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Accounting and Auditing Update Winter Education Conference January 23, 2014 west virginia chapter.

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1 Accounting and Auditing Update Winter Education Conference January 23, 2014 west virginia chapter

2 Norman Mosrie Presenter: Norman Mosrie, CPA, CHFP, FHFMA Partner, Dixon Hughes Goodman LLP, Charleston, WV A certified healthcare financial professional, Norman serves as Partner-in- Charge of Assurance for the West Virginia region. With his involvement with the American Institute of Certified Public Accountants Healthcare Expert Panel and FASB not-for-profit financial statement project resource group, Norman is actively involved in accounting, financial reporting, and other matters impacting the healthcare and not-for-profit industries. His significant healthcare experience includes financial reporting, acquisition due diligence, corporate compliance, and third party reimbursement for various types of healthcare entities including academic medical centers, community hospitals, nursing homes, home health agencies, physician practices, and research organizations. Norman has developed and led healthcare training programs at the local, area, and national levels. He is a member of various professional and civic organizations that includes being a past Council Member and Healthcare Conference Committee Chairman with the AICPA, Special Review Committee Member with the GFOA, and Past Board Member of the HFMA. Norman graduated summa cum laude from Marshall University where he earned his BBA in Accounting. He is actively involved with his alma mater, including currently serving as the College of Business Advisory Board President. 707 Virginia Street, East Suite 1700 Charleston, WV 25301 304.414.3913 direct 2

3 Discuss recent accounting and auditing standards as well as emerging issues and the expected impact on health care entities 3

4 Health Care Accounting & Auditing Update ASU 2011-07: “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities” ASU 2012-01: “Continuing Care Retirement Communities-Refundable Advance Fees” ASU 2013-04: “Liabilities: Obligation Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date” ASU 2013-06: “Services Received from Personnel of an Affiliate” FASB Project: Discontinued Operations Accounting For Premier Transaction Accounting Developments Impacting Health Care – New Revenue Recognition Standards – Impact of New Revenue Recognition Standards – Impact of Other Accounting Proposals Common Practice Issues – RAC Audits Accounting for EHR Incentive Payments Accounting for ICD-10 Costs 4


6 Background ASU 2011-07: Background Provided relief for entities that “treat first” and then assess a patient’s ability to pay –Requested by hospitals with unusually high bad debt expense associated with indigent patients that do not qualify for charity care –Bad debt expense was significantly distorting operating metrics Misapplication noted in practice by HCOs that assess ability prior to providing services Stay tuned - FASB revenue recognition project proposed rules would change presentation 6

7 Highlights ASU 2011-07: Highlights Primarily applies to acute-care hospitals that operate emergency rooms ASU focuses on primary payor status (i.e., uninsured indigent patients that do not qualify for charity), not deductibles & coinsurance If HCO has ability to “gate keep” on which patients it accepts for treatment, ASU likely wouldn’t apply “Significance” language was included to eliminate any notion of a “trip wire” (i.e., if you have a single uninsured indigent patient, then you are in the scope and must apply the guidance) 7

8 “Application of ASU 2011-07 in Consolidated Financial Statements” AICPA TPA 6400.47: “Application of ASU 2011-07 in Consolidated Financial Statements” Facts –Multi-entity HCO issues both consolidated and subsidiary financial statements Question –Should assessments of “significance” performed for individual subsidiary statements be retained in consolidation? Or should a separate assessment of “significance” be made at the consolidated financial reporting entity level? Response –Determination is an accounting policy that should be disclosed and consistently applied from period to period 8

9 “Application of ASU 2011-07 in Consolidated Financial Statements” AICPA TPA 6400.47: “Application of ASU 2011-07 in Consolidated Financial Statements” Stand-alone FS Consolidated FS Nursing home Acute-care hospital Using Policy Election A Using Policy Election B Net Patient Service Revenue $ 200,000 $ 460,000$660,000 Less: Provision for bad debts (180,000) (260,000) NPSR less provision for bad debts 200,000 280,000480,000 400,000 Operating expenses: Specific expenses (listed) (105,000) (145,000)(250,000) Provision for bad debts (80,000) - - Total operating expenses (185,000) (145,000)(330,000) (250,000) Excess of revenues over expenses $ 15,000 $ 135,000 $ 150,000 9 Retain subsidiary-level assessment in consolidation Make a separate assessment at consolidated level


