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Www.plantemoran.com {FASB A&A Update} Southwest Ohio HFMA Chapter October 17, 2014 Andrew Gentzkow and Dawn Stark.

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Presentation on theme: "Www.plantemoran.com {FASB A&A Update} Southwest Ohio HFMA Chapter October 17, 2014 Andrew Gentzkow and Dawn Stark."— Presentation transcript:

1 {FASB A&A Update} Southwest Ohio HFMA Chapter October 17, 2014 Andrew Gentzkow and Dawn Stark

2 Overview IssuedProposed Private Company Council Updates Going Concern Discontinued Operations Donated Personnel Services from Affiliates Joint and Several Liability Revenue Recognition Financial Statement Presentation for Not-for Profits (NFP) Extraordinary Items Leases Simplification Agenda Goodwill for NFP Pushdown Accounting 1

3 Private Company Reporting Newly established Private Company Council Characteristics of private companies that are different from public: o Types and number of financial statement users o Access to management o Investment strategies o Ownership & capital structures o Accounting resources o Learning about new financial reporting guidance 2

4 Private Company Reporting PCC identifies, deliberates and proposes specific exceptions and modifications to US GAAP for private companies FASB considers the PCC proposals and, if approved, issues them for public comment Final standards are issued as FASB ASU’s, not as PCC Standards Not-for-Profit Organizations are not “private companies” 3

5 What’s changing under ASU Clarifies definition of “public” and “nonpublic” business entities for financial reporting purposes Not-for-profit entities treated as a class unto themselves Effective date and transition New definition apply prospectively to new accounting and reporting standards issued after December 2013 Prior definition continues to apply to standards issued on or before December Private Company Reporting

6 ASU modifies the master glossary to define a “Public Business Entity” as a business entity meeting any one of the following criteria: Files financial statements with SEC Required by Securities Exchange act of 1934 to file Required to file with Regulatory agency for upcoming issuance of securities Has securities that are traded on an exchange or OTC Market Securities are unrestricted and required by law or contract to issue GAAP statements This update defines who can use PCC standards 5 Private Company Reporting

7 6 Old Approach “Public entity” (including NPO conduit obligators) “Nonpublic Entity” New Approach Public for-profit entity Nonpublic for- profit entity Special handling for NPOs Remains in effect for all standards previously issued Applies prospectively to new standards going forward Private Company Reporting

8 Private Company Reporting 7 Issued Accounting for Goodwill (ASU ) Variable Interest Entity Guidance for Common Control Leasing Arrangements ( ASU ) Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps (ASU ) Proposed Business Combinations- Accounting for Identified Intangible Assets

9 What’s changing under ASU : Shifts responsibility to management to evaluate Requires management to consider if: o Probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. o Without taking into account management’s plans to alleviate doubt that have not been fully implemented by the date of the financial statements o Disclosures:  Conditions or events giving rise to doubt  Management’s evaluation of the significance of those conditions or events  Management’s plans that either alleviate or are intended to alleviate the doubt Effective for periods ending after December 15, Going Concern

10 What’s changing under ASU : Raises the bar for when disposals can be reported as discontinued operations Eliminates the concept of “continuing involvement” Extensive new disclosures, including disclosure of “significant dispositions” that do not qualify for discontinued operations Transition: Applied prospectively Early adoption permitted Adopt 1 st quarter of calendar year 2015/fiscal year 2016 All others: for annual financial statements with fiscal years beginning on or after December 15, 2014 Reporting Discontinued Operations 9

11 Existing rulesRules under ASU Component of an entity that comprises operations and cash flows that can be clearly distinguished Major strategic shifts in an entity’s operations Significant continuing involvement and permitted Not applicable Disclosures required only for transactions that qualify as discontinued operations Disclosures also required for disposals of “individually significant components” that do not qualify for discontinued operations Neither requires or prohibits reclassification of assets and liabilities of discontinued operations for prior periods presented Assets and liabilities must be reclassified for all comparative periods presented Reporting Discontinued Operations 10

12 Donated Personnel Services Received from Affiliates What’s changing under ASU : Applies to not-for-profit entities, including not-for-profit, business oriented health care entities, that receive services from personnel of an affiliate that directly benefit the recipient not-for-profit entity AND for which the affiliate does not charge the recipient not-for-profit entity Provides guidance that not-for-profit entities apply for recognizing and measuring services received from personnel of an affiliate o Expense and “contribution” associated with donated personnel services received must be recognized in the recipient’s financials o Transaction would be measured based on affiliate’s actual costs unless cost would over/understate the value received, then can elect fair value 11

