hfma hospital financial management

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Tyler Bernier, CPA

August 16, 2013

Accounting and Finance Reporting Changes: What Your Healthcare Organization Needs to

Know

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Agenda

• EHR Incentives• RAC and Similar Accruals• Clarified Audit Standards• FASB Update• Bad debt expense and allowance disclosures• Malpractice claims• Charity care disclosure• Other Updates

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Agenda

• GASB Update• GASB codification and clarification• Reporting entity and component units• Financial reporting – Deferred inflows and

outflows and net position• Pension plans – employer accounting• Other GASB updates

• Proposed Changes• Lease Accounting – FASB/IASB• Single Audit

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Electronic Health Records

• Incentives from both Medicare and Medicaid

• Current guidance• AICPA - preliminary conclusion• SEC - additional guidance• White Paper by Health Care Expert Panel/HFMA

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• Medicare reimbursement• Demonstrate meaningful use

• 90 consecutive days – year 1• Within a Federal Fiscal Year

• Maintain meaningful use and attest annually

• Medicaid reimbursement• Varies by state

• Idaho: attestation similar to Medicare – 50/40/10 payments

• Some states reimburse before meeting meaningful use

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• AICPA/HFMA white paper• Not approved by SEC, FASB, GASB, others• “Reasonable assurance” • Cliff or ratable method• Recommended revenue location:

• In performance indicator• Separate from patient revenue• Generally, operating

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• SEC Method/Model• “Gain contingency” - delays recognition

• Relevant Accounting Considerations• Gain contingency• Revenue recognition• Matching

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• Medicare EHR reimbursement treatment method• Revenue recognition method - PPS

• Record upon attestation• Record upon receipt – more conservative approach• Record when final calculation available – most

conservative• Recommend - other operating

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• Medicare EHR reimbursement treatment method• Revenue recognition method - CAH

• Same as PPS, except option to defer revenue• Based on matching concept• Defer based on avg. lives of related EHR equipment or 4

years• Recommend - other operating• Other Considerations

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• Impact• Potential for change if authoritative guidance

is released• If not deferred for CAH, operating revenues will

be overstated in year 1 and understated in future years based on recognition of expenses

• Without authoritative guidance, disclosure of policy is most important aspect

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• DISCLAIMER• There is no authoritative guidance• Treatment will need to be analyzed on an

individual entity basis• Result should reasonably follow authoritative

guidance framework

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RAC and Similar Accruals

HFMA Principles and Practices (P&P) Board Issue Analysis, “Accounting for RAC Audit Adjustments and Exposures”• Accounting for Recovery Audit Contractor

(RAC) audit settlement liabilities• Potentially relates to other audit contractors –

MIC, MAC, ZPIC, etc.

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• Applicable situations• Notification of RAC audit adjustments• Notification of a RAC audit adjustment

recovery• Billing and/or payment for services that are

potentially non-reimbursable• Concerned about RAC audit adjustments not

yet identified

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• RAC adjustments represent persuasive evidence that criteria for revenue recognition have not been met• Liability and contractual adjustment in period

of notification• Consideration of causes of adjustments and

whether they apply to other accounts within the scope (look-back period) of RAC audits

• Consider potentially successful appeals

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• RAC adjustments• For positive adjustments (receivables),

• Only recorded once finalized through CMS• Gain contingency accounting

• Changes in estimates recorded in current period

• Apply historical take-backs to future claims, unless process is corrected

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• Reserves should be based on specific identification• Don’t duplicate reserves already made

• General reserves should not be recorded• SOP 00-1 – “Auditing Health Care Third Party

Reserve and Related Receivables”• Other entity experience only applies if

operating and billing procedures are identical

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• Impacts• Review reserves to determine if they are

specifically identified and calculated or general in nature

• Identify root cause of RAC adjustments and whether they apply to existing balances

• Potential identification of billing/documentation issues resulting in self-reporting• Discuss with legal counsel, if discovered

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Clarified Audit Standards

• Combination, re-organization, and clarification of existing standards• Some new matters incorporated

• Why does this matter to you as the provider?

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• Group Audit Requirements• Definition of group audit• Identification of components

• Impacts on You• Increased communications• Potentially lowered testing scopes• Potentially expanded scope of testing

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• Updated audit opinions• Additional paragraphs• Titles included• “Unmodified” vs. “unqualified”

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Health Care Accounting Standards Update

FASB Updates

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Bad Debts and Allowance

ASU 2011-07 – “Presentation and Disclosure of Patient Service Revenue, Provision of Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities”

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• Affects HC entities that “recognize significant amounts of patient service revenue at the time services are rendered even though the entities do not assess a patient’s ability to pay.”

