FASB Revenue Recognition for Healthcare: Webcast for Investors



hello and welcome to this podcast for investors that focuses on the impact the new revenue standard on the healthcare services sector I'm Jeff Brickman senior investor liaison at the Financial Accounting Standards Board thanks for joining us with me today our FASB board member mark Siegel an FASB senior project manager mary Mazzella we will provide a brief overview of the revenue model along with some sector specific impacts that we expect for the healthcare services sector throughout the discussion we will have slides you can follow along with that will include a few samples that should build illustrate some of the impacts we are anticipating but first before we begin I'd like to remind everyone that the views expressed in this podcast the personal views of the participants official positions of the FASB are reached only after extensive due process and deliberations with that let's get started mark can you give a high-level overview of the new revenue model sure Jeff I guess first let me just set the stage by mentioning that this podcast is part of a series of industry-specific webcasts and podcasts to help investors know what to expect as public companies adopt the new revenue recognition rules next year at the latest some companies have in fact already adopted as of the third quarter 2017 to the extent you follow more than just health care companies you probably want to check out WWF ASB org and click on the investors link and look for the educational resources available for investors section to find archived webcasts and podcasts for other industries we've already covered so for example we've previously recorded webcasts including QAS with executives from the a and D industry as well as executives from the software and SAS industries as far as the new Rev rekt mato goes as you'll see on slide to the new revenue standard has an overarching framework to recognize revenue it applies to nearly all revenue from contracts with customers except for a few areas where there are other models in GAAP like for insurance companies or or leases or financial instruments one goal though was to reduce wherever we could the industry specific differences in revenue rules because it's really not sustainable for the FASB to keep revenue rules up to date on a sector-by-sector basis especially with new industries popping up all the time because of technology or other factors and really the lines between industries blurring it's important to note too that the new rules for gap revenue are generally converged with IFRS rules so that most public companies around the globe will soon be following the same set of rules however it's definitely true that the impact of the standard will vary from industry to industry the new standard includes five steps to recognize revenue which are displayed on the screen the company will evaluate its contract with a customer to make sure there is a substantive contract and will then identify the promises that was made to the customer as part of that contract and which of those that should account for separately the third step requires the determination of the overall consideration which is really the purchase price and whatever that company expects to receive for all those promises including any estimates of what might be considered variable or contingent amounts a company will then allocate that total amount of estimated consideration to each of the promises that have been made to the customer and that's step four finally the last step is that it will recognize revenue either at a point in time or over time as the seller satisfies the promises that were made to the customer that's helpful mark so Mary what are some of the impacts of the new revenue standard that we expect to see in the healthcare services sector Jeff we wanted to highlight one significant area of change where we were anticipating for healthcare service providers on slide three and that area relates to a service providers accounting for the provision for bad debts or bad debt expense of some they call it as background today's GAAP requires healthcare service providers to record revenue using the billed amount for its services even when the service provider does not expect to collect that amount this might be the case for an uninsured patient the service provider is also required to record a corresponding provision for bad debts the provision for bad debts can be significant some healthcare service providers because of uninsured patients or patients with high deductibles or high co-pays today the service provider is also required to show the provision for bad deaths as a separate line item on the face of the income statement to come to a net revenue amount this grossed up presentation is unique to the healthcare services sector as Mark mentioned before much of the industry specific guidance including this bad debt aspect of the guidance will no longer apply when an entity adopts the new revenue standard the new revenue standard requires an entity to recognize revenue in an amount that reflects the consideration the entity inspects to be entitled to in determining this amount and enemy must consider both explicit and implicit price concessions or discounts both explicit and implicit and price concessions or discounts reduce the amount of revenue that will be recognized can you further explain what you mean by an explicit price concession versus in implicit price concession sure as an example of an explicit price concession consider a healthcare service provider that has a list price for a procedure of $1,000 some insurance companies may have a negotiated rate of $800 with the healthcare service provider for that specific procedure if a patient is insured by one of those