KEY ACCOUNTING AND REPORTING ISSUES IMPACTING HEALTHCARE ORGANIZATIONS

KEY ACCOUNTING AND REPORTING ISSUES IMPACTING HEALTHCARE ORGANIZATIONS IN 2014 Kelly Thrift Daron Tarlton HFMA DIXIE INSTITUTE February 25, 2014 1

Session Objective • Recognize key emerging financial accounting and reporting issues that will have an impact on your financial statements • Understand how to implement the latest accounting standards and to account for transactions unique to the healthcare industry • Evaluate the implications of these changes from the perspective of stakeholders and users of your financial statements • Understand the latest healthcare industry accounting and reporting trends and the status of key projects on the horizon 2

Session Schedule • 12: 00 – 1: 00 FASB updates • 1: 00 – 1: 10 Break • 1: 10 – 1: 50 FASB projects • 1: 50 – 2: 10 Industry practice issues • 2: 10 – 2: 20 Break • 2: 20 – 3: 00 GASB updates • 3: 00 – 3: 10 GASB projects • 3: 10 – 3: 15 Questions / discussion 3

Classification of Healthcare Organizations • Investor-owned – Investors/private equity with objective of making a profit – Follow FASB for-profit guidance • Not-for-profit – Charitable organization with no ownership interests with objective of self sustaining services – Follow FASB NFP guidance • Governmental – Public organization with no ownership interests for which elected officials are ultimately accountable – Follow GASB guidance 4

ASU 2010 -23: Healthcare Entities (Topic 954) Measuring Charity Care for Disclosure • Effective Date – Fiscal years beginning after 12/15/10 • Impact – Use cost as the measurement basis for charity care disclosures – Disclose a description of method used to calculate cost – Disclose reimbursements received intended to compensate for providing charity care 5

ASU 2010 -24: Healthcare Entities (Topic 954) Presentation of Insurance Claims and Related Insurance Recoveries • Effective Date – Fiscal years beginning after 12/15/10 • Impact – Requires insurance recoveries receivable to be reported separate from related claim liabilities for malpractice and similar contingencies – AICPA Technical Practice Aid Section 6400 • TIS 6400. 49 Contingencies similar to malpractice – Applies to similar contingent liabilities, such as workers compensation and D&O claims • TIS 6400. 50 Accrual of legal costs for contingencies other than malpractice – Required to accrue estimated legal costs with related malpractice claim liability – Policy election for non-malpractice claims – can accrue or expense as incurred • TIS 6400. 51 Presentation of recoveries when insurer pays claims directly – Provider is still primary obligor - must gross up recovery receivable unless right of offset • TIS 6400. 52 Insurance recoveries from certain retrospectively rated insurance policies – If premium is adjusted to reflect actual experience, then loss is self-retained and no receivable is recorded 6

ASU 2011 -04: Fair Value Measurements (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U. S. GAAP and IFRS • Effective Date – Fiscal years beginning after 12/15/11 • Impact – Clarifies fair value measurement criteria – Additional disclosures required • Reason for fair value measurement, entity’s valuation policies and procedures • Description of valuation techniques and inputs for Level 2 and Level 3 measurements • All transfers between levels in hierarchy, including reason and policy – Nonpublic entities not required to disclose transfers between Levels 1 and 2 • Quantitative information about significant unobservable inputs used for Level 3 measurements – Not required to create quantitative information if quantitative unobservable inputs are not developed by the entity when measuring fair value (for example, when an entity uses prices from prior transactions or third-party pricing information without adjustment) • Narrative description of measurements’ sensitivity to changes in unobservable inputs if significant (public entities only) 7

A timeline of recent fair value guidance FAS 35 Plan investments valued at fair value FAS 157 (adopt 2008) - Apply new FV definition - Hierarchy disclosures FSP FAS 157– 4 (adopt 2009) Disaggregate hierarchy disclosures by “nature and risk” category for equity and debt securities ASU 2009– 12 “NAV” (adopt 2009) - Use of NAV as a practical expedient for valuation - Additional disclosures and hierarchy guidance ASU 2010– 06 (adopt 2010) - Disaggregate hierarchy disclosures by “nature and risk” class for all FV assets and liabilities - Disclose transfers between Level 1 and 2 - Other new disclosures ASU 2010– 06 (adopt 2011) Expanded disclosure of Level 3 activity ASU 2011 -04 (adopt 2012) “Game Changer” -Description of valuation processes for L 3 -Unobservable inputs table (quantitative) for L 3 -Public entities to disclose all L 1 and L 2 transfers -Public entities to provide narrative description of sensitivity of FV to changes in unobservable inputs (qualitative)

ASU 2011 -04: Fair Value Measurements (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U. S. GAAP and IFRS Illustrative Tabular Disclosure

