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Revenue recognition and healthcare: Well begun is half done

September 26, 2017 Article 5 min read
Dawn Stark Christa LaBrosse
Healthcare providers face unique challenges when implementing the new principles-based revenue recognition standard. With the deadline approaching, these best practices can help support a smooth transition.

View down white hospital hallway.

As organizations have prepared to implement the new revenue recognition standard set forth by the FASB, some efforts have gained recognition as best practices while others have, through a process of trial and error, proven to be somewhat less effective. For those in the healthcare field, these successes and missteps can offer valuable insight into making sure that the process runs smoothly as the deadline for implementation draws near.

A quick review of the steps to implementation
The major steps organizations should take to implement the new standard include:
  1. Assign staff to be experts and organize a project team.
  2. Learn about the new standard and teach those affected.
  3. Determine areas of judgment.
  4. Inventory revenue streams and related contracts.
  5. Determine the GAAP change.
  6. Evaluate the impact of the GAAP change on financials, processes and systems, and operational/performance metrics.
  7. Determine the transition approach.
  8. Develop interim disclosures (if required).
  9. Educate key stakeholders.
  10. Execute necessary changes.

No matter where an organization is among these steps, it seems as though the executives feel like they aren’t as far along as they “should” be. However, they often aren’t giving themselves enough credit for what they’ve completed, and they usually aren’t aware of lessons learned from earlier adopters that can make it much easier to catch up.

First, understand that your financial statements are going to look different.

Best practices by implementation phase
Let’s start with a look at the different phases of the implementation process and how some early adopters have overcome some of the challenges encountered to date:
  • The initiation phase (steps 1-4)
    • Challenge: The inventory of contracts and terms in this phase requires extensive work with a variety of individuals from within the organization. Many healthcare providers, particularly continuing care facilities, may have several contracts with a patient/resident. Some of those contracts could be explicit, tangible, and easily analyzed, while others could be implicit agreements that are harder to quantify.
    • Best practice: Cast a wide net when inventorying revenue streams and related contracts. Make sure your project team sits down with various individuals from across the organization and really challenge them to think about how the organization generate revenue to identify all explicit and implicit agreements. When beginning this process, give some examples of the explicit versus implicit agreements to ensure the project team is able to develop a complete inventory of contracts.
  • The gap and impact analysis phase (steps 5-9)
    • Challenge: Understanding and quantifying the changes to revenue that occur under the new standard. Even if the new recognition process results in substantially similar revenue numbers under the new rules, the additional information and disclosures needed to explain the process in the financial statements will change.
    • Best practice: Document the work you do in this phase thoroughly from start to finish. Review AICPA and FASB interpretations of the guidance to see how your conclusions compare. Remember that a key differentiator between this principles-based standard and the previous rules-based standard rests in the supporting documentation you provide to explain your process.
  • The implementation phase (step 10)
    • Challenge: Having a process in place to capture the data necessary under the new standard.
    • Best practice: If you must provide financials based on the new standard in 2018, a best practice is that your process is ready to track the new information at the start of the year. In a worst-case scenario, you could use the information generated under the old standard and perform calculations that reflect the impact of the new standard.
Best practices: Staffing
On top of identifying additional revenue streams that may track through their department, your IT team will also need to be looped in early. You’ll need them to make sure that historical data is available to support portfolios that are established to determine collectability and transaction prices. Chances are that your system already captures the information needed, but it’s also likely that no one has built a report that combines all of the relevant data in a form that flows easily into the new reports you might need.

The closer you are to your deadline in either 2018 or 2019, the greater the demand this transition will place on your people who can figure out these answers. If you’re behind on the process and you need to reflect the new standard in your first-quarter interim financials in 2018, you’ll almost certainly be devoting your staff to this process full time. You will undoubtedly have to rely heavily on the people who have full-time jobs in your organization to support the transition process with the institutional knowledge they have regarding your specific contracts and processes. That may cause a need for temporary support to keep the day-to-day administration of the facility running smoothly. Plan for temporary support to perform administrative tasks that might be common among other healthcare providers so that you can free the employees with specific knowledge of your systems to focus on the transition.

It’s certainly possible to get on top of this new standard and get things implemented on deadline, but there’s no time left to delay.

Best practices: Going live
  • First, understand that your financial statements are going to look different. Even if you don’t significantly change the way you recognize revenue under the new standard, you’ll disclose more about the thought process and analysis that goes into the revenue number. With principles-based accounting, the key will be explaining how you arrived at a number, rather than presenting a number prepared under a more rules-based environment that provides for a more consistent understanding by readers. Refer to guidance from the FASB and the AICPA industry task force on how those disclosures should look.
  • Next, review your financials to determine if your implementation of the standard caused significant changes in income statement and balance sheet accounts. If your organization has financing agreements that are based on certain amounts of revenue or receivables or other balance sheet accounts, your debt covenants could be affected. You need to reach out to your banks and work to make sure that debt covenants aren’t breached.
Other best practices
  • Exclude contribution revenue, if applicable, from the analysis. Focus on contract revenue
  • Identify what contracts, if any, are substantially similar enough to be evaluated as a “portfolio” of contracts, rather than performing an individual analysis on a contract-by-contract basis. Portfolio grouping can reduce the amount of time spent analyzing individual contract obligations. On the other hand, if any contracts can be joined together as a portfolio with common recognition standards, make sure that their terms remain similar from year-to-year.
  • Carefully determine a transaction price. The new recognition standard could require that historical models for estimates of collectability be revised.
  • In the continuing care arena, decide what constitutes a performance obligation related to the resident.
“Well begun is half done…”
Of all the advice we could offer to healthcare providers about implementing the new standard, perhaps the most important tidbit can be attributed to famed fictional nanny Mary Poppins: “Well begun is half done.”

It’s certainly possible to get on top of this new standard and get things implemented on deadline, but there’s no time left to delay. So get going. And if you run into challenges, we’re here to help.

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