Accounting and Auditing Update. Tennessee Chapter of hfma Spring Institute 2016 Presented by William C. Matheney FHFMA CPA and Meredith P.

Transcription

1 Accounting and Auditing Update Tennessee Chapter of hfma Spring Institute 2016 Presented by William C. Matheney FHFMA CPA and Meredith P. Cate

2 Today s Objectives Present an overview of pertinent recently issued accounting and auditing standards relevant to healthcare finance professionals Help participants understand the impact of these standards on their organization Help participants prepare for full implementation of the standards

3 A Look at the Horizon Accounting Changes Leases Revenue Recognition Deferral of Effective Date (ASU ) Principal vs. Agent (ASU ) Identifying the Performance Obligations (ASU ) Narrow Scope Improvements and Practical Expedients (ASU ) Other Auditing Changes AU-C Section 9700 Liquidation Basis Sustainability Financial Statements Audit Risk Alert for Not-for-Profits

4 Leases (ASU )

5 Background Provide users with more relevant information on and a more faithful representation of leasing arrangements It was estimated that SEC registrants held off-balance sheet lease obligations of approximately $1.25 trillion The new standard is similar to previous GAAP The previous accounting model did not require lessees to recognize the assets and liabilities arising from operating leases

6 Overview Lessee: Recognizes a right-of-use asset and lease liability on the balance sheet. Lessor: Accounting model remains virtually the same with a few minor changes. Applies to all leases except short-term leases (12 months or less) Effective for public business entities for fiscal years beginning after December 15, For all other entities, effective for fiscal years beginning after December 15, 2019.

7 Identifying a Lease Determine whether the contract contains a lease. Does it convey the right to control the use of an identified asset? To determine this, the customer must have both: The right to obtain substantially all of the economic benefits The right to direct the use of the identified asset.

8 How to Classify Leases-Lessees Leases are classified as finance or operating leases A lessee should classify a lease as a finance lease and a lessor should classify a lease as a sales-type lease when the lease meets ANY of the following criteria at lease commencement: The leases transfers ownership at the end of the lease term The lease grants the lessee an option to purchase The lease term is for the major part of the remaining economic life The present value of the sum of the lease payment equals or exceeds substantially all of the fair value of the underlying asset Asset is of such a specialized nature A lessee should classify the lease as an operating lease when none of the above criteria are met.

9 How to Classify Leases-Lessors When a lease is not classified as a sales-type lease, a lessor should classify the lease as either a direct financing lease or an operating lease. The lease would be an operating lease unless BOTH of the following are met, in which case the lease would be a direct financing lease: The present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the underlying asset. It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.

10 Reporting For leases 12 months or less, lessee should recognize lease expense on a straight-line basis For finance leases, a lessee is required to do the following: Recognize a right-of-use asset and a lease liability Recognize interest separately from amortization Classify repayments of the principal within financing activities and payments of interest and variable lease payments within operating activities

11 Reporting (continued) For operating leases a lessee is required to do the following: Recognize a right-of-use asset and a lease liability Recognize a single lease cost Classify all cash payments within operating activities

12 Sale and Leaseback Transactions Must meet the requirements for a sale in Topic 606, Revenue from Contracts with Customers If classified as a finance/sales-type lease, no sale has occurred. A repurchase option precludes sale accounting unless The asset is nonspecialized and Exercise price of the option is the fair value

13 Lease Example Facts Lessee enters into a 10-year lease with option to extend for an additional 5 years. Lease payments are $50,000 per year during the initial term and $55,000 per year during the optional period. Lessee incurs initial direct costs of $15,000. At the commencement date, Lessee concludes that it is not reasonably certain to exercise the option to extend the lease and, therefore, determines the lease term to be 10 years. Lessee s incremental borrowing rate is 5.87%. The rate implicit in the lease is not readily determinable.

14 Lease Example- Lessee At the commencement date, Lessee makes the lease payment for the first year, incurs initial direct costs, and measures the lease liability at the present value of the remaining 9 payments of $50,000, discounted at the rate of 5.87 percent, which is $342,017. Lessee also measures a right-of-use asset of $407,017 (the initial measurement of the lease liability plus the initial direct costs and the lease payment for the first year). JE: ROU Asset 407,017 Lease Liability 342,017 Cash 65,000 During the first year of the lease, Lessee recognizes lease expense depending on whether the lease is classified as a finance lease or as an operating lease.

15 If the Lease is Classified as a Finance Lease Lessee depreciates its owned assets on a straight-line basis. Therefore, the right-of-use asset would be amortized on a straight-line basis over the 10-year lease term. The lease liability is increased to reflect the Year 1 interest on the lease liability in accordance with the interest method. As such, in Year 1 of the lease, Lessee recognizes the amortization expense of $40,702 ($407,017 10) and the interest expense of $20,076 (5.87% $342,017). JE: Amortization 40,702 Interest 20,076 ROU Asset 40,702 Lease Liability 20,076 At the end of the first year of the lease, the carrying amount of Lessee s lease liability is $362,093 ($342,017 + $20,076), and the carrying amount of the right-of-use asset is $366,315 ($407,017 $40,702).

16 If the Lease is Classified as an Operating Lease Lessee determines the cost of the lease to be $515,000 (sum of the lease payments for the lease term and initial direct costs incurred by Lessee). The annual lease expense to be recognized is therefore $51,500 ($515, years). JE: Lease Expense 51,500 Lease Liability 20,076 ROU Asset 31,424 At the end of the first year of the lease, the carrying amount of Lessee s lease liability is $362,093 ($342,017 + $20,076), and the carrying amount of the right-of-use asset is $375,593 (the carrying amount of the lease liability plus the remaining initial direct costs, which equal $13,500).

