Entities of health care recognize revenue for which a little portion of the total amount is billable or billed or the final collection is not assured reasonably at the time the services are rendered. There have been concerns raised by the constituents that these kind of accounting practices lead to gross-up revenue for unexpected amounts to be collected in the end. To add to it, due to the fact that entities of health care make their own decisions as far as bad debts and adjustment to revenues is concerned, the decisions are different from one another and it is not easy to compare them hence it is not easy for users of financial statements to make an analysis.
The main purpose of this proposed paper is to offer financial statement users with wide transparency about entities of health care allowances and net revenue for accounts that are doubtful. This paper will give financial statement users information that will assist in the assessment of the entities’ sources of the changes and net revenue in its allowance for accounts that are doubtful this means; an element that is a combination of disclosures which are linked with the reconciliation of the activity taking place in the doubtful accounts’ allowance for the time frame when major source of revenue occurs. The amendments need for the health care entities to state the bad debts provision as a reduction from revenue in their operations statement.
After the board meeting on ratification in December 1st 2010, input from a constituent was received by staff and it brought forth a few concerns of the health care entities that is; doubtful accounts allowance, bad debts provisions, disclosure of net revenue or net discounts and contractual allowances and presentation (Weirich, 2012).
The agreement can have a wider effect than the board or task force may have thought about so far. An example is, the decision that needs a health care entity to show its provision for bad debts as a part of net revenues may need determination of the formulas and the effect of state income tax allocation, revision of financial statements of pro forma that are linked with acquisitions and mergers, revision of debt covenants and compensation metrics, revision of guidance revenue to investors/analysts, making changes in the systems of information technology and finally recasting of forecasts and budgets. These issues bring out various reasons for concern.
The agreement is not clear on how to show bad debts from business activities that are noncore. For example imagine that ten percent of an entity’s business is familiar with noncore business activities and the remaining ninety percent is familiar with the provision of health care services very much like renting property that is real and the sale of medical services. The constituent pinpointed that the consensus does not help realize whether provision for bad debts was in anyway linked to these noncore activities and whether this should be brought forward as a revenue component.
The board agreed in 8th December 2010 to re-expose the agreement made by the EITF during their 19th November 2010 meeting on the 09-H issue and due to the concerns on the implementation and potential effects that may come about due to this agreement. Sixty days was the official period for comments to be made on the proposed update (Weirich, 2012). The proposed update amendments would eventually affect all of the revenues for entities that lay within the range of the health care entity’s Topic 954.
In the suggested update, the amendments need an entity of health care to be able to transform its statement presentation on operations by classifying once again the bad debts provision from an expense on operations to a reduction from revenue or net of discounts and contractual allowances. On top of that, there is a requirement for a health care entity that gives high-tech disclosure to give provision on how it considers collectability in figuring out the timing and amount of bad debt and revenue expenses to be considered (Braggs, 2011). Required by the amendments also is the revenue disclosures together with a reconciliation of the happenings in the allowance in case of any doubtful accounts by major type or pay.
How the main provisions differ from current US generally accepted accounting principles (GAAP) and the improvement.
The presentation of the operation’s statement and addition of brand new disclosures that are not needed by the GAAP at present is what the proposed update amendments would most likely have to change. The transformation of the operation’s statement presentation is an improvement from the GAAP currently as it would lead to the presentation of a certain amount of net revenue that is nearer to the amount expected to be collected by the health care entity (Braggs, 2011). The bad debts provisions are still needed to be revealed in a spate line as a reduction from revenue in the operation’s statement. The new disclosures help financial statement users to properly grasp customer credit risk and how a health care entity puts into consideration collectability in the application of policies of revenue recognition.
When the amendments come to be effective
The most effective date will be known once the board/task force put into consideration the feedback gotten on the proposed amendments. The amendments that are in line with the bad debt’s provision presentation in the operations statement are applied retrospectively to the former presented periods. The amendments together with their required disclosures in the suggested update would be given in the subsequent reporting and adoption periods.
At the moment IFRS does not need disclosures or presentations that are similar as provided for in the amendments of the proposed update. The board has produced an exposure draft, Revenue Recognition (topic 605) however: revenue from customer contracts that need the measurement of net revenue at the expected entity amount for collection and the disclosure of disaggregated information of revenue (Braggs, 2011).
The board and the task force normally welcomes organizations and individuals to offer their comments and ideas on any big or small matter in connection to this proposed update, especially if the issues need to be addressed with immediate effect. Comments are especially helpful if they come from respondents who agree with the guidance proposed and even to those who do not agree with the proposed guidance. Comments are worth a lot if they help in the identification and clear explanation of the issue and question to which there is a relationship (King and Pappas, 2011). Any of the respondents who are not in agreement with the guidance that has been proposed are requested by staff or the task force to suggest or come up with other alternative or supportive ideas to come up with a solution or help in specific reasoning of the issue.