11 What’s changing:  Treating a refundable CCRC entrance fee as deferred revenue that is amortized into income over the life of the facility would be appropriate only if Resident agreement specifies that amount of refund payable is limited to the proceeds of reoccupancy of the unit Entity’s policy/practice is to comply with the refund limitation  Otherwise, refundable entrance fee should be reported as a refund liability Implications for CCRCs ASU 2012-01: Implications for CCRCs 11

12 CCRC Technical Corrections ASU Background SOP 90-8 was the original guidance for refundable fees Amortization of fees refundable through reoccupancy was intended to be a narrow exception “In effect, the CCRC acts as if it were an agent for present and future residents” (“risk” is with the resident) Diversity in practice developed due to misunderstanding of the intent of the original SOP Contract terms changed as a result of changing economic conditions and marketing approaches “Dangling Debit” Issue 12

13 Refundable Advance Fees ASU 2012-01: Refundable Advance Fees Requires specific language in contract limiting refunds to proceeds of reoccupancy Reported as cumulative effect adjustment to beginning net assets or retained earnings of the earliest year presented HOWEVER: FASB Revenue Recognition Exposure Draft –Expected to allow NO amortization of refundable fees 13

14 Refundable Advance Fees ASU 2012-01: Refundable Advance Fees Effective Dates –For public entities, fiscal periods beginning after December 15, 2012 If your organization has publicly traded debt or conduit debt, you would be considered a public entity for reporting purposes (For example, tax exempt bonds issued through an issuing authority would be conduit debt) –For non-public entities, fiscal periods beginning after December 15, 2013 Early adoption permitted –If not early adopted, disclosure consideration if material –For many, will likely need to do the work to calculate whether material or not for disclosure purposes 14

15 FSO Calculation ASU 2012-01: Refundable Advance Fees: FSO Calculation Current guidance requires deferred revenue from entrance fees to be off-set against the Future Service Obligation (FSO) No new specific guidance has been issued Adoption of ASU 2012-01 may result in recording FSO –Should record as component of cumulative effect adjustment –Impact needs to be considered –Consult with Actuaries and Auditors 15


17 Joint & Several Liability ASU 2013-04: Joint & Several Liability Effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 for public companies and for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter for nonpublic entities Guidance should be applied retrospectively for all periods presented Applies to separately issued financial statements of entities that have joint & several liability for a fixed obligation (e.g., debt) Addresses question of reporting debt of Obligated Group 17

18 Joint & Several Liability ASU 2013-04: Joint & Several Liability Obligations should be measured as the sum of the following: – The amount the reporting entity agreed to pay under the arrangement with its co-obligors –Any additional amount the reporting entity expects to pay on behalf of the co-obligors Disclosures should include: –The nature of the arrangement and relationship with other co-obligors –Total amount outstanding under the arrangement –The reporting entities recorded liability and any receivable recognized –The nature of any recourse provisions with other entities 18


20 Main Provisions Recipient NFP entity recognizes services received from personnel of an affiliate that directly benefits the recipient NFP entity Services measured at the cost recognized by the affiliate for the personnel providing services –If it will significantly overstate or understate the value of the service received, the recipient NFP entity may elect to recognize that services received at either The cost recognized by the affiliate for the personnel providing that service, or The fair value of that service Does not apply when the affiliate charges at least the approximate amount of direct personnel costs or the approximate fair value of services provided 20

