OVERVIEW

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments", which significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The most significant change in this standard is a shift from the incurred loss model to the current expected credit loss model (?CECL?). Under the standard, disclosures are required to provide users of the financial statements with useful information in analyzing an entity?s exposure to credit risk and the measurement of credit losses. Financial assets typically held by healthcare entities that are subject to this standard include, but are not limited to, resident accounts receivable.

Changes to the financials under ASC 326 include:

• The allowance for doubtful accounts will now be called the allowance for credit losses.
• Any reference to bad debt expense should be called credit loss expense.
• The amount of the allowance for credit losses should be noted on the balance sheet.
• A roll forward of the allowance for credit losses should be included in the footnotes.
• The policy footnote regarding the calculation of the allowance for credit losses will need to be expanded to include additional detail of management?s methodology for calculating the allowance based on historical experience, current conditions, and reasonable supportable forecasts. This would include detail of the risk characteristics considered (aging categories, customer credit rating etc.)

CECL requires entities to measure expected losses for financial assets based on historical experience, current conditions, and reasonable supportable forecasts. Developing the CECL allowance requires judgment and selection of methods that are appropriate for their industry and their business practices to determine the proper credit loss.

There are many factors to consider as part of the methods for calculating an allowance such as the credit risk of your major payors (i.e., governmental payors, commercial insurers, etc.). Do you have the correct consideration for credit risk, specifically with regards to your current price concession and any component that is attributable to credit risk (generally self-pay accounts).

Healthcare entities, under ASC 606, already utilize sophisticated methodologies for calculating the amounts that they expect to collect from contracts with customers based on current contracts with payors. Oftentimes accounts receivables are recorded net of implicit and explicit price concessions. Some entities also may record an allowance for credit losses, to represent risk of loss not contained within the price concessions. This allowance is most commonly applicable for entities that already perform an evaluation of the resident or patient?s ability to pay prior to providing services, such as in a long-term care facility.

IMPLICIT PRICE CONCESSIONS VS. CREDIT LOSSES:

Implicit price concessions and credit losses (bad debts) are all attributable to instances when a provider renders services but ultimately receives less consideration than the amount to which it is contractually entitled. The financial statement presentation and disclosure requirements for implicit price concessions and credit losses (bad debts) differ significantly. The provision for credit losses (bad debts) is a period expense that is reported separately. On the other hand, implicit price concessions represent reductions of revenue.

The distinction between whether a healthcare entity has offered an implicit price concession or suffered a credit loss is important because it affects the timing and classification of recognition in the income statement. Under ASC 606, subsequent changes to estimates of implicit price concessions are accounted for as changes in the transaction price for the revenue transaction and are recorded as an adjustment to revenue. However, a credit loss on a receivable recognized pursuant to ASC 326 is an expense. The key consideration is whether the adjustment is due to a change in the amount the provider was willing to accept in exchange for services provider (implicit price concession) or if the adjustment is a write-off of an amount to which the provider believed they were entitled, but ultimately were unable to collect due to a credit loss. Providers will need to apply judgment to determine whether an amount that ultimately becomes uncollectible is truly a credit loss or an additional implicit price concession.

CONCLUSION

Healthcare entities will have to adopt the new standard on January 1, 2023, which will result in a more thorough analysis of measuring its credit losses relating to resident accounts receivable. This analysis will require entities to expand its methodology for calculating the allowance based on historical data, current conditions, and reasonable supportable forecasts. In preparing and documenting their methodology, entities will have to support whether or not any change in the contract amount represents a price concession or credit loss.