The Impact of Revenue Recognition on Healthcare
Revenue Recognition: ASU 2014-09, Revenue from Contracts with Customers (Topic 606), is effective for public business entities, and certain not-for-profit entities that have publicly traded conduit (or direct) debt, with annual reporting periods beginning after December 15, 2017. All other entities are required to adopt this by annual reporting periods beginning after December 15, 2018. Entities may now early adopt.
This new standard may result in significant changes to the timing and amount of revenue recognized by an entity. AAFCPAs advises that healthcare provider clients prepare now to determine how the new Revenue Recognition Standard affects your financial picture, your stakeholders, and the way you do business.
How May the Standard Impact Healthcare Providers?
- The new standard may lead to delayed revenue recognition, especially in incentive or performance based contracts where certain performance obligations have to be met in order to record revenue. This may, at times, misalign the patient revenues and patient expenses.
- Third party payor contracts will have to be analyzed and bundled in order to be accounted for properly. Each “bundle” may need to be treated differently.
- Variable consideration will need to be addressed for all scoped in revenue types in order to determine accurate transaction prices. These prices may no longer match cash value received. It may be difficult to distinguish between bad debt and variable consideration.
What Revenue Streams May Be Affected By The New Revenue Recognition Standard?
- Fee for service, incentive based and capitated payments will be affected.
- Certain revenue streams will be scoped out, such as government grants and contracts, and charity care which may or may not include self-pay revenue.
The new standard will require significant management judgment in addition to changing the way many healthcare organizations recognize revenue in their financial statements.
Healthcare organizations must understand and consider the impact of recognized or deferred revenue on any debt covenants, as well as any potential concern that financial statement users may have regarding profitability changes. It is important to be proactive so you are able to communicate with lenders, grantors, and the Board, and mitigate any concerns that may arise regarding your change in financial position.
If you have any additional question about how the ASU 2014-09: Revenue from Contracts with Customers will impact you directly, please contact your AAFCPAs partner, or Matt Hutt, CPA, CGMA at 774.512.4043, firstname.lastname@example.org, or Courtney McFarland, CPA, MSA at 774.512.4051, email@example.com.
AAFCPAs’ Revenue Recognition Task Force
AAFCPAs’ Revenue Recognition Task Force includes senior level professionals who have been devoted to understanding and interpreting this ASU since the Financial Accounting Standards Board (FASB) announced the project.
Technical Accounting Advisory
Understanding and implementing accounting standards can be complex, time-consuming, and often requires requisite skills and expertise not found on your internal finance team. AAFCPAs provides financial management assistance on these complex technical accounting issues, allowing clients to confidently apply the standard with greater efficiency and ease. Learn more about how AAFCPAs can help you implement the Revenue Recognition Standard.