by Michael Wade, CPA, Watkins Uiberall, PLLC
In today’s world of healthcare and financial reporting for health systems, assisted living programs and health insurance, it’s imperative to stay connected with the updated accounting standards and regulations in the industry. As the outside auditor or the inside CFO of a company in this industry, maintaining this compliance can require continuous monitoring throughout your career as current legislation dictates several of the accounting and financial reporting standards that affect the healthcare industry. One of the most important set of standards that are crucial for GAAP compliance in this industry are revenue recognition updates.
Regarding the changes to the new update, FASB has decided to base the new standard on a core principle for recognizing revenue: revenue should be recorded only when services are provided or goods are transferred to customers at the agreed price. To summarize the highlights of the new standard, healthcare organizations will now determine revenue recognition based on the following 5 factors:
- Identify the contract with the customer.
- Identify the performance obligations in the contract that are to be met.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies the performance obligations
Some of the healthcare type industries that will be affected by the new standard are continuing care retirement communities, hospitals and health systems, and third-party payer settlements. For hospitals and health systems specifically, one example of a challenge that organizations in this healthcare industry will face is the providing of emergency services to uninsured or self-pay patients. Under the new standard, the organizations must determine all the factors listed above. These considerations will impact both the timing and amount of revenue that is ultimately recognized.
FASB, AICPA and several trade associations have begun studying the issues facing healthcare organizations, but formal guidance is not expected soon, as most guidance associations have taken a “wait and see” attitude before developing formal guidance. As noted earlier however, several task forces are being put together to assist in implementation guidance along with accounting firms across the country taking on the initiative to help their clients in the challenges their facing with interpreting and implementing the requirements from the new standard.
Both public and non-public healthcare companies should prepare to adopt the new standard requirements by reviewing their current revenue cycles and recognitions policies for areas that will be affected by the new requirements. As with the industry itself, healthcare accounting and financial reporting standards are constantly evolving and compliance in this industry will require dedicated individuals with high-levels of experience and expertise.