17 Revenue Recognition (Topic 606) On May 28, 2014, the FASB issued Accounting Standards Update No , Revenue from Contracts with Customers (Topic 606). The International Accounting Standards Board issued similar guidance in convergence with this US Standard. The press release related to the converged standards can be retrieved at For public business entities, certain not-for-profit entities, and certain employee benefit plans, the effective date was for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The effective date for all other entities was for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, On August 12, 2015, the FASB issued an Accounting Standards Update (ASU) deferring the effective date of the new revenue recognition standard by one year.

18 Who Will Be Affected by the New Guidance? The new guidance on revenue recognition affects any reporting organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).

19 Comparison to the Existing GAAP

20 Why did FASB and IASB issue the converged standards? Remove inconsistencies/weaknesses in current recognition of revenue. Provide a better framework to address revenue recognition issues. Improve comparability of revenue recognition across entities, industries, jurisdictions and capital markets. Provide more useful information to financial statement users through more consistent revenue recognition reporting. Simplify financial reporting by reduction in the number of requirements to which each entity must refer to for guidance and comply with.

21 Groups with Significant Interpretation Roles in the US Financial Accounting Standards Board ( FASB ) Transition Resource Group ( TRG ) Solicit, analyze and discuss stakeholder issues Inform FASB and IASB about those issues Provide a forum for stakeholders to learn about the new guidance American Institute of CPAs ( AICPA )

22 Revenue Recognition Task Forces The AICPA plans to develop a separate Accounting Guide for Revenue Recognition. To facilitate this there have been Revenue Recognition Task Forces formed for 16 industries to evaluate application of the standard and interpret questions raised by stakeholders. The timeline for the Guide has not been disclosed.

23 Five Step Approach to Implementing the Standard 1. Identify the contract with the customer. 2. Identify the performance obligations (promises) in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to various performance obligations. 5. Recognize revenue when the reporting organization satisfies the performance obligations.

24 Questions We Will Answer 1. What constitutes a contract with a customer? 2. What are performance obligations and why are they important? 3. What is a transaction price? 4. How does the transaction price get allocated among performance obligations? 5. How and when are the performance obligations determined to be satisfied?

25 Criteria for a Contract to Exist Approval and commitment of the parties. Identification of the rights of the parties Identification of payment terms Commercial substance Probability of collection

26 Performance Obligations Performance obligations are promises included in the contract. These should only be accounted for if they are: Capable of being distinct. Distinct within the context of the contract. They are not of immaterial nature.

27 When To Recognize Revenue Over Time Customer simultaneously receives and consumes benefits as the reporting entity performs the performance obligations. Performance creates an assets that the customer controls. Performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to receive payment.

28 When to Recognize Revenue at a Point in Time The reporting entity has a present right to payment for the good or service The customer has legal title to the asset received The reporting entity has transferred physical possession of the asset The customer has the significant risks and rewards of ownership The customer has accepted the asset

29 Allocated Transaction Price When multiple performance obligations exist, the transaction price should be allocated to the individual performance obligations. The standard requires these be allocated based on the stand-alone transaction price of the individual performance obligations.

30 Things to consider when determining the Transaction Price Variable consideration Constraining estimates of variable consideration Existence of a financing component Non-cash consideration Consideration payable to the customer

31 Transaction Price Allocation Example Patient comes in for Knee replacement surgery and is covered by the Comprehensive Care for Joint Replacement ( CCJR ) bundle. Basic facts are: Surgery and a ten day hospital stay Thirty day stay in a nursing home or subacute unit for rehabilitation Three months of twice weekly therapy in the home

32 Allocation of the Transaction Price Charges Reimbursement % Allocation Based on Charges Ten day hospital stay $40, % 31,048 Thirty day stay in SNF ($200/day * 30) $6, % 4,657 Three months of twice a week Home Health Therapy ($150 *2*4*3) $3, % 2,794 Total $49, % 38,500

33 Allocation of the Transaction Price (continued) Charges Reimbursement % Allocation Based on Charges Ten day hospital stay $40,000 35, % 31,631 Thirty day stay in SNF ($200/day * 30) $6,000 5, % 4,700 Three months if twice a week Home Health Therapy ($150 *2*4*3) $3,600 2, % 2,169 Total $49,600 42, % 38,500

34 Recent Audit Guidance AICPA Statement on Auditing Standards No. 130 An Audit of Internal Control that is Integrated with an Audit of Financial Statements. AICPA Statement on Auditing Standards No. 131, Amendment to Statement on Auditing Standards No. 122 Section 700. Forming an Opinion and Reporting on Financial Statements.

35 Proposed Accounting Standards Updates ( PASU ) PASU Fair Value Measurement (Topic 820) Disclosure Framework- Change to Disclosure Requirements for Fair Value Measurement PASU Statement of Cash Flows (Topic 230) Classification of Cash Receipts and Cash Payments ( a consensus of the Emerging Issues Task Force) PASU Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic )- Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost

36 Governmental Accounting Standards GASB Statement 80 Essentially the same as the FASB Lease standard, but proposes that all leases are financing. In exposure draft with comments due by May 31, 2016.

37 Contact Information Matheney Stees & Associates P.C Shallowford Road Ste 101 Chattanooga, TN Matheney Stees & Associates. How may we help you? William C. Matheney FHFMA CPA MBA Phone or x105 Meredith P. Cate Phone or x112