The following shows the effective and transitional information that is in line to standards of accounting up to date in health care entities. Disclosure and presentation of doubtful accounts allowance, bad debts provision and disclosure and presentation of net revenue: The content that is on hold linked to this paragraph will be effective for the fiscal years starting with after or on the date that will be inserted for exposure (Braggs, 2011).
Each entity shall apply content that is pending and that which is linked retrospectively to this paragraph with an exception of the initial adoption period, the entity of reporting should not necessarily give disclosures that are otherwise needed by any pending content that is in relation to this paragraph for any past periods that are shown for purposes of comparison . The disclosures that are needed by the content that is pending and which is linked to this paragraph shall be given using a prospective basis from the beginning. In the time that initial adoption is taking place disclosures that are comparative to the content that is pending and is linked to this paragraph will be needed for only periods that are presented soon after the adoption date (Clutterbuck, 2001).
Members of the Financial Accounting Standards Board took part in approving of the amendments in the proposed update with a unanimous vote. The considerations and synthesis of the task force/ board members in coming up with a conclusion for the proposed update will include the board’s basis for giving an explanation to their own conclusions when required to supplement the consideration put forward (Braggs, 2011). Also included is the reason for allowing some of the approaches used while rejecting other approaches in the process. Specific board members and the task force pull greater weight when it comes to some particular issues than others.
The health care entity unlike other industries does not need to assess if collectability is in a reasonable manner assured before revenue recognition. A health care entity gives provision for services in which the collection ultimately of a portion or all of the amounts billable or billed cannot be predicted by the time the services are rendered (Hendry et al., 2002). The health care entity under industry practice records revenue from patients of self-pay at the amount of gross charge together with a relatively high provision of bad debt in the service period. This practice makes it hard for the financial statement users to assess the recorded revenue’s quality as it may show amounts that have not been collected ultimately. On top of this, it is hard for the financial information users to compare various entities of health care as these entities have a large discretion in the setting of their policies, discount policies and the gross charge rates for charity care.
As a first step, just until the completion of the IASB and FASB’s joint revenue recognition project, during an EITF meeting on 16th of September 2010 the board came to an agreement on the exposure of the issue on EITF no. 09-H, health care entities that include; doubtful accounts allowances, bad debts provision and disclosure and presentation of net revenue and handed out a proposed update on accounting standards on the 6th of October 2010 where enhanced disclosures were needed on the net revenue sources and a revision of the happenings of the doubtful accounts allowance (Braggs, 2011).
The proposed update comment period lasted up to 5th of November 2010 with staff receiving ten letters of comments. Some of the comments on the letters by respondents to the proposed update showed that they would rather the board allow the provision for bad debt presentation to be as a net revenue reduction in the event of the operation’s statement. The board members additionally pinpointed their preference of linking the amounts related to continuous transformation of credit risks and the amounts of the provision that represent concession pricing. Other board members worried about the ability of this kind of approach to operate and were of the view that there is no occurrence of such bifurcation in the present GAAP; no information was to get lost on the basis of being required to present expenses on bad debt on a line item that is separate, such as revenue reduction (King and Pappas, 2011).
The board came up with the idea that the presentation for bad debts be carried out separately as revenue reduction unlike the operating expenses and to enhance the health care entity disclosures putting in mind the timing and amount of bad debts and revenue. The board made a decision to require disclosures that have more detail about the revenue sources together with a reconciliation of the doubtful accounts and allowances of the activity (Weirich, 2012). The board realized that the provision for bad debts presentation in the operations statement will show net revenue that is after the bad debt provision amount that is more close to the amount expected to be collected by the health care entity. The board also realized that all the new disclosures will offer users of financial statements with wider transparency on the allowance and net revenue of the health care entity for any doubtful accounts by main source or payor of revenue.
The determination of an effective date will occur once the board members look at the feedback on the proposed update amendments. The amendments that go along with the operations statement presentation will be applied to all prior presented periods retrospectively. The disclosures that are needed by the amendments in the proposed update will be offered in the subsequent and adoption reporting periods. To enhance financial information comparability the board members choose to require presentation of retrospective application of the operations statement of presentation. The members were of the view that operationally it should not be hard to transform the presentation as it is fixed to the reclassification of bad debt provision from a line item in the operating expense to revenue reduction.
