicaid coverage. If the entity has historical evidence to determine the transaction price and percentage of cases that qualify for Medicaid vs. the entity’s charity care policy vs. becoming uninsured self-pay, than this approach can be applied to an individual contract or portfolio of similar contracts to estimate and recognize revenue. Absent sufficient historical evidence to reasonably determine whether a contract or portfolio of contracts would qualify for Medicaid, charity care or uninsured self-pay, the entity would be unable to conclude that a contract exists, and would recognize revenue upon receipt (e.g. cash basis). There may be possible relief here, as discussed later in this article.

As indicated above, a health care entity must determine if it is probable that it will collect substantially all of the consideration to which it is entitled. Therefore, the transaction price must be determined, and that price may often be less than the stated price in the contract. This is not an uncommon concept for a health care entity. The Task Force calls this variable consideration, since the contract price is impacted by implicit price concessions to the patient. Pricing can be impacted by discounts, contractual adjustments, and other factors. To estimate the transaction price, an entity would consider all information available (historical, current and forecasted) and estimate the price based upon probable cash collections from each particular patient class (e.g. self-pay, Medicare, Medicaid, or other). These estimates may be subsequently changed based on new information obtained by the entity, although the goal from the origination of the contract should be to avoid situations where recognized revenue is subsequently reversed.

Issue #8-1 is impacted by the specifics of each situation, and there are many variables at play for any single contract. To provide further clarity, the Task Force has provided seven examples in its final working draft, which is available at the Task Force’s website, a link for which is included at the end of this article.

Issue #8-2:  Application of the portfolio approach to contracts with patients

As indicated above, health care entities may use the practical expedient of a portfolio approach to account for patient contracts as a collective group, rather than as individual contracts. An entity must carefully consider what portfolios have similar contract characteristics. Specific considerations might include:

• Type of service (inpatient vs. outpatient; elective vs. non-elective; etc.)
• Type of payors (commercial insurance, Medicare, Medicaid, uninsured self-pay, etc.)
• Type of patient responsibility (uninsured self-pay, co-pay, deductible, etc.)

Under the portfolio approach, an entity may consider historical cash collections and reimbursement rates by type of service, payor and/or patient responsibility, and group similar contracts into a single portfolio. Ultimately, assuming the entity has the information required to identify portfolios of similar contracts, as well as the probable consideration the entity will receive, this expedient is likely the best approach for most entities with large volumes of patient contracts. The alternative would be a contract-by-contract evaluation.

More to Come

There are still a number of issues being worked on by the Health Care Task Force, including issues specific to CCRCs, and it’s likely that additional issues will be added to the Task Force agenda as they are identified. We’ll continue to provide updates as other issues are identified and/or resolved by the Health Care Industry Task Force. In the meantime, more information regarding revenue recognition implementation issues, for each of the sixteen industries focused on, is posted regularly on the AICPA Revenue Recognition Resource Center.

For questions on this article, or other technical issues impacting health care organizations, contact Jeremy Veilleux or your BNN advisor at 800.244.7444.