Revenue Recognition Guidance Alters Presentation of Bad Debt for Healthcare Organizations
Hospitals, clinics, and other healthcare organizations should prepare for big changes when implementing FASB’s sweeping new rules to calculate the top line in their income statements. One of the more significant changes ushered in by the revenue recognition standard affects the assessment of bad debts, and investors and analysts need to be prepared, as noted in an October webcast on the new accounting standard. Under existing GAAP, a healthcare service provider records revenue using the amount it bills for a service, even if it does not expect to collect that amount; the difference is recorded on the income statement as a provision for bad debt expense and helps calculate net revenue. Under the new guidance, bad debt expense will no longer be a separate line item; instead, total revenues will already include the amount the hospital or healthcare company does not expect to collect from patients.
Investor Advisory Group Asks for Definition of Auditable Non-GAAP Measures
As regulators search for ways to ensure that non-GAAP financial measures are not misleading to investors, a working group of the PCAOB’s Investor Advisory Group (IAG) recently recommended that standards setters get involved in promoting the accuracy of a public company’s key performance indicators. Public companies routinely say that non-GAAP measures provide a better reflection of how they manage their business than many GAAP metrics, and investors find it useful to get management’s perspective on the company’s operations. These metrics are not consistent or audited, however, and companies often use them during quarterly earnings calls and in press releases to present a better financial picture to investors. “We are concerned that corporations are selectively reporting one-time and recurring items as non-GAAP financial measures that may make ‘core’ operations look more favorable and not disclosing one-time adjustments that would make ‘core’ operations look worse,” explained Tony Sondhi, president of financial advisory services company A.C. Sondhi & Associates, LLC, co-lead of the working group, and member of FASB’s Emerging Issues Task Force (EITF).
Board to Propose Alignment with Some PCAOB Standards
The AICPA’s Auditing Standards Board (ASB) voted to issue a proposal to align its guidance with some of the standards the PCAOB has issued in the past few years. The planned proposal is expected to address guidance for communicating with audit committees and examining related party transactions. The ASB also said the proposed changes are intended to improve the quality of non-public company audits. Comments will be due by May 15, 2018, and the provisional effective date of the proposed standard would be for audits of financial statements for periods ending on or after June 15, 2019.