13 Donated Personnel Services Received from Affiliates Addresses reporting by recipient entity only (not the entity providing the services) Applies only to recognition and measurement of personnel costs Applies only when services are provided by employees of an affiliate that controls, is controlled by, or is under common control with the recipient entity Does not apply to situations where recipient compensates the affiliate for the services provided Applies to services received from for-profit affiliates as well as not-for profit affiliates Transition: Effective for periods beginning after June 15, 2014 with early adoption permitted Prospective application with option to apply modified retrospective application 12

14 What’s changing under ASU : Provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangement to reduce diversity in practice Entity measures obligations resulting from joint and several liability arrangements as the sum of: o Amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors o Any additional amount the reporting entity expects to pay on behalf of its co-obligors Transition: Effective for annual periods ending after December 15, Early adoption permitted Joint and Several Liability 13

15 Health System Obligated Group Hospital A $150 million Hospital B $100 million Hospital C $50 million Facts: Obligated group issued debt totaling $300 million Hospitals are joint and severally liable for repayment of debt In addition to the consolidated financial statements, each hospital issues standalone statements Joint and Several Liability 14

16 Health System Obligated Group Hospital A $150 million Hospital B $100 million Hospital C $50 million Conclusion: Each hospital’s standalone statements should display its share of the obligation with disclosure of the amount contingently owed (Hospital B’s statement shows $100 million liability and disclose $200 million contingent obligation) Disclosures should include nature and amount of obligation as well as information about risks such obligations pose to entity’s future cash flows If in a future period it becomes probable that Hospital A will be required to pay Hospital C’s portion, Hospital A would record incremental additional liability at that time Joint and Several Liability 15

17 16 Finally issued! Effective Date: for periods beginning after 12/15/2016 (Public) and December 15, 2017 (nonpublic) Revenue Recognition

18 Revenue Recognition Project Contracts with customers Joint project with IASB (Convergence) One common model across industries Principles vs. rules based 17 Revenue Recognition

19 Overview Step 1 Identify the contract with a customer Step 2 Identify the separate performance obligations in the contract Step 3 Determine the transaction price Step 4 Allocate the transaction price to the separate performance obligations Step 5 Recognize revenue when (or as) the entity satisfies a performance obligation 18

20 Overview Healthcare entity implications: Recognition and measurement of revenue from self pay patients Estimating “variable consideration” Pattern of recognition of revenue under CCRC contracts 19

21 Identifying Contracts with Customers The definition of contract and customer establish the scope of the model Contract: An agreement between two or more parties that creates enforceable rights and obligations. Can be written, oral or implied by an entity’s customary business practice Customer: A party has contracted with an entity to obtain goods or services 20

22 An entity shall account for a contract with a customer that is within the scope of this Topic only when the following criteria are met Parties have approved the contract in writing, orally, or in accordance with other customary business practices Both parties have enforceable rights and obligations Parties can identify the payments terms Contract has commercial substance Probable that the entity will collect the consideration to which it is entitled 21 Identifying Contracts with Customers

23 If contract does not meet the previous criteria in ASC An entity shall continue to assess the contract to determine whether the criteria in paragraph in ASC are subsequently met. When consideration is received from the customer, the entity shall recognize the consideration received as revenue only when either of the following events has occurred: o Entity has no remaining obligations to transfer goods or services to the customer, and all or substantially all, of the consideration promised by the customer has been received by the entity and is nonfundable. o The contract has been terminated, and consideration received from the customer is nonrefundable. 22 Identifying Contracts with Customers

24 Amount expected to be entitled to in exchange for transferred goods/service In some cases the promised consideration may be variable because facts and circumstances indicate that the entity may accept a lower price that the amount stated in the contract- price concession. If a portion of the transaction price is variable or contingent on the outcome of future events, adjust transaction price to reflect the uncertainty Use probability-weighted estimate or most likely amount expected, whichever is the best predictor 23 Determine the Transaction Price

25 Impact of the new revenue recognition standards on CCRC’s Step 2: Identifying the performance obligations and Step 5: Recognize revenue as obligations is satisfied o CCRC advance fees refundable only from proceeds of reoccupancy o Applicability of revenue recognition guide to CCRC o Time value of money o Performance obligations and pattern of transfer o Obligation to provide future services o Contract acquisition costs 24 Revenue Recognition… CCRC Considerations

26 Resources available: FASB Joint Transition Resource Group o Will consider issues that apply to common transactions that could reasonably create diversity in practice AICPA Revenue Guide Project o 15 chapters for specific industries, including healthcare o Healthcare task force are already considering implementation issues such as  Self-pay revenue recognition  Pattern of revenue recognition that would apply to CCRC entrance fees 25 Revenue Recognition

27 Revenue Recognition… Common Questions For healthcare entities, who is the customer (patient or the third party payor)? The healthcare entity’s customer is the patient. The healthcare entity’s contract with the third party payor is relevant in determining the transaction price (Step 3). What happens to bad debt expense as a result of the new ASU? All previous ASU will be superceeded. Therefore, entities that applied ASU will no longer present bad debts on patient revenue as a component of net patient revenue. What happens to charity care? The rules associated with the recognition and disclosure of charity care remain the same under the new ASU. 26