insurance companies the healthcare provider gives an explicit price concession or a discount to that customer of $200 so the amount of revenue to recognize would be the $800 explicit price concessions today are included as contra revenue and net operating revenue before the bad debt provision implicit price concessions are handled the same way as explicit price concessions in the new standard they reduce the amount of revenue to recognize implicit price concessions are not contractual price concessions like the $200 discount my example instead they involve situations in which an entity's business practices to accept a lower amount for its goods or services we expect implicit price concessions to be common in the healthcare services sector because some healthcare companies provide or are required by law to provide services regardless of the amount that will ultimately be collected for example an uninsured patient may only ultimately pay a small fraction of the price of the services I should note that a charity care patient would not be receiving an implicit price concession because they typically do not pay any amount for the services provided which means there would not be a substantive revenue contract to evaluate under the guidance going forward for non charity care patients healthcare service providers will need to estimate the amount they ultimately expect to receive for the services provided considering both explicit and implicit price concessions that estimated amount is the amount that will be recognized as revenue the revenue amounts may be adjusted in future periods if the service provider collects more or less than they originally estimated this amount is required to be disclosed as out of period revenue if the adjustments occur in a different reporting period than when the health care services were performed because the service provider estimates the amount it will ultimately collect it's possible that the company will not have significant amounts of bad debt expense bad debt expense on receivables would be recognized due to changes in the facts and circumstances about a patient's ability or intent to pay the estimated amount for example this likely will be the case in the healthcare service provider is informed that the patient declared bankruptcy or that the patient is no longer employed as a change from the gross stuff presentation we discussed earlier any provision for bad debts will be presented as an operating expense outside of revenue after the adoption of the new standard as you may be thinking healthcare service providers will need to exercise significant judgement to determine whether a change in its estimate is due to changes in patient specific facts and circumstances resulting in bad debt expense thanks Mary those are good points to think about my experience investors tend to key in on the areas of a company's financials where management uses significant judgment perhaps it would be helpful to walk us through an example of an implicit price concession sure Jeff we've laid out an example on slide 4 assume a hospital provides medical services in the emergency room to an uninsured patient the hospital is required by law to provide medical service to all emergency room patients and the patient does not qualify for any government subsidies and is not a charity care patient the hospital typically charges $10,000 for the services provide but based on the hospital's historical experience with discounts to similar customers it estimates the customer will pay only $1000 based on these facts the hospital would recognize $1,000 of revenue when it provides the emergency room services it would not recognize ten thousand dollars of revenue and nine thousand dollars of bad debt expense like it would under today's GAAP thanks Mary so based on that example it seems like under both the old and new guidance the net amount of revenue is the same it's a thousand dollars so the difference today is that there's a gross revenue of ten thousand dollars and bad debt of nine thousand dollars and under the new guidance there will be a revenue of one thousand dollars is that correct and will that be the same result in all situations yes that's correct based on the SEC filings that we've reviewed some healthcare companies have disclosed that they do not expect a material difference in their results of operations as a result of the new standard but it's worth looking at company's disclosures to understand whether there has been a change in why Mary mentioned charity care mark does the new revenue standard affect the health care service providers accounting and disclosures for charity care patients so Jeff I think that's an important point the new revenue standard doesn't affect the guidance or disclosures at all related to charity care charity care still will not qualify for recognition as revenue healthcare service providers they're gonna have to continue to disclose their policy for providing charity care as well as the level of charity care they're provided thanks mark I think investors are gonna be happy to hear that the charity care disclosures will continue to be provided so far we've focused on implicit price concessions but how should a healthcare service provider account for transactions in which it does not give an implicit price concession okay so let's walk through that on slide 5 as Mary mentioned earlier implicit price concessions those are going to be common in the healthcare services sector because some healthcare companies they're required by law to provide services whether or not the patient could pay for them however a healthcare service provider is not granting an implicit price concession in all cases when it doesn't receive the entire build amount for example if a service provider is not required to