21 Presentation & Disclosure Main Provisions: Presentation & Disclosure Recipient NFP Health Care Entities should report as an equity transfer the increase in net assets associated with services received Other recipient NFP entities: –Update does not prescribe presentation guidance other than prohibits reporting as a contra-expense or contra-asset Corresponding decrease in net assets or creation or enhancement of an asset resulting from the use of services received from personnel of an affiliate that directly benefit the recipient NFP and for which the affiliate does not charge the recipient NFP shall be presented similar to how other such expenses or assets are presented Subtopic 850-10, Related Party Disclosures, applies to services received from personnel of an affiliate 21

22 Effective Date Prospectively for fiscal years beginning after June 15, 2014 Early adoption is permitted Use a modified retrospective approach under which all prior periods presented upon the date of adoption should be adjusted, but no adjustment should be made to the beginning balance of net assets of the earliest period presented 22

23 Initial Measurement Cost varies from entity to entity Cost should include direct personnel costs incurred –Compensation –Payroll-related fringe benefits 23


25 Definition of “Discontinued Operation” 25 Current GAAPProposed revised GAAP Qualifying threshold  Component of an entity that comprise operations and cash flows that can be clearly distinguished  “Component” could range from an asset group to a reportable segment  Component that has been disposed of (or is classified as held for sale) that -represents a separate major line of business/geographic area of operations or -is part of a single coordinated disposal plan or -is an acquiree that meets “held for sale” criteria upon acquisition Additional requirements  Significant continuing involvement not permitted  Operations and cash flows that have not been eliminated from ongoing operations - not disc ops Not applicable

26 #1 Illustration #1 Assume ABC Health System operates a nursing home. ABC agrees to sell the nursing home in a transaction that will close subsequent to year-end. After the sale, ABC will continue to be involved in managing some of the nursing home’s administrative functions May ABC present the nursing home as a discontinued operation in its current year financial statements? 26 Current GAAP No “Significant continuing involvement” precludes discontinued operations treatment Proposed GAAP Perhaps Assuming the following criteria are met: Major line of business/geographical area Single coordinated plan to dispose Held for sale

27 #2 Illustration #2 Same facts, but assume ABC operated five nursing homes and was planning to sell only one May ABC present the sold nursing home as a discontinued operation? 27 Current GAAP No “Significant continuing involvement” precludes discontinued operations treatment Proposed GAAP Probably not Would likely fail the “major line of business” criterion One entity out of five may not be considered “major”

28 For individually material components classified as discontinued operations  Reconciliation of component’s major income and expense items to after- tax income or loss from discontinued operations reported on face of income statement  Reconciliation of component’s major classes of assets and liabilities to amounts presented on the face of balance sheet  Disclosure of cash flows by category Proposed Disclosures Discontinued Operations: Proposed Disclosures 28 For continuing ownership interest post-disposal  Entity’s ownership interest before and after disposal transaction  Income/loss from entity’s ongoing noncontrolling interest and the line item in which it is presented

29 Proposed Disclosures Discontinued Operations: Proposed Disclosures 29 Individually material components NOT classified as discontinued ops  Pre-tax profit of loss attributable to the disposed component  Profit or loss attributable to the parent (if noncontrolling interest)  Reconciliation of component’s major classes of assets and liabilities classified as “held for sale” to amounts presented on the face of the balance sheet


31 Accounting for Premier Transaction Premier is a supplier of surgical and medical supplies to healthcare providers and was owned by approximately 181 U.S. hospitals, health systems and other health-care organizations. On August 23, 2013, Premier filed a registration statement with the SEC for an initial public offering of its common stock. On September 25, 2013, the Pricing Committee for Premier approved the final terms of the initial public offering and the newly issued Class A common shares of Premier, Inc. began trading on September 26, 2013. 31

32 Accounting for Premier Transaction The public offering will change the investment structure for the holdings of its owners Prior to the restructuring, the owners held equity ownership in two legal entities: a services company and an operating company As part of the transaction, the owners exchanged their ownership interest in these two entities for class B shares in newly formed Premier Inc (which also provides class B unit ownership in a newly established LLP that is wholly owned by Premier, Inc) The class B shares become convertible, at the option of the holder, into cash or class A shares, in various tranches, over a period of 7 years In connection with the reorganization, Premier entered into a tax receivable agreement with the member owners to pay certain tax receivable benefits over a 15 year period. 32