ASU 2011 -07: Healthcare Entities (Topic 954) Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts • Effective Date – Fiscal years beginning after 12/15/11 for nonpublic entities • Impact – Provision for bad debt reclassified from operating expense to deduction from patient service revenue • Only if significant revenues are recognized without consideration of ability to pay • Certain bad debts are still an operating expense – Related to patient receivables only if the entity assess ability to pay and only records what it actually expects to collect – Related to non-patient receivables • TIS 6400. 47 - Application of ASU 2011 -07 in Consolidated Financial Statements – Should “significance” assessment performed for subsidiary level financial statements be retained in consolidation? – Policy election that is required to be disclosed and applied consistently 10

ASU 2011 -07: Healthcare Entities (Topic 954) Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts • Impact – Additional disclosures required • Policies for recognizing revenue and determination of bad debts by major payor source • Qualitative and quantitative information about changes in the allowance for doubtful accounts and changes in underlying assumptions or estimates 11

AICPA TIS 6400. 47 Application of ASU 2011 -07 in Consolidated Financial Statements Stand-alone FS Consolidated FS Acute-care hospital Nursing home Net Patient Service Revenue Less: Provision for bad debts $ NPSR less provision for bad debts 200, 000 $ 460, 000 (180, 000) 200, 000 280, 000 Operating expenses: Specific expenses (listed) (105, 000) (145, 000) Provision for bad debts (80, 000) Total operating expenses Excess of revenues over expenses 15, 000 $ - (185, 000) $ Using Policy Election A 135, 000 Retain subsidiary-level assessment in consolidation 660, 000 $ (180, 000) 400, 000 (250, 000) - (330, 000) $ 660, 000 (260, 000) 480, 000 (80, 000) (145, 000) $ Using Policy Election B 150, 000 (250, 000) $ 150, 000 Make a separate assessment at consolidated level 12

ASU 2011 -07: Healthcare Entities (Topic 954) Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts 954 -310 -55 -2 Illustrative Disclosure Accounts receivable are reduced by an allowance for doubtful accounts. In evaluating the collectibility of accounts receivable, Entity A analyzes its past history and identifies trends for each of its major payor sources of revenue to estimate the appropriate allowance for doubtful accounts and provision for bad debts. Management regularly reviews data about these major payor sources of revenue in evaluating the sufficiency of the allowance for doubtful accounts. For receivables associated with services provided to patients who have third-party coverage, Entity A analyzes contractually due amounts and provides an allowance for doubtful accounts and a provision for bad debts, if necessary (for example, for expected uncollectible deductibles and copayments on accounts for which the third-party payor has not yet paid, or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables associated with self-pay patients (which includes both patients without insurance and patients with deductible and copayment balances due for which third-party coverage exists for part of the bill), Entity A records a significant provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. The difference between the standard rates (or the discounted rates if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts. 954 -310 -55 -3 Illustrative Disclosure Entity A’s allowance for doubtful accounts for self-pay patients increased from 90 percent of self-pay accounts receivable at December 31, 20 X 1, to 95 percent of self-pay accounts receivable at December 31, 20 X 2. In addition, Entity A’s self-pay writeoffs increased $1, 000 from 8, 000 for fiscal year 20 X 1 to $9, 000 for fiscal year 20 X 2. Both increases were the result of negative trends experienced in the collection of amounts from self-pay patients in fiscal year 20 X 2. Entity A has not changed its charity care or uninsured discount policies during fiscal years 20 X 1 or 20 X 2. Entity A does not maintain a material allowance for doubtful accounts from third-party payors, nor did it have significant writeoffs from third-party payors. 13

ASU 2012 -01: Healthcare Entities (Topic 954) Continuing Care Retirement Communities – Refundable Advance Fees • Effective Date – Fiscal years beginning after 12/15/12 (public) and 12/15/13 (nonpublic) – Retrospective application • Impact – Requires refundable entrance fee to be reported as a liability unless: • The resident agreement explicitly limits the amount of refund to the proceeds of reoccupancy of the unit, and • The refund limitation policy is actually followed in practice – If refunds are limited to reoccupancy proceeds, then report as deferred revenue and amortize to income over the term of the agreement – May result in recording future service obligation (FSO) liability – High likelihood of restatement 14

ASU 2012 -02: Intangibles – Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment • Effective Date – Fiscal years beginning after 9/15/12 • Impact – Similar to guidance in ASU 2011 -08 related to testing impairment of goodwill – Provides the option to use a qualitative approach to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired • More-likely-than-not means > 50% likelihood of impairment • Qualitative factors include: – – Macroeconomic, industry, and market conditions Cost factors and financial performance Entity-specific events Other qualitative factors 15