accept all patients and determines that collection of substantially all of the consideration is probable then amounts that ultimately are not collected maybe due to credit risk that was present in the patient contracts it seems like each company will need to evaluate its specific facts and circumstances to determine whether to record an adjustment to revenue or bad debt expense is there anything else you can add to help at this point yeah so Jeff like like you pointed out this this is going to be an area where it will depend on the healthcare services provider specific facts and circumstances so let me walk through an example on slide 6 that will hopefully illustrate when the service provider has not granted an implicit price concession and therefore it's appropriate for the service provider to record bad debt expense so in this example the hospital provides services to a patient for cosmetic surgery which isn't covered by insurance the hospital assesses whether the customer can pay the $50,000 for the services now based on this assessment it concludes that it's probable that the customer will pay substantially all of what they owe for the services so this conclusion also implies that the hospital is not granting an implicit price concession to the patient now however it's important to point out that this assessment is really only designed to determine whether collection is probable and the hospital knows that it's historical experience with similar patients suggests that 2 percent of the patients will not pay this is a result of the general credit risk of customers so based on these facts the hospital the hospital will record the full 50 thousand dollars as revenue for the services provided because it has not granted an implicit price concession for that contract and it has determined that collectability is probable the hospital will then assess receivables for impairment and record bad debt expense as a result of that ok mark I know the new standard also includes disclosure requirements that are different than those that healthcare service providers apply under today's GAAP can you tell us about the new standards disclosures and when companies will have to transition to this new standard yeah so that's right Jeff new disclosure requirements are the same for companies across industries so the industry specific disclosures that exist today that require a healthcare entity to disclose information about bad debts by major payer source of revenue and how the major payer source is identified those unfortunately will no longer be required after the adoption of the new standard now however as I mentioned before healthcare companies will still need to provide the charity care disclosures also the new standard includes a disclosure package as slow as shown on slide 7 that was developed with a lot of input from investors to provide more information about a company's contracts and revenue that it has recognized included disaggregated or broken down information about the revenue the disclosures will also include information about significant judgments and estimates how and why an entity recognizes revenue and information about any revenue that was recorded in this period that relates to a different period or a prior pair before so you also asked about transition so slide 8 illustrates the transition requirements public companies are required to adopt the new requirements in fiscal year 2018 beginning with the first quarter the standard includes to transition methods for companies to apply but regardless of the transition approach that a company takes it will have to provide some degree of comparative information to its investors so you will be able to understand the impact of the new standard on a company's revenue during the first four quarters of the year that standard is adopted investors should keep an eye out for the 10ks and 10-qs issued before the adoption of the new standard for disclosures about the transition method of company plans to use and the expected impacts of the standard thanks mark that's helpful it's important for investors to keep in mind that today we've discussed some of the bigger changes we've heard about but it's possible there are other changes for a particular healthcare service provider so there's no substitute for understanding a company's disclosures about the impact a new standard to wrap up this podcast I'd like to take a moment to discuss some of the key takeaways and observations from this conversation for bad debt expense will no longer be a separate line item on the face of the income statement to come to net revenue in many cases revenue under the new standard will already include the amounts of the company does not expect to collect so the provision for bad debts likely will significantly decrease second any provision for bad debt as a result of patient specific credit deterioration will be recorded as an operating expense rather than as a contra revenue third I also want to reiterate that a healthcare service provider will need to extra exercise significant judgment to determine whether is granting an implicit price concession or accepting some amount of general credit risk and whether subsequent changes an estimate should be recorded as bad that expense or revenue the new revenue standard requires a company to disclose information about its significant judgments and estimates so hopefully healthcare companies will provide this additional useful information which should include how those judges and estimates change over time thanks for joining us for this podcast and we hope you have found it helpful additional information including all of our contact info and further details on the new revenue standard can be found at WWF ASB org

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