The New Revenue Recognition Standard: Implications for Healthcare Companies

What the paper says

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a converged standard on recognition, Revenue from Contracts with Customers, on May 28, 2014. Since that time, the Boards have made some amendments (mostly to the guidance on licensing of intellectual property) and have provided further clarifications and a few practical expedients. The new standard is currently scheduled to become effective for calendar year 2018 for public companies applying U.S. Generally Accepted Accounting Principles (GAAP) and calendar year 2019 for nonpublic companies applying U.S. GAAP.Rather than providing industry-specific guidance, this new standard provides general recognition guidance across all industries. Therefore, the companies most likely to be impacted by the new standard are those that have been applying industry- or transaction-specific guidance under current U.S. GAAP.Healthcare is one of those industries affected. For example, some healthcare entities apply Accounting Standards Codification® (ASC) Subtopic 944-605, Financial Services- Insurance > Revenue Recognition, while others apply ASC Subtopic 954-605, Healthcare Entities > Revenue Recognition, and still others apply ASC Subtopic 958-605, Not-for-Profit Entities > Revenue Recognition, depending on their specific operations.WHY A NEW STANDARD?There were several weaknesses or problems with how U.S. GAAP and International Financial Reporting Standards (IFRS) dealt with recognition that led the FASB and the IASB to jointly develop a new standard (see Table 1).Much of the guidance was developed for particular industries (for example, insurance companies, hospitals, and continuing care communities) or types of transactions (such as long-term construction contracts). For instance, healthcare companies that provide services to self-pay patients may recognize at the time the services are provided even though the collectibility is not reasonably assured. According to ASC paragraph 954-605-45-4, if the patients do not pay, the providers present the resulting bad debts as an adjustment to revenue. Other health services entities generally are required to conclude that collectibility is reasonably assured before is recognized, and the resulting bad debts are presented as an expense.Additionally, it has been noted that there are very limited disclosure requirements related to recognition. This means that some companies provide very limited disclosures regarding the number that is arguably the most important one in the financial statements-revenue. On top of that, many financial statement users view the disclosures that are provided by some companies as mostly boilerplate in nature.A NEW REVENUE RECOGNITION MODELThe new standard provides a new model for recognition that is intended to be applied by companies in substantially all industries. For it to be applicable across industries, the Boards established a core principle that underlies the new recognition model as well as a five-step process to implement the core principle (see Table 2). Additionally, to address user concerns regarding the lack of disclosures about revenue, the new standard includes far more extensive disclosure requirements. Table 3 provides a summary of the disclosure requirements under the new standard.Core PrincipleParagraph 83 of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states that is recognized when it is realized or realizable and earned. The IASB's Conceptual Framework for Financial Reporting contains similar guidance in paragraph 4.48, saying that revenue should be earned, and the amount of income can be measured reliably and have a sufficient degree of certainty.Yet the new standard states (in FASB ASC paragraph 606-10-10-2) that the core principle is: An entity shall recognize to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. …