Healthcare Accounting Update. February 14, 2018 Presented by: Greg Heitkamp, Audit/Accounting Senior Manager

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1 Healthcare Accounting Update February 14, 2018 Presented by: Greg Heitkamp, Audit/Accounting Senior Manager

2 Agenda ASU & ASU Revenue from Contracts with Customers Effective date: 12/31/18 Public Business Entities 12/31/19 All other entities ASU Leases Effective date: 12/31/19 Public Business Entities 12/31/20 All other entities ASU Not-for-Profit Presentation and Disclosure Effective date: 12/31/2018 All entities

3 Overview of Revenue Recognition Standard Core Principle: An entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to the entity expects to be entitled in exchange for those good or services ASC Five Step Approach: Identify the contract with the customer Identify performance obligations Determine the transaction price Allocate the transaction price Recognize revenue when (or as) a performance obligation is satisfied

4 Step 1: Identify the Contracts With a Customer Affects contracts with a customer that meet the following criteria» Approval and commitment of the parties» Identification of rights of the parties» Identification of payment terms» Contract has commercial substance» Probable that entity will collect substantially all consideration to which it will be entitled in exchange for goods and services.

5 Step 2: Identify the Performance Obligations» A performance obligation is a promise in a contract with a customer to provide a good or service.» Entity should assess the goods or services promised in a contract and identify as a performance obligation each promise to transfer to the customer either:» A good or service that is distinct, or» A series of distinct goods or services that are substantially the same.

6 Step 3: Determine the Transaction Price The transaction price is the amount of consideration the entity expects to receive in exchange for goods or services.» To determine the transaction price, the following should considered:» Variable consideration» Constraining estimates of variable consideration» The existence of a significant financing component» Noncash considerations» Consideration payable to the customer

7 Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract» The Transaction price is allocated to each of the promises made to the customer/patient.

8 Step 5: Recognize Revenue When (or as) the Entity Satisfies a Performance Obligation» Recognize revenue either at a point in time or over time as services are delivered.

9 Presentation of Bad Debt on Income Statement Current Presentation: Net Patient Service Revenue before bad debt Less: Provision for bad debt Equals = Net operating Revenue Future Presentation: Net operating Revenue Potentially portion of bad debt expense in operating expenses

10 Disclosure Requirements» Disclosure requirements are the same across all entities.» Current healthcare specific disclosures no longer required.» Charity Care disclosures stays the same» Disaggregation of revenue» Amounts recognized relating to performance in previous periods

11 Significant Takeaways» Bad debt expense no longer separate line item under net revenue» Provision for bad debt likely to decrease, now an operating expense» Significant judgements and estimates will need to be used and disclosed.

12 ASU The New Lease Standard Overview» Key Changes» Lessees recognize right-of-use asset and lease liability for most leases» Lease classification will drive expense recognition» Lessor model largely unchanged

13 Lease Classification» If a lease meets any of the following five conditions, it is a finance lease:» Transfer of ownership» Option to purchase is reasonably certain» Lease term is a major part of the economic life» Present value of lease payments is substantially all of the fair value» Specialized nature

14 Overview - Example Lessee enters into a lease of non-specialized digital equipment with Lessor. Lease term Economic life Purchase option Rent Payments 3 years (no renewal option) 5 years None Interest rate 7% Fair value of asset $500 Residual value guarantee 100, paid in arrears, escalating $3 annually None

15 Overview - Example Financial statement impact - lessee Operating Lease Finance Lease Balance sheet, beginning of year Right-of-use asset $270 $270 Lease liability ($270) ($270) Income statement Lease expense 103 Amortization 90 Interest expense 19 Income before tax (103) (109) Balance sheet, end of year Right-of-use asset $186 $180 Lease liability ($189) ($189)

16 Ongoing requirements Reassessment lease Cause» Changes in lessee renewal terms, termination, or purchase options» Change in amounts probable of being owed under a lessee provided residual value guarantee» Contingency resolved such that some or all variable payments become fixed Effect» Reallocate contract consideration between lease and nonlease components» Re-measure lease liability» Adjust right of use asset» Update discount rate?» Reclassification of the lease

17 NFP Presentation and Disclosure ASU Key Objectives Update, not overhaul, the current model Improve net asset classification scheme Improve information in financial statements and notes about: financial performance, cash flows, and liquidity Better enable NFPs to tell their financial story Issued August 18, 2016, ASU No

18 Net Assets and Endowments

19 Classification of Net Assets - Overview Current GAAP Unrestricted Temporarily Restricted Permanently Restricted ASU Without Donor Restrictions* With Donor Restrictions* Disclosures Amount, purpose, and type of board designations** Nature and amount of donor restrictions * NFPs may choose to disaggregate further ** New disclosure requirement Underwater Endowments Revised net asset classification Reflected in net assets with donor restrictions rather than in net assets without donor restrictions

20 Net Asset Classification Requirements Two classes» With donor/grantor-imposed restrictions; and time restrictions Includes perpetual and temporary» Without donor/grantorimposed restrictions Includes board-designated Disclosure requirements» Composition of net assets with donor/grantor restrictions» Emphasis on how/when resources (net assets) can be used Specified purpose(s) Specified time(s) Perpetual (endowment, i.e., funds of perpetual duration )» Quantitative and qualitative information about board designations (future slide)» Endowment disclosures Conform to two net asset classes New underwater endowment disclosures