Accounting Update. Anne Cloutier, CPA, FHFMA Principal March 27, 2015

Transcription

1 Accounting Update Anne Cloutier, CPA, FHFMA Principal March 27, 2015

2 Current Accounting for Leases Capital leases - a lessee recognizes leased assets and liabilities on the balance sheet. Operating leases - a lessee does not recognize lease assets or liabilities on the balance sheet. The existing standards fail to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.

3 SUMMARY OF TENTATIVE DECISIONS REACHED TO DATE Lessee Accounting Model Leases of most assets other than property (Type A) Recognize right of use asset and lease liability, initially measured at present value of lease payments; present interest related to liability separate from amortization of assets Leases of most property (Type B) Recognize right of use asset and lease liability A lessee would report a straight-line lease expense in its income statement.

4 Small-Ticket Leases Permit the lease guidance to be applied at a portfolio level by lessees and lessors. Guidance does not provide specific requirements on materiality. Short-Term Leases Applies to leases with a maximum possible term of 12 months or less. Lease Term and Purchase Options Consider all relevant factors that create an economic incentive to exercise an option to extend, or not to terminate, a lease. Include such an option in the lease term only if it is reasonably certain that the lessee will exercise the option having considered the relevant economic factors.

5 Lessee Transition Apply a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements (the date of initial application). Operating (Type B) Leases A lessee should initially recognize an asset and liability at the later of (a) the date of initial application and (b) lease commencement. Measure the lease liability at the present value of the sum of the remaining minimum rental payments

6 Propose Disclosure Requirements Overall Disclosure Objective Enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Undiscounted cash flows on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years, and reconciling the undiscounted cash flows to the discounted lease liabilities recognized in the statement of financial position. Nonpublic Business Entity Considerations Decided not to provide any specified reliefs from the disclosure requirements for nonpublic business entities (that is, all other entities besides public business entities).

7 Qualitative Disclosure Requirements Information about the nature of its leases (and subleases), including: A general description of those leases; The basis, and terms and conditions, on which variable lease payments are determined; The existence, and terms and conditions, of options to extend or terminate the lease.; The existence, and terms and conditions, of residual value guarantees provided by the lessee; and The restrictions or covenants imposed by leases. Information about leases that have not yet commenced but that create significant rights and obligations for the lessee. Significant assumptions and judgments in applying the lease standard

8 Quantitative Disclosure Requirements Require a lessee to disclose the following quantitative items: - Type A lease expense, segregated between amortization of assets and interest on liabilities. - Type B lease expense. - Short-term lease expense. - Sublease income. - Weighted-average remaining lease term, disclosed separately for Type A and Type B leases. - Weighted-average discount rate for Type A and Type B leases as of the reporting date. - Gains and losses arising from sale and leaseback transactions.

9 NEXT STEPS Discuss private company considerations Begin drafting a final leases standard based on the tentative decisions reached by the FASB. Discuss the benefits and costs of the new leases standard, effective date, and any sweep issues that arise during drafting of the final leases standard.

10 Revenue Recognition Revenue is an important number to users of financial statements in assessing an entity s financial performance and position. However, previous revenue recognition requirements in U.S. generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRS), and both sets of requirements were in need of improvement.

11 Revenue Recognition 1. Remove inconsistencies and weaknesses in revenue requirements. 2. Provide a more robust framework for addressing revenue issues. 3. Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. 4. Provide more useful information to users of financial statements through improved disclosure requirements. 5. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

12 The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

13 Step 1: Identify the contract(s) with a customer. Agreement between two or more parties o Parties have approved the contract (written or oral) o Identify each party s rights o Identify payment terms o Commercial substance o Probable that consideration will be collected (ability and intention to pay)

14 Step 2: Identify the performance obligation in the contract. Performance obligation is the promise to transfer goods or services to a customer A good or service (or a bundle of goods or services) that is distinct A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer Service = Patient Care

15 Step 3: Determine the transaction price Transaction price is the amount of consideration you expect to receive Expect to receive less than full amount, should be reflected in the transaction price Expected value weighted average in range of outcomes/contracts Most likely amount with two possible outcomes (all or nothing) Reassess at the end of the reporting period

16 Step 4: Allocate the transaction price to the performance obligations in the contract. Allocate the transaction price to each performance obligation identified in the contract Performance obligation = patient care

17 Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. Performance obligation satisfied at a point in time or over time Recognize revenue over time, if one of the following criteria is met: a. The customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs b. The entity s performance creates or enhances an asset that the customer controls as the asset is created or enhanced c. The entity s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date

18 AICPA - Health Care Entities Revenue Recognition Task Force Issue # Description of Implementation Issue 1 Consideration of the following regarding self-pay balances: Application of step 1 in determining if there is a contract Application of step 3 in determining the transaction price considering allowances/discounts and implicit price concessions Application of the portfolio approach (including CCRC contracts) 2 CCRC Revenue Stream Identifying the performance obligation(s) and recognizing the monthly/periodic fees and nonrefundable entrance fees under the different types of contracts for continuing care retirement communities Identifying the performance obligation(s) and recognizing the performance obligation(s) to provide future services and use of facilities Significant Financing Component - CCRC Contracts 3 Scope of prepaid health services as it relates to revenue recognition and the application of FASB ASC 954 vs. ASC Disclosure requirements for health care entities 5 Contract acquisition costs for prepaid health services and CCRC entrance fees 6 Determination (estimation) of transaction price (expected value vs. most likely) as it relates to third party estimates

19 Effective Date For a public entity annual reporting periods beginning after December 15, Early application is not permitted. A public entity is an entity that is any one of the following: 1. A public business entity 2. A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market For all other entities (nonpublic entities) - effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

20 Contact Information Anne Cloutier