ASU 2012 -05: Statement of Cash Flows (Topic 230) Not-for-Profit Entities: Classification of the Sale of Proceeds of Donated Financial Assets in the Statement of Cash Flows • Effective Date – Fiscal years beginning after 6/15/13 • Impact – Requires NFPs to classify cash receipts from sale of donated financial assets consistently with other cash donations, when the financial assets are converted to cash “nearly immediately” upon receipt • Classify as operating activities, unless time-restricted or use-restricted for capital purposes - then classify as financing activities – If not converted to cash “nearly immediately” upon receipt, then classify as investing activities 16

ASU 2013 -03: Financial Instruments (Topic 825) Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities • Effective Date – Upon issuance • Impact – Clarifies applicability of ASU 2011 -04 fair value measurement and hierarchy disclosure requirements for financial instruments that are not measured at fair value but disclose fair value • Requirement to disclose fair value measurement and hierarchy levels for such assets does not apply to non-public entities with more than $100 million in assets or which have derivative instruments – Nonprofit entities that are conduit debt obligors are considered public entities for purposes of this guidance » Therefore – if >$100 M assets and conduit debt – disclose! 17

ASU 2013 -04: Liabilities (Topic 405) Obligation Resulting from Joint and Several Liability Arrangement for Which the Total Amount of the Obligation is Fixed at the Reporting Date • Effective Date – Fiscal years beginning after 12/15/13 (public) and 12/15/14 (nonpublic) – Retrospective application • Impact – Requires co-obligors to report a liability in their respective stand-alone financial statements for fixed obligations where they have joint and several liability • Obligations should be measured as the sum of the following: – The amount the reporting entity has 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 – Potential for restatement 18

ASU 2013 -04: Liabilities (Topic 405) Obligation Resulting from Joint and Several Liability Arrangement for Which the Total Amount of the Obligation is Fixed at the Reporting Date • Impact – Requires additional disclosures • • 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 19

ASU 2013 -06: Not-for-Profit Entities (Topic 958) Services Received from Personnel of an Affiliate • Effective Date – Fiscal years beginning after 6/15/14 (prospective) – Modified retrospective approach for comparative financial statements – adjust prior periods’ presentation but not beginning net assets • Impact – Requires nonprofit entities that receive services from the personnel of an affiliate to recognize those services as an operating expense with an offsetting contribution • Measured at the cost recognized by the affiliate for those personnel or at fair value • Contribution is below-the-line equity transfer • Applies only to personnel costs and only if no compensation is received 20

ASU 2013 -10: Derivatives and Hedging (Topic 815) Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes • Effective Date – New or redesignated hedging relationships on or after 7/17/13 • Impact – Expands benchmark rates to include federal funds rates 21

ASU 2013 -12: Definition of a Public Business Entity – An Addition to the Master Glossary • Effective Date – Upon issuance of ASU • Impact – Creates a single definition of “public business entity” • Typically any entity that files with the SEC – Specifically excludes nonprofit entities • Different than existing guidance where conduit obligors are typically considered “public” entities for purposes of applicability of codification – Does not impact existing requirements • Future guidance will consider applicability of nonprofits on a standard-by-standard basis 22

TIS 6400. 48 Accounting for Costs Incurred During Implementation of ICD-10 • Effective Date – ICD-10 implementation deadline of 10/1/14 • Impact – Costs incurred are either capitalized or expensed: • Business process re-engineering - Expense as incurred • Education and training of coders, clinicians, and business office personnel - Expense as incurred • Project consultants - Capitalize/expense as appropriate – Allocate contract price to project components based on relative fair values, then treat accordingly • Modification and replacement of billing and medical records information systems Capitalize/expense as appropriate 23

TIS 6400. 48 Accounting for Costs Incurred During Implementation of ICD-10 • Impact – Modification and replacement of billing and medical records information systems: • Property and equipment – Capitalize based on capitalization policy – Allocate maintenance/service costs and report separate from fixed assets • Software development and modification – Only upgrades and enhancements that result in additional functionality can be capitalized » Preliminary project stage – Expense as incurred » Application development stage - Capitalize/expense using internal-use software guidance » Postimplementation-operation stage – Expense as incurred 24

ASC 720 -45 -55 Illustration Internal-Use Software Implementation Costs Legend: a - Expense as incurred per ASC 720 -45 b - Expense as incurred per ASC 350 -40 c - Capitalize per ASC 350 -40

Exposure Draft: Proposed ASU 2011 -250 Revenue from Contracts with Customers • Status – Proposed ASU issued in March 2013 – Final discussions in November 2013, performing outreach and preparing for final vote – Final ASU expected in first half of 2014 • Impact – Core revenue recognition concepts: • • • Identify the contract Identify separate performance obligations Determine transaction price Allocate transaction price to separate performance obligations Recognize revenue when/as entity satisfies performance obligations – Revenue recognition for indigent and self-pay patients • Exposure draft is not clear whether or how health care entities should recognize revenue associated with indigent and self-pay patients • Tentative decision to include a “collectability” threshold for recognition 26