33 Accounting for Premier Transaction Accounting issue considerations: –Does the exchange of equity ownership in the old entities for class B shares in Premier Inc. require any new accounting for the holders of these shares? –As the class B shares become convertible into class A shares, is there any accounting prior to the conversion options being exercised (i.e. equity method)? –What is the amount of gain that should be recognized for the shares that were sold in October 2013? –Should the transaction be evaluated under the nonmonetary exchange guidance in ASC 845, the vendor relationship guidance in ASC 605 or some other guidance? –Should a value be assigned to the tax receivable agreement? 33

34 Accounting for Premier Transaction Due to the focused attention regarding the accounting treatment for this transaction, it is suggested that entities consult with their auditors regarding the appropriateness of the accounting treatment based on their own facts and circumstances Stay tuned for accounting guidance on this matter 34


36 New Revenue Recognition Standards Background - The FASB and IASB are in the final stages of issuing revenue recognition that will supersede all existing guidance The core principles of revenue recognition are: 1.Identify the contract 2.Identify separate performance obligations 3.Determine the transaction price 4.Allocate the transaction price to the separate performance obligations 5.Recognize revenue when (or as) the entity satisfies a performance obligation 36

37 Impact of New Revenue Recognition Standards Revenue recognition for indigent and self-pay patients –The exposure draft was not clear whether or how health care entities should recognize revenue associated with indigent and self-pay patients –Recently, the boards tentatively decided to include a “collectability” threshold for recognition Contracts with Medicare/Medicaid: –Can use either “most likely amount” or “expected value” in estimating variable consideration, whichever is best predictor 37

38 Impact of New Revenue Recognition Standards Revenue transactions involving multiple contractual relationships –As many as four different parties may be associated with a revenue transaction involving a hospital –Under the proposal, the “customer” is the patient Third-party payor makes payment on the patient’s behalf; it is not a separate “contract with a customer” 38

39 Impact of New Revenue Recognition Standards Scope of prepaid health service contracts –Currently, these contracts are within the scope of ASC 954 – Health Care Entities –Uncertainty exists with respect to whether these contracts are within the scope of the new exposure draft related to Insurance contracts Prepaid health services contracts – contract acquisition costs –Under ASC 954 acquisition costs related to prepaid health services contracts are expensed –Under the new exposure draft incremental costs are capitalized if the entity expects to recover those costs –As a practical expedient, these costs can be expensed if the amortization period is less than one year 39

40 Impact of Other Accounting Proposals Not-for-profit financial reporting project – –Operating indicator Should there be a defined operating indicator for non-health care NPOs? If so, what are the implications of that decision on HCO “performance” indicator? –FASB has tentatively decided that net assets should be classified as either those with donor-imposed restrictions or those without donor-imposed restrictions i.e., eliminate distinction between temporary and permanent restrictions on face of financial statements 40


42 RAC Audits Common Practice Issues: RAC Audits Under the Tax Relief and Health Care Act of 2006, there is a permanent nationwide Recovery Audit Contractor (RAC) program The objective of RAC audits is to detect and recoup improper payments in the Medicare fee for service program RAC audits have resulted in significant payment reductions –However, audit activities in many states are still slow 42

43 RAC Audits Common Practice Issues: RAC Audits Question: Is it appropriate for an HCO to record a revenue reserve at the date the services are rendered for Medicare revenue that it believes CMS will “take back” as a result of future adjustments and/or findings? HCOs should make a reasonable estimate of the amounts it expects to receive from third-party payers and such estimates shall be recorded in the period that the related services are rendered –ASC 954-605-25-6 states “Estimates of contractual adjustments, other adjustments, and the allowance for uncollectibles shall be reported in the period during which the services are provided even though the actual amounts may become known at a later date 43