As far as the new disclosures are concerned, respondents in the letters were of the view that it might be hard to get information that is needed to go along with the guidance of previous periods, especially for disclosure in tabular reconciliation of doubtful accounts in the allowance of the activity. The board agreed to pave way for prospective applications of all the disclosures needed (Braggs, 2011).
Some of the respondents indicated about the proposed update the need for important changes in the system in order to be able to gain information by payer sources that are major especially if the requirements include doubtful accounts and allowance presentation from patients who do not have separate insurances from the doubtful accounts allowances from those with co-payments and deductibles.
The board realized that significant transformation to the system should really not be required as the intention of the disclosure is to be consistent with the way an entity manages its business currently for example, the assessment of credit risk. The board realized that entities may identify with major sources of payer in various ways and they decided that coming up with payer sources that are prescribed would lead to the disclosure becoming too rigid and would not give the users who are on the same level of transparency what management is able to offer through the determination of payer sources on the notion of how its business is managed. Soon after the ratification board meeting on 1st December 2010, the staff got input from constituents that brought about a few concerns on the issue of 09-H (Braggs, 2011).
The agreement might have a wider effect than the board taskforce is willing to consider so far. An example is the decision for the health care entity need to present bad debts provisions as a net revenue component may need more forecasts and recasting of budgets, transformations of the information technology systems, revision of revenue guidance to the investors/analysts, compensation metrics revision and covenants of debt, revision of financial statements of pro forma that are linked to acquisitions and mergers, and deciding on the effect to the state income tax allocation formulas.
The consensus is not clear on hoe to present the bad debts of the activities of noncore businesses. For example imagine that ten percent of an entity’s business is familiar with noncore business activities and the remaining ninety percent is familiar with the provision of health care services very much like renting property that is real and the sale of medical services. The constituent observed that the agreement does not address the issue of whether the bad debts provisions that are linked with these noncore activities should be applied as a revenue component.
The board in a meeting held on 8th December 2010 agreed to re-expose the reached consensus by the task force/ board members in the meeting that was held on the 19th of November 2010, specifically on this issue and because of the concerns about the implementation and potential effects that may come about as a result of the agreement. The staff sat down and talked it out with the board members about the decision and they did not get any objection from the board members (Braggs, 2011).
The main purpose for the financial reports is to give information that can be of use to capital market participants, donors, creditors and potential and present investors in order to come up with rational resource allocation decisions, credit and similar rational investments. The benefits however, of giving information solely for this reason should be able to explain the related costs. Various users of financial information, donors, creditors and potential and present investors benefit from the upgrades present in financial reporting while the investors bear the costs of implementing new guidance. The analysis of the benefits and costs by the board members in the issuing of new guidance is in an unavoidable way more qualitative than quantitative as there does not exist any method that can measure in an objective way the new guidance implementation costs or be able to quantify in financial statements the value of improved information.
The task force does not expect that the entities might incur extra costs due to the proposed update amendments. The amendments do not develop requirements that are new to accounting other than transforming the operational statement of presentation through the reclassification of bad debt revision from an expense of operations to revenue reduction (net of discounts and contractual allowances) and offering extra disclosures where information is readily available given that the disclosures are focusing on how the business is able to manage its entities. The task force is of the opinion that the proposed update amendments will bring about comparisons between various health care entities that in the process of handling the business entities might make varying judgments on the adjustments to revenue and bad debts. Due to this the task force/board members are of the view that the advantages of the disclosures that are needed definitely outweigh the associated information provision costs.
Bragg, S. M (2011) Wiley GAAP: Interpretation and application of generally accepted accounting principles 2011. Accounting Journal, 328 (2):28-56.
This document uses the data collected for Health entities 2011, a major population survey
Clutterbuck, P. (2001). Building health entities: Implications for policy and practice. Ref Type: Generic
The paper briefly describes the Financial accounting standards and the research process that was part of it. It then does a social capital analysis of the initiative using the bonding and bridging to determine its benefits.
Hendryx, M., Ahern, M., Lovrich, N., & McCurdy, A. H. (2002). Access to health care and community social capital. Health Services Research, 37, 87-103.
This study examines accounting variability in access to health care across 22 major U.S. cities. The researchers study the reported experience with health care entities in the past and review the amendments.
King M. and Pappas-Rogich M. (2011) Implementing Health care entities standards to promote the health. Geriatric Nursing, 32(6):459-64.
This paper describes the amendments and in light of this empirical evidence it then examines the various benefits of the amendment
Weirich, T. M. (2012). Accounting and auditing research and databases: Practitioner’s desk reference. Michigan: John Wiley and Sons.
This article draws fundamental accounting principles, testing the proposed amendment conceptual model and reviews perceived impact on health.