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Healthcare Organizations Need to Prepare for Revenue Recognition Changes

By Linda Marie Pearson, CPA, CFE

Prepare for Revenue RecognitionThe implementation of FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts with Customers (Topic 606) will affect how healthcare organizations recognize revenues. The purpose of the change is to eliminate industry specific revenue recognition rules and establish a universal rule for all companies.  Here is what you need to know about the change:

  Proposed Effective
  Date

Private companies must implement the change for annual periods beginning after December 31, 2018.  Early adoption is permitted.

  Who is Affected?

Applies to all entities.

  Main Provisions

 

1.  Evaluate whether there is a substantive contract.

2.  Identify the promises made to the customer and whether they should be accounted for separately.

3.  Determine the purchase price and assess the amount expected to be received, including estimate any contingencies. This provision causes Healthcare Organizations to record as revenue the amount expected to be received which, in this industry, can be different than the amount billed. For example, a procedure may be charged at $800, however uninsured patients will most likely pay less.  In this example, if the Healthcare Organization expects to collect only $500, then revenue is recorded at $500, regardless of what is billed.  Under current GAAP, the Healthcare Organization would have recorded $800 as revenue and $300 as bad debt expense.

4.  Allocate the amount to each promise in the contract.

5.  Record the revenue, either all at once or over time, as it satisfies the promises made to the contract.

For more than 16 years, I have been helping clients interpret and apply U.S. GAAP.  Over this time, I have trained clients and developed tools to assist management in becoming self-sufficient in making these determinations.  If you need assistance and would like to discuss this matter further, please contact me at 401-752-0566 or lpearson@sansiveri.com.

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