28 Potential impact of Revenue Recognition standard: Comparability of historical financial results Long term – will have little impact Year to year financial results could be impacted Outside users (bank, bonding companies) will have to adapt how they analyze 27 Revenue Recognition

29 Potential impact of Revenue Recognition standard: Administrative burden o Possible limitations of IT systems o Time involved in analyzing each contract o Retrospective implementation (even limited) Contract terms o Might see a change in how contracts are negotiated, designed or worded as companies try to get to a desired accounting result 28 Revenue Recognition

30 Proposed Pronouncements and Projects Proposed Financial Statement Presentation for Not-for Profits (NFP) Extraordinary Items Leases Simplification Agenda Goodwill Accounting for NFP and Public Entities Pushdown Accounting Note: These are not final/issued yet and in various stages in approval process. 29 Proposed Pronouncements and Projects

31 Since 2011, the FASB has been working with the Not-for-Profit Advisory Committee (NAC) to improve financial reporting of NFP entities. Objective is to reexamine existing standards for financial statement presentation of NFP entities focusing on improving: Net asset classification requirements Information provided in financial statements and notes about liquidity, financial performance and cash flows. Exposure draft expected in 4th quarter Financial Statements of Not-for-Profit Entities

32 Net Asset Classes With donor-imposed restrictions Without donor-imposed restrictions 31 Financial Statements of Not-for-Profit Entities

33 Fundamental shift in financial statement presentation Operating- Cash flows associated with “core” business assets and liabilities Investing – investment of “noncore” assets Financing – How the business is financed (debt, equity) Would eliminate healthcare performance indicator (though one could be voluntarily presented). 32 Financial Statements of Not-for-Profit Entities

34 Reporting of expenses for all NFP entities Requiring NFPs to report expenses by function and by nature in one location  Statement of Activities/Operations  Separate Statement of Expenses  In the footnotes 33 Financial Statements of Not-for-Profit Entities

35 Concept of Extraordinary Items Exposure draft released in July 2014 Objective of this proposed ASU: o Reduce the cost and complexity of income statement presentation by eliminating the concept of extraordinary items o Maintaining or improving the usefulness of the information provided to the users of the financial statements Transition o Applied prospectively o Effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, o Early adoption permitted. 34 Extraordinary Items

36 Joint project with IASB Current status Re-deliberation Expecting final standard next year (2015) Implementation probably 2018 or after Leases < 12 months scoped out 35 Lease Exposure Draft

37 Current provisions Lessees would report virtually all leases like capital leases are reported today Balance sheets would be “grossed up” to reflect right of use assets and lease obligation liabilities Different pattern of expense recognition for leases similar to old FAS 13 capital leases than operating leases Lessor model generally mirrors lessee model 36 Lease Exposure Draft

38 Lessee Accounting Balance sheet o Lease asset and liabilities recognized on balance sheet Statement of Operations o Type B lease – Use straight line expense model (rent expense) o Type A lease – Apply financing lease expense model (amortization and interest expense) 37 Lease Exposure Draft

39 Potential impact of Leases standard (primarily from Lessee’s standpoint): Essentially all leases on will be “on the balance sheet” Impact on key financial ratios and metrics, such as: o Working capital o Debt to net worth o Debt service coverage o EBITDA o Net Operating Income Resulting impact on loan covenants May change “buy” vs. “lease” decisions Lessees may be motivated to favor short-term leases 38 Lease Exposure Draft

40 Lessor Accounting Financing lease o De-recognize the underlying lease asset; replace with a lease receivable and residual asset- relatively unchanged from existing rules Operating lease (unchanged from existing rules) o Leased asset remains on books and is depreciated o Recognize rental income 39 Lease Exposure Draft

41 Presentation of debt issuance costs Measurement date of defined benefit plan assets Balance sheet classification of debt Accounting for income taxes Simplification Agenda 40

42 What could be changing: Added to agenda in November 2013 FASB staff is performing outreach and research on four possible alternatives: o Private company alternative (ASU ) o APB 17 approach (amortize over useful life, capped at maximum) o Direct write-off of goodwill o Simplified impairment test Different conclusions might be reached for public business entities than for NPO’s Goodwill Accounting NFP and Public Entities 41

43 Exposure draft released in April 2014 Should an acquiree’s standalone statements reflect historical basis of assets and liabilities, or “new basis” resulting from acquisition date remeasurement? No guidance available for private companies or NFP entities Proposal would provide all entities with an unrestricted OPTION to apply pushdown accounting Final standard expected 4 th quarter of 2014 Pushdown Accounting 42

44 Any Questions?


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