Exposure Draft: Proposed ASU 2011 -250 Revenue from Contracts with Customers • Impact – Contracts with Medicare/Medicaid • Can use either “most likely amount” or “expected value” in estimating variable consideration, whichever is best predictor – Revenue transaction involving multiple contractual relationships • As many as four different parties may be associated with a revenue transaction at a hospital • Third-party payor makes payment on the patient’s behalf; not a separate “contract with a customer” – Prepaid health services contracts – Capitalize incremental costs if expectation of recovery – AICPA Healthcare Expert Panel comment letter to FASB: • Impact of ASU 2011 -07, presentation of bad debts • Third party settlements –probability weighted vs. best estimate method • Revenue transaction with multiple contractual relationships – Patient, hospital, physician, and insurer - should not be treated as separate contracts • Clarify NFP exclusions for onerous performance obligations • Questions related to CCRC contracts and fees 27

Exposure Draft: Proposed ASU 2013 -221 Financial Instruments – Recognition and Measurement • Status • Proposed ASU issued in February 2013 • FASB and IASB began redeliberating September 2013 • Final ASU expected in second half of 2014 • Impact – Requires financial assets to be classified and measured based on the contractual characteristics and the entity’s business model for managing assets and risks • Legal form of financial instrument is secondary • Financial assets are measured and reported at: – Amortized cost - Held only for collection of contractual cash flows (principal & interest) – Fair value through OCI - Held for collection of contractual cash flows and market gains – Fair value through net income – All other financial assets – All equity investments (except equity method) are reported at FV through net income • Can elect to measure equity method investments based on observable price changes for identical or similar investment of the same issuer – Financial liabilities are generally measured and reported at amortized cost 28

Exposure Draft: Proposed ASU 2013 -270 Leases • Status – Proposed ASU issued in May 2013 – FASB and IASB began redeliberating January 2014 • Impact – Lessee accounting - liability • • • All leases > 12 month term to be capitalized Asset = right to use the leased asset for the lease term Liability = present value of lease payments Variable lease payments not pegged to an index or rate are not included in the liability Term = non-cancellable lease term and any renewal options where there is a significant economic incentive for the lessee to extend the lease • Private companies and nonpublic NFPs can elect to use risk-free rate to discount the liability and are not required to disclose a roll-forward of the liability 29

Exposure Draft: Proposed ASU 2013 -270 Leases • Impact – Lessee accounting – expense • Expense recognition depends on nature of asset and whether lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset • Most leases “other than property” (i. e. equipment, vehicles) • Report interest expense on lease liability separate from amortization expense on leased asset • Most leases of “property” (i. e. land, buildings) • Report single straight-line lease expense, combining interest from lease liability with amortization expense on leased asset – Lessor accounting – mirrors lessee accounting 30

Exposure Draft: Proposed ASU 2013 -230 Reporting Discontinued Operations • Status – Proposed ASU issued in April 2013 – Final ASU expected in first quarter of 2014 – Expected implementation date: • Public entities (including conduit debt obligors) – periods beginning after 12/15/14 • Nonpublic entities – periods beginning after 12/15/15 • Impact – Redefines “discontinued operations” to only include disposals of components that represent a significant strategic shift for the organization • Represents major line of business/geographical area, single coordinated plan to dispose, or asset group held for sale • Replaces current definition focuses on elimination of cash flows of a component or asset group with no significant continuing involvement 31

Exposure Draft: Proposed ASU 2013 -230 Reporting Discontinued Operations • Impact – Expands disclosures about financial results of discontinued operations and disposals of individual components of any entity – Financial information of discontinued operations, including cash flows – Pretax profit or loss of a component that was disposed but does not qualify as a discontinued operation – Nature and extent of continuing involvement with a discontinued operation 32

Exposure Draft: Proposed ASU 2013 -290 Insurance Contracts • Impact – Two basic approaches to account for insurance contracts: • Building block approach – Measure the contractual liability at the present value of unbiased, probabilityweighted mean of future estimated cash flows plus a profit margin that is recognized over time – Recognize revenue over the coverage and settlement periods as the obligation to provide coverage and other services is satisfied – Most life insurance, annuity, and long-term health insurance contracts • Premium allocation approach – Initially measure the contractual liability based on future contractual premiums, then reduce liability as revenue is recognized – Incurred claims liability is measured and reported separately – Recognize revenue over the coverage period on the basis of the expected timing of incurred claims – Most property, liability, and short-term health insurance contracts 33