44 RAC Audits Common Practice Issues: RAC Audits There is significant diversity in practice on how health care entities are estimating and recording recoveries for claims under appeal When an entity receives notification from CMS of the payment reduction it means that the revenue criteria has not been met – so the company must evaluate whether this is –a change in estimate, or –a correction of a prior period error 44

45 RAC Audits Common Practice Issues: RAC Audits Error versus Changes to Estimates –Due to the complexities involved in billing medical services, such conclusions will likely require a significant amount of judgment –The audit findings should be carefully reviewed and management should assess whether the findings were: Errors: Mathematical mistakes, systemic input errors, oversight or misuse of available information, misapplication of known contract terms, etc. Changes in estimates: Changes due to variances in the interpretations of regulations and contracts, clarification provided through new information, and experience provided for improved judgment, etc. –Management should also review its accounting and reporting policies and processes to determine if such policies and processes did consider, or should have considered, the need for an allowance at the date of service for such audit findings 45

46 RAC Audits Common Practice Issues: RAC Audits If this is considered to be a change in estimate then –an accrual for RAC adjustment should be recorded –this is generally a contra revenue adjustment along with the set up of a corresponding liability There is a diversity of practice on when to record a receivable for recoveries on appealed claims There are two alternate views on this topic 46

47 RAC Audits Common Practice Issues: RAC Audits View 1: –This view is based on ASC 450-30, Contingencies –Since it not certain that the provider’s appeal will be successful, no receivable or related gain should be recorded until the appeals process is complete 47

48 RAC Audits Common Practice Issues: RAC Audits View 2: –This view is based on SOP 00-1,“Auditing Health Care Third-Party Revenues and Related Receivables,” which states that “The fact that information related to the effects of future program audits, administrative reviews, regulatory investigations, or other actions does not exist does not lead to a conclusion that the evidence supporting management's assertions is not sufficient to support management's estimates” –Under this view, estimating recoveries for the successful appeal of denied RAC claims would be appropriate 48

49 RAC Audits Common Practice Issues: RAC Audits –However, this estimate should be based on provider specific facts and circumstances and the success rate of the organization during prior appeals process related to similar claims –While industry data can be used to corroborate company estimates, many believe that can’t be the sole support for recording claims recoveries –Some Firm’s have taken the position that View 1 is the only acceptable response in absence of provider specific data as described above so need to discuss with your auditor early in the estimation process 49

50 RAC Audits Common Practice Issues: RAC Audits If an entity suspects that it may have billed for services that are potentially not reimbursable then they should: –implement changes to billing practices and/or clinical operations on a prospective basis and –evaluate whether revenue recognition criteria were met related to services previously billed and record adjustments based on whether it was a change in estimate or error correction If the entity is concerned about potential RAC adjustments that have not yet been identified they should record estimated contractual adjustments based on specifically identified issues and a general reserve should not be recorded if it is not supported by entity-specific data 50

51 RAC Audits Common Practice Issues: RAC Audits For more information on this topic, please refer to the HFMA white paper at: 51

52 HFMA Issue Analysis The issue analysis includes information on the accounting for RAC audit adjustments, as well as an appendix with questions and responses that were used to develop the issue analysis The issue analysis provides guidance on: –When a health care entity receives a notification of a RAC audit adjustment –When a health care entity suspects it may have billed for and/or been paid for services that are potentially nonreimbursable –When a health care entity is concerned about potential RAC adjustments for issues that have not yet been identified –When a health care entity receives notification of a RAC audit adjustment recovery 52


54 PPS Medicare Acute Care EHR Accounting & Reporting: PPS HFMA Issue Analysis Paper December 2011 Overview of Accounting Models for acute-care inpatient hospitals that are paid under the inpatient prospective payment system – Two Alternatives –Contingency –Grant SEC registrants vs. Non-registrants Provides practical assistance on this issue but is not authoritative 54

