By Hogi Kurniawan
As 2019 wraps up for healthcare facilities, CFOs and budget directors are facing one of the busiest periods their industry has ever seen. If the first days of implementation for the Affordable Care Act (ACA) seemed daunting, the accounting involved in recognizing revenue under the new standards set by the Federal Accounting Standards Board (FASB) can be downright intimidating.
There are many new disclosures and documentation requirements that have not been part of previous year-end planning exercises. Now, heavy loads of information are being required to accompany the financial statements of all private healthcare companies. The new revenue recognition standards were applicable for public companies last year.
This means that private practices, clinics and hospitals will have to verify all streams of revenue and their related contracts as well as purchase orders. Any change or investment implemented over the past year that may have had an operational or financial impact, such as readmission prevention measures and anti-microbial planning, should be evaluated as well.
Revenue recognition standards have been a point of controversy since they were first introduced in 2014 as Accounting Standards Update (ASU) 2014-09. Then, there were four amendments adopted in 2016:
- ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date
- ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)
- ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing
- ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients
The standard paints every sector of the economy with a broad brush and applies similar accounting practices to areas that have traditionally followed very different guidelines. Healthcare is certainly one of these areas as it has unique revenue models, largely driven by insurance and government subsidies – each of which will need ample documentation supporting the final adoption and implementation impact of the new revenue standards.
Depending on the size and scope of the healthcare operation, this “information dump” will likely constitute two to three times more documentation – not to mention research, analysis, and documentation – than has been required in the past.
It is an undertaking that will likely expand beyond the walls of the CFO’s office as most department heads will likely be involved with researching and securing documents. Even some of the more subtle changes could require full top-down changes at an organization. This will include the cooperation of lower-level employees as well as the C-suite executives and external stakeholders or investors.
This new approach puts a greater emphasis on more details, judgment, and disclosures.
Existing revenue recognition guidance lacks consistency across industries. This new standard is aimed at improving comparability and eliminating gaps in guidance. Depending on an entity’s existing business model and revenue recognition practices, the new standard could have a significant impact on the amount and timing of revenue recognition, which in turn could impact key performance measures and debt covenant ratios, and ultimately could affect contract negotiations, business activities, and budgets.
As a result, chief executives and CFOs not only have to reassess the way they run their companies, many may have to implement changes at the middle management and point-of-sale levels as well. These situations could have wide-reaching effects on ongoing resource management, business processes and policies, and current IT infrastructure.
Hogi Kurniawan, CPA, is a senior audit manager at Haskell & White, one of Southern California’s largest independently owned accounting, auditing and tax consulting firms. He was an audit manager for a Big Four firm working with both public and private companies after graduating with a bachelor’s degree from the Indiana University Kelley School of Business. He is a member of the American Institute of Certified Public Accountants.