Exposure Draft: Proposed ASU 2013 -300 Disclosure of Uncertainties about an Entity’s Going Concern Presumption • Status – Proposed ASU issued in June 2013 – FASB to begin redeliberating in Spring of 2014 • Impact – Provides guidance on management’s responsibilities in evaluating and disclosing going concern uncertainties • Requires disclosure under either of the following scenarios: – More likely than not (i. e. > 50% chance) that entity will be unable to meet its obligations within 12 mos. without taking actions outside normal course of business – Known or probable that entity will be unable to meet its obligations within 24 mos. without taking actions outside normal course of business – Requires management to evaluate going concern uncertainties at each reporting period – Disclose conditions and events that create uncertainty, their possible effects and significance, mitigating conditions, and management’s plans to address the uncertainty 34

Exposure Draft: Proposed ASU 2013 -300 Disclosure of Uncertainties about an Entity’s Going Concern Presumption • Impact – Requires management to evaluate going concern uncertainties at each reporting period – Requires certain disclosures about conditions and events that create uncertainty, their possible effects and significance, mitigating conditions, and management’s plans to address the uncertainty 35

Other FASB projects • Not-for-profit financial statements – Improve net asset classification requirements • Classify based on donor-imposed restrictions or not; eliminates temporarily vs. permanently restricted – Improve information provided in notes about liquidity, financial performance, and cash flows – Define an intermediate operating measure based on “mission” or “availability” dimensions • Accounting for goodwill – not-for-profit and public companies – Objective is to reduce the cost and complexity required for accounting for goodwill on an ongoing basis. Alternatives being deliberated include: • Amortization of goodwill over 10 years • Direct write-off of goodwill • Simplified impairment test • Accounting for government assistance – In research and exploratory phase – Considering the need to establish explicit guidance for the accounting and disclosure of government assistance – Currently only guidance in not-for-profit topic sections for contributions received • That guidance excludes tax exemptions, tax incentives, tax abatements and the transfer of assets from governments to business entities 36

Accounting for Premier transaction • Premier is a limited partnership GPO owned by 181 member providers • Corporate reorganization and IPO of class A shares of newly created Premier, Inc. – Class A shares issued on 9/26/13, reorganization effective upon close of IPO on 10/1/13 • In connection with Premier reorganization and IPO, investor owners (limited partners) received ownership interest in the new limited partnership as well as class B shares in Premier, Inc. – Class B shares have no intrinsic value and are not marketable – held in voting trust – Class B shares of Premier, Inc. are exchangeable by the limited partners for class A shares over 7 years • Vest at 1/7 of initial allocation each year – Premier, Inc. purchased 1/7 of all limited partners’ initial allocation of class B shares on 10/1/13 • Resulted in a big realized gain – Premier, Inc. executed a tax receivable agreement where certain tax benefits are paid to investor owners • Several significant accounting and reporting issues arise from this transaction 37

Accounting for Premier transaction • Lots of questions, not many answers… – Cutoff question for limited partners that have 9/30/13 FYE – How to measure and present ownership interest in Premier LP? • Equity method (expected diversity in practice – many provider previously accounted for on cost method) – How to calculate and present the gain from limited partners’ initial divestiture of class B shares on 10/1/13? • Realized investment gain – How to recognize, measure and present class B shares of Premier Inc. ? • • • Fair value – level 2 pegged to class A share price per NASDAQ? Fair value – level 3 pegged to class A share price with adjustment due to resrictions? Fair value for vested tranches (level 2) and zero value for nonvested tranches? – How to recognize, measure and present accretion /gain in value in class B shares as tranches vest? • Marketable investment gain? Equity investment income? Vendor incentive payments (contra supplies expense)? ? ? – AICPA Healthcare Expert Panel is discussing but no definitive answers yet 38

Accounting for alternative investments • Alternative investments = no readily determinable fair market value – Includes ownership interests in hedge funds, LPs, LLCs, JVs, CCTs, etc. • ASC 958 -320 (former FAS 124) applies only to NFP investments in: – Debt securities – Marketable equity securities • Excludes nonmarketable equity securities • Nonmarketable equity securities are accounted for by: – < 20% ownership – cost method – 20 -50% ownership – equity method • exception for partnerships and LLCs - 3 -5% ownership – >50% ownership or control - consolidate – OR at fair value by electing the fair value option 39

Accounting for alternative investments • Should I report using equity method or at fair value? – If equity method, then: • • Separate line item on face of FS Expanded disclosures including name of individual funds Summarized financial information for total fund All gains and losses are reported above the performance indicator (above the line) – If fair value, then: • Disclose significant valuation methodology and significant inputs • Include in fair value tabular disclosure - Level 2 or 3 – Look at underlying investments – Can possibly use NAV as practical expedient • • Assess potential impairment (are unrealized losses temporary or other-than-temporary? ) Unrealized gains and temporary losses are reported below the line Unrealized losses from OTTI and all realized gains/losses are reported above the line Other required disclosures from electing fair value option 40