55 PPS Medicare Acute Care EHR Accounting & Reporting: PPS Contingency Accounting Model –Contingencies must be resolved prior to recognizing revenue Compliance with meaningful use for full reporting period (i.e., any continuous 90 days in FFY in first year and full FFY after that) Discharge information related to discharges in the hospital’s cost report year that begins in EHR reporting period –EHR reporting period is based on Federal fiscal year of October 1 through September 30th Consequently, under this model typically the contingency related to discharge and other final payment calculation data is not met until the last day of the cost report year 55

56 PPS Medicare Acute Care EHR Accounting & Reporting: PPS Contingency Accounting Model (continued) –Incentive payment income recorded entirely in period last contingency resolved –Careful consideration should be given to all potential contingencies and entities should support and document how any such contingencies were considered and/or resolved –SEC has informally indicated that registrants should follow this model 56

57 PPS Medicare Acute Care EHR Accounting & Reporting: PPS IAS 20 Grant Accounting Model (1) –Grant income is recognized Hospital complies with grant requirements Payment is reasonably assured –Cliff recognition Hospital unable to determine compliance until after EHR reporting period has ended Income recognized all at once 57 (1) International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance

58 PPS Medicare Acute Care EHR Accounting & Reporting: PPS Grant Accounting Model (continued) –Estimation recognition “Reasonable assurance” of compliance with minimum number of meaningful use criteria and other grant requirements Income recognized ratably over the EHR reporting period once “reasonable assurance is met” –If reasonable assurance met during interim point during the reporting period, then a cumulative catch-up adjustment is made, with remaining income recognized ratably over remainder of compliance period –If reasonable assurance is no longer met, previously recognized income should be reversed and treated as a change in accounting estimate 58

59 PPS Medicare Acute Care EHR Accounting & Reporting: PPS Reasonable assurance is judgmental –How long has the hospital been operating an EHR system? –How far along is the hospital with implementing computer physician order entry (CPOE)? –How reliable are the processes and controls in place? –Is the hospital doing the bare minimum to qualify for meaningful use (i.e., in Stage 1, hospitals have to comply with 14 core objectives and 5 of 10 menu set objectives)? NOTE: Management should be able to adequately support, through appropriate documentation, the point at which the hospital met or will meet the applicable requirements 59

60 PPS Medicare Acute Care EHR Accounting & Reporting: PPS Use of estimates in income recognition –Incentive payments are based on statutory formula –If compliance with other requirements is reasonably assured, hospital may estimate inputs (e.g., total discharges, charity charges) to formula to determine income to be recognized –Need to make estimates should not delay recognition of income –As estimated inputs are later replaced by actual inputs, management will revise estimates as necessary and account for as a “change in accounting estimate resulting from new information”, similar to current accounting for third party settlements 60

61 PPS Medicare Acute Care EHR Accounting & Reporting: PPS Statement of operations presentation –Private and not-for-profit hospitals Operating or non-operating on a facility basis that complies with existing GAAP Regardless, should be presented separately from patient revenues –Governmental hospitals GASB standards identify what should be reported in the non- operating cash flows category Revenue associated with operating cash flows (i.e., EHR incentive payments) should be reported as operating revenue (but separate from patient revenues) 61

62 PPS Medicare Acute Care EHR Accounting & Reporting: PPS Disclosures –Accounting policy including financial statement presentation, method of income recognition, and location in statement if not apparent on face of the statement –General description of the program –Based on best estimates subject to audit by the Federal government or its designee, with changes in estimate recognized in the period known –Material changes in prior year estimates impacting current year income –Overall extent of disclosures impacted by materiality 62

63 caidPPS Medicaid EHR Incentive Payments: PPS State Medicaid programs may also establish their own EHR meaningful use incentive programs; each state is unique—carefully consider specific state facts and circumstances Concepts in the HFMA Medicare issues paper may be helpful in determining accounting policy Acute care hospitals may receive EHR incentive payments from both Medicare and Medicaid, if eligible for both programs 63