Accounting for EHR meaningful use incentive payments • Acute care PPS hospitals – two alternatives – Contingency model • All contingencies must be resolved prior to recognition – Compliance with MU objectives for full reporting period (Stage 1 - initial 90 -day then 365 -day period) – Discharge information contained for cost report year that begins in EHR reporting period » EHR reporting period is Federal fiscal year ending 9/30 » Contingency typically not resolved until last day of cost report year • Incentive payment recorded entirely in period that last contingency is resolved • SEC registrants required to follow contingency model 41

Accounting for EHR meaningful use incentive payments • Acute care PPS hospitals – two alternatives – Grant model • Follows IAS 20 guidance for accounting for government grants and assistance • Recognize income as requirements are met and payment is reasonably assured • Two alternatives for recognition: – Cliff recognition » Determine compliance after EHR reporting period » Income recognized all at once – Estimation recognition » Income recognized ratably over EHR reporting period after “reasonable assurance” of compliance » Judgment call – assessment should be adequately documented » If reasonable assurance is no longer met, de-recognize as change in accounting estimate 42

Accounting for EHR meaningful use incentive payments • Acute care PPS hospitals – Presentation and disclosure • Present separately from patient service revenue as other operating or nonoperating income • Disclose accounting policy for recognition and presentation, description of program, and management estimates – Materiality is always a consideration – Medicare vs. Medicaid • Medicaid EHR programs are distinct from Medicare, unique to each state – Assess the specific requirements of the state Medicaid EHR program before recognizing revenue 43

Accounting for EHR meaningful use incentive payments • Critical access hospitals – Incentive payment is reimbursement of actual cost to acquire, construct, and develop software and fixed assets necessary to meet EHR meaningful use criteria • Different than PPS hospitals where payments are an incentive to use technology, not a reimbursement – Accelerates payment of amounts that would otherwise be reimbursed through the cost report as such assets are depreciated – Diversity in practice as to timing of recognition and presentation – no authoritative guidance • Recognize entire amount within net patient service revenue in period in which meaningful use criteria are met • Recognize entire amount within other revenue in period in which meaningful use criteria are met • Defer recognition upon receipt and amortize to net patient service revenue over related assets’ useful life • Defer recognition upon receipt and amortize to other income over related assets’ useful life 44

FASB GASB 45

FASB vs. GASB • Am I a Government? – “Public body corporate and politic” or meet any of following criteria: • • Election or appointment of majority of officers by state or local government Potential for unilateral dissolution by a government Power to enact and enforce a tax levy. Direct issuance of tax exempt debt (potentially rebuttable classification) – Most governmental healthcare providers are SPGs engaged only in BTAs • • “Special-purpose governments” engaged only in “business-type activities” Follow enterprise fund accounting – full accrual, full economic resources Policy election to follow FASB guidance that does not conflict with or contradict GASBs Typically present single column financial statements for combined reporting entity – Primary government and fully-blended component units (i. e. controlled affiliates) – “Combined” instead of “consolidated” 46

FASB vs. GASB • Who Cares? – Stakeholders and users of financial statements • Investors, board, rating agencies, banks, vendors, community – State and federal regulators • CMS, IRS, FTC, DOL, DCH – Financial statement auditors • Completely different sources of authoritative GAAP • Impact – – – Reporting entity Presentation/classification Accounting recognition and measurement Disclosure requirements Required supplementary information 47

• Impact FASB vs. GASB – Reporting entity • Subsidiaries/controlled affiliates vs. component units – Presentation/classification • • • Financial statement titles Combined vs. consolidated Deferred inflows/outflows of resources Net position vs. net assets Direct method cash flows – Accounting recognition and measurement • • Pension liability Debt issuance costs Loss on refunding Bad debt Interest expense Goodwill Capital assets Insurance recoveries 48

FASB vs. GASB • Impact – Disclosure requirements • • • Fair value of financial instruments Deposit and investment risks Deposit collateral Rollforwards of capital asset, long-term debt, claims liability Pension and other postemployment benefits Combining schedules – Required supplementary information • MD&A • Schedule of funding progress 49

Hospital Authority A - Not restructured GASB Hospital Authority A Community Hospital NFP Foundation Physician Group Community Hospital Nursing home 50

Hospital Authority B - Restructured GASB Hospital Authority B $ LT lease; Authority does not appt NFP Board NFP Health System NFP Community Hospital NFP Foundation Conduit debt Debt svc pmts “Lease pmts” DSH IGTs For-profit Physician Group FASB NFP Community Hospital NFP Nursing home 51