64 Revenue From Meaningful-use Incentive Payments Critical Access Hospitals (CAH): Revenue From Meaningful-use Incentive Payments Because CAHs are otherwise reimbursed on a reasonable cost basis and not pursuant to a prospective payment system (PPS), the incentive payment methodology for CAHs is different than it is for PPS hospitals Incentive payments are in lieu of amount CAH would have received under reasonable cost principles –Increased reimbursement (20%) –Acceleration of other amounts CAH can expense reasonable costs incurred for purchase of depreciable assets in a single year cost report upon meeting 90 day meaningful use requirement 64

65 Revenue From Meaningful-use Incentive Payments CAHs: Revenue From Meaningful-use Incentive Payments A diversity in practice has been observed with respect to how critical access hospitals (CAHs) recognize revenue from meaningful-use incentive payments Journal of Accountancy article August 2013 at: 65

66 Revenue From Meaningful-use Incentive Payments CAHs: Revenue From Meaningful-use Incentive Payments The following are the different view points related to revenue recognition: –Under the first view earnings process is complete in the period when the meaningful use criteria is met and the entire payment is recognized as net patient revenue at that time –Under the second view defer the payment upon receipt and amortize it into income as net patient revenue during the periods over which the technology is depreciated –Under the third view treat the incentive payment as a government grant and recognize as deferred income (grant income or grant income and net patient revenue for normal depreciation component) over the useful life of the asset acquired or deduct the payment in calculating the carrying amount of the asset thus recognizing a reduced depreciation expense 66

67 CAH Incentive Payments Medicare payments to CAHs are based on actual reasonable costs incurred associated with qualified EHR technology (i.e. cost reimbursed) Incentive payments are in lieu of amount CAH would have received under reasonable cost principles –Increased reimbursement (20%) –Acceleration of other amounts CAH can expense reasonable costs incurred for purchase of depreciable assets in a single year cost report upon meeting 90 day meaningful use requirement 67

68 CAH EHR Accounting Entities should consider your particular facts and circumstances ASC 235-10 provides general guidance regarding disclosure related to accounting policies including that entities should disclose any principles involving “a selection from existing acceptable alternatives” 68


70 Implementation Accounting for System Upgrades – ICD-10 Implementation Preliminary stage Application development stage Post-implementation stage 70 New system installation ICD-10 changes during 2011-2012 ASC 350-40 – Internal Use Software Costs

71 ICD-10 System Upgrades System upgrade = modification of existing system Generally, costs of modifying existing systems are expensed Only certain costs of changes that result in “additional functionality” can be capitalized –Additional functionality: modifications that enable the software to perform tasks that it was previously incapable of performing Specific facts and circumstances should be considered in evaluating whether any modifications result in additional functionality –Each entity’s project is unique 71

72 Helpful Chart from ASC 720-45-55 72 Legend: a =Expense as incurred per ASC 720-45 b =Expense as incurred per ASC 350-40 c =Capitalize per ASC 350-40

73 Some Factors to Consider Assessing “additional functionality”: Some Factors to Consider FactorPointer towards “additional functionality” Extent and types of changes made to software design More changes/more complicated changes Extent of additional coding required, additional software processes developed More extensive coding required; more software processes added Ability to use additional coding capabilities beyond submitting claims System changes that harness the more detailed billing code data for other purposes How changes are billed by vendorSeparately billed Past history of system upgradesSignificant time since last upgrade; history of modifications that were capitalized Complexity of interfaces between billing system and downstream systems More/higher complex interfaces will involve more significant changes 73 Professional judgment should be applied in evaluating preponderance of evidence provided by these and other factors.

74 Key Takeaways ICD-10 System Upgrades: Key Takeaways Applicable guidance –ASC 350-40 (Internal Use Software Costs) –ASC 720-45 (Business Project Reengineering) Much of the cost will likely be expensed Some costs associated with “upgrades/ enhancements” may be capitalizable –But only applies to certain costs incurred during application development stage –Must enable system to perform functions it previously was not capable of performing (“additional functionality”) –“Additional functionality” is assessed based on analysis of each entity’s facts and circumstances –How does the entity plan to utilize the additional information? EP issued a TPA on these matters in June 2012 74

75 Question & Answer Session 75

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