FASB GASB 52

GASB Statement No. 61 The Financial Reporting Entity: Omnibus An Amendment of GASB Statements No. 14 and No. 34 • Effective Date – Fiscal years beginning after 6/15/12 • Impact – Modifies and expands guidance related to recognition, presentation, and disclosure of component units and equity interests within a reporting entity • Modifies criteria for inclusion of a component unit based on financial accountability – Requires a financial benefit/burden relationship in addition to fiscal dependency • Modifies criteria for blending component units – Requires a financial benefit/burden relationship if boards are substantively the same – Requires blending if total CU debt will be paid almost entirely by the primary government 53

GASB Statement No. 61 The Financial Reporting Entity: Omnibus An Amendment of GASB Statements No. 14 and No. 34 • Impact – Modifies and expands guidance related to recognition, presentation, and disclosure of component units and equity interests within a reporting entity • Other presentation and disclosure guidance – – Modifies criteria/requirements for major component units Requires PG to report equity interest in discretely presented component unit Requires disclosure of rationale for inclusion of each CU and the manner of inclusion Allows for single column presentation by SPGs engaged only in BTAs » Requires disclosure of summary combining information for fully-blended CUs (including cash flows) – High potential for restatement • Inclusion, exclusion, and de-blending of CUs in the PG’s reporting entity 54

GASB Statement No. 62 Codification of Accounting and Financial Reporting Guidance Contained in pre-November 30, 1989 FASB and AICPA Pronouncements • Effective Date – Fiscal years beginning after 12/15/11 • Impact – All authoritative guidance is now embodied in GASB codification • Supersedes GASBS 20 for SPGs that are engaged only in BTAs and other similar entities • Eliminates need to determine which pre-1989 FASB and AICPA pronouncements to apply – Can still elect to apply non-GASB guidance that does not conflict with GASB 55

GASB Statement No. 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position • Effective Date – Fiscal years beginning after 12/15/11 – Retrospective application • Impact – Modifies recognition, presentation and classification of certain financial statement elements • Deferred inflows/outflows of resources – “New” financial statement elements – distinct from assets and liabilities – Items previously reported as assets and liabilities will be reclassified • Net position – Residual balance of all other elements on the balance sheet – Replaces “net assets” – Classified in three components: » Investment in capital assets » Restricted » Unrestricted 56

GASB Statement No. 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position Statement of Net Position Assets Cash and cash equivalents Capital assets Total assets Deferred outflow of resources Liabilities Accounts payable Bonds payable Total liabilities Deferred inflow of resources Net position Net investment in capital assets Restricted Unrestricted $ 30, 000 125, 000 155, 000 10, 000 20, 000 22, 000 8, 000 105, 000 30, 000 57

GASB Statement No. 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position • Impact – Classification as deferred inflow/outflow of resources is not a judgment call • Only assets and liabilities specifically addressed by GASB guidance should be reclassified • GASBS 63 specifically identifies deferred change in fair value of hedge as deferred inflow/outflow of resources • GASBS 65 identifies additional assets and liabilities to be reclassified as deferred inflows/outflows of resources 58

GASB Statement No. 64 Derivative Instruments: Application of Hedge Accounting Termination Provisions – an Amendment of GASB Statement No. 53 • Effective Date – Fiscal years beginning after 6/15/11 • Impact – When a swap counterparty or swap counterparty’s credit support provider is replaced, the hedging derivative relationship terminates unless an effective hedging relationship continues • Swap counterparty or swap counterparty’s credit support provider is replaced with an assignment or in-substance assignment – To maintain effective hedge status, collectability must be assured and replacement swap agreement must have identical terms as original swap agreement with no gap in coverage – If all criteria are not met, recognize deferred change in fair value of prior hedge, assess new hedge for effectiveness, account for accordingly – Potential for restatement 59

GASB Statement No. 65 Items Previously Reported as Assets and Liabilities • Effective Date – Fiscal years beginning after 12/15/12 • Impact – Identifies specific items currently recognized as assets or liabilities that should be reclassified as a deferred inflow/outflows of resources – Deferred inflows/outflows of resources • Deferred charge from refunding of tax exempt debt – Amortize to interest expense over shorter of new or old debt • Nonexchange transactions received or receivable before time requirements are met (but after all other eligibility requirements have been met) • Deferred gain/loss on sale-leaseback transaction 60

GASB Statement No. 65 Items Previously Reported as Assets and Liabilities • Impact – Not deferred inflows/outflows of resources • Debt issuance costs – Expense all debt issue costs except insurance costs when incurred – Report prepaid insurance costs as asset • Nonexchange transactions received or receivable before eligibility requirements have been met • Lease assets and liabilities – Initial direct costs of operating leases expensed when incurred – High likelihood of restatement from write-off of debt issuance costs 61

GASB Statement No. 68 Accounting and Financial Reporting for Pensions: An Amendment of GASB Statement No. 27 • Effective Date – Fiscal years beginning after 6/15/14 – Retrospective application to extent practical (see GASB implementation guidance) • Impact – Requires employer sponsors of defined benefit pension plans to report an asset or liability for the difference between net pension obligation and fair value of plan assets • Previously only recorded asset/liability based on current funding (annual required contribution) – High likelihood of restatement from recording net pension asset/liability 62

GASB Statement No. 68 Accounting and Financial Reporting for Pensions: An Amendment of GASB Statement No. 27 • Impact – Requires use of entry age actuarial cost method for estimating pension liability – Annual pension expense includes: • • • Benefits earned Interest on pension obligation Projected earnings and other net position Changes in benefit terms Amortization of changes in net pension obligation due to changes in assumptions and differences in actual experience – Initially flows through below-the-line, then amortized to pension expense over a closed 5 -year period 63

GASB Statement No. 69 Government Combinations and Disposals of Government Operations • Effective Date – Fiscal years beginning after 12/15/13 – Prospective application • Impact – Provides guidance on accounting for combinations of legally separate entities where continuing organization is a governmental entity • Government acquires/combines with another government, nonprofit entity, or for-profit • Provides guidance where there previously was none – used to look to analogous FASB guidance • Does not apply when acquiree continues to exist as a separate legal entity – potential CU – Proper accounting depends on whether transfer, merger, or acquisition 64

GASB Statement No. 69 Government Combinations and Disposals of Government Operations • Impact – Proper accounting depends on whether transfer, merger, or acquisition • Transfer – transfer of operations that do not constitute legally separate entity without significant consideration – Record carrying values of assets and liabilities • Merger – combination of legally separate entities without significant consideration – Record carrying values of assets and liabilities • Acquisition – Acquisition of legally separate entity or its operations in exchange for significant consideration – Assumption of liability is consideration – Record assets and liabilities at acquisition value (i. e. market-based entry price) » If consideration exceeds acquisition value, then record deferred outflow of resources and amortize over estimated useful life » If acquisition value exceeds consideration, then reduce values assigned to noncurrent assets 65

GASB Statement No. 70 Accounting and Financial Reporting for Nonexchange Financial Guarantees • Effective Date – Fiscal years beginning after 6/15/13 – Retrospective application • Impact – Requires governmental entities that extend nonexchange financial guarantees to record a liability and expense if it is more likely than not that payment will be required • Applies only to guarantees extended without exchange of equivalent consideration • Requires qualitative approach in evaluating likelihood of payment – More like than not means >50% chance of payment – Assess factors such as financial condition, breach of contract, initiation of bankruptcy, etc. • If more likely than not, then record liability and expense – Measure at discounted present value of best estimate of future cash outflows 66

GASB Statement No. 70 Accounting and Financial Reporting for Nonexchange Financial Guarantees • Impact – Governmental entities that receive nonexchange financial guarantees should only record the contingent gain upon payment • Unless PG extends guarantee to CU, then CU records receivable to offset recorded PG liability – Requires certain disclosures for all nonexchange financial guarantees extended • Description of the guarantee (type, length, relationship, other arrangements) • Total amount of all guarantees outstanding at reporting date • If liability recorded because payout is more likely than not, required to disclose: – Roll-forward of liability from prior year to current year end – Any changes in estimates impacting revenues/expenses – Total cumulative payments that have been made under the agreement 67

Other GASB projects • Fair value measurement and application – Approach is divided into two parts: • Definition of fair value and fair value measurement – will likely align with ASC 820 definitions and market-based approach to fair value • Fair value measurement and application – specifically identifying assets and liabilities that should be recorded at fair value and how they should be valued. – Alternative Investments (private placements, hedge funds, REITs, partnership interests) will be valued using NAV as “practical expedient” like NFPs per ASC 820 – Investments in certain Entities that Calculate Net Asset per Share – Will likely require levels disclosures, inputs to valuation methodology, disclosure of significant unobservable inputs into Level 3 investments, etc. – Status: • Preliminary views published, currently in comment period • Exposure draft expected May 2014 • Final standard expected December 2014 68

Other GASB projects • Lease accounting – Added to project agenda April 2013 – Looking to piggy-back off of FASB/IASB lease project – Project will provide a basis for the board to consider whether current operating leases meet the definition of assets or liabilities. – “Should there be a distinction between operating and capital leases? ” – Very preliminary at this point as they have set a date to begin discussions on the topic at the September 2013 meeting – Status • Expect to issue Exposure Draft in December 2014 • Final standard expected in December 2015 69

Other GASB projects • GAAP hierarchy – Want to establish a hierarchy for GAAP similar to the hierarchy established by the AICPA in 1992 – There would be two levels of GAAP for GASBs • Authoritative – GASBs including implementation guides • Non-Authoritative - GASB concept statements, FASBs Codification, AICPA (unless specifically agreed upon by GASB) – Status • Expect to issue Exposure Draft in February 2014 • Final standard expected in June 2015 70

QUESTIONS? 71