• Effective for first annual period ending after December 15, 2012

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• Provision for bad debts associated with patient service revenue will be transferred from an operating expense to a deduction from net patient service revenue.• Other bad debts - still an operating expense• Presented on a separate line after NPSR

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Example Disclosure from Accounting Standards Update:

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• Disclosures• Policy for assessing the timing and amount of

uncollectible patient service revenue recognized as bad debts by major payor source of revenue• Major payor sources shall be identified by the entity -

consistent with how the entity manages its business• Example per standard:

Third-party payorsSelf-payTotal all payors

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• Disclosures• Qualitative and quantitative information about

significant changes in the allowance for doubtful accounts• Significant changes in estimates and underlying

assumptions• The amount of self-pay write offs• The amount of third-party payor write offs• Other unusual transactions impacting the allowance

for doubtful accounts

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• Disclosures• Two examples in the ASU provide a detailed

example of expected disclosures• Includes charity care and/or uninsured discount

policies• Also includes allowance for doubtful accounts in

third-party payor accounts

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• Impacts on certain financial ratios:ImprovedOperating and Total MarginsDays Cash on Hand**Net Days in Accounts Receivable

(depending on which net revenue is used for calculation)

• More transparency in allowance disclosures

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Malpractice Claims

ASU 2010-24 – “Health Care Entities (Topic 954) Presentation of Insurance Claims and Related Insurance Recoveries”

• Requires that insurable risk claims be recorded gross - insurance liability and insurance recovery receivable, if applicable• Record based on contingency accounting• Analyze receivable for collectibility

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Malpractice Claims

• Types of Insurance• Malpractice Insurance• Workers’ Compensation• Health/Dental Insurance

• Types of Coverage• Claims made policies• Excess insurance coverage• Umbrella coverage, etc.

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Malpractice Claims

• Impacts:• Limited, if any expected impact on income

statement• Potential additional liabilities on balance sheet• Meaning of recording a liability?

• Legal counsel• Insurance agency• Board

• If material, disclosures necessary

• Fiscal years beginning after December 15, 2010

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Goodwill and Intangibles Impairment

• ASU 2010-28 – “Intangibles --- Goodwill and Other”

• ASU 2011-08 – “Intangibles—Goodwill and Other (Topic 350) Testing Goodwill for Impairment”

• ASU 2012-02 – “Intangibles – Goodwill and Other”

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ASU 2010-28 – Goodwill Impairment

• If goodwill has zero or negative carrying amounts, step 1 may be skipped as fair value is expected to exceed $0.

• Entity is still required to complete Step 2 of impairment test if it is more likely than not that a goodwill impairment exists.

• Effective – beginning after 12/15/11

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ASU 2011-08 – Goodwill Impairment

• Optional pre-step 1 assessment• Qualitative assessment of goodwill• More-likely-than-not impairment analysis

• Several factors listed in ASU to consider for analysis

• Effective - beginning after 12/15/11

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ASU 2012-02 – Intangibles Impairment

• Relates to indefinite-lived intangible assets, other than goodwill

• Qualitative assessment of goodwill, similar to new goodwill analysis – more-likely-than-not

• Effective - beginning after 9/15/12

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• Impacts:• Qualitative analysis will need to be documented,

rather than a quantitative calculation (step 1 analysis)

• Should reduce time in assessment of goodwill and other intangible assets

• Optional steps in impairment assessment

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Business Combinations

• ASU 2010-29 – “Business Combinations”

• Expanded disclosure requirements for business combinations for public entities

• Effective for first annual period beginning on or after December 15, 2010

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Business Combinations

• Disclosure of revenue and earnings of the combined entity as though the combination occurred at the beginning of the comparable period reported (i.e. beginning of PY).

• Supplemental pro forma disclosure requirements• Material, nonrecurring pro form adjustments

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Fair Value

• ASU 2011-04 – “Fair Value Measurement”

• Additional explanation of FV measurement and expanded disclosures

• Effective for fiscal years beginning after December 15, 2011

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Fair Value

• Expanded Disclosures for Public Entities• Information about transfers between Level 1

and 2• Sensitivity of Level 3 measurements

• To changes in unobservable inputs• To interrelationships between unobservable inputs

• Level of FV for items not measured at FV, but required to be disclosed at FV

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Cash Flows – Donated Financial Assets

• ASU 2012-05 – “Statement of Cash Flows”

• Donated financial assets should be reported as operating inflows or, if restricted, financing activities.

• Effective for fiscal years beginning after June 15, 2013. Early adoption permitted.

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Joint & Several Obligations

• ASU 2013-04 – “Liabilities”

• Reporting and disclosure requirements in certain joint and several liability arrangements.

• Effective for fiscal years beginning after December 15, 2013 (2014 for nonpublic). Early adoption allowed.

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Joint & Several Obligations

• Entity involved in joint & several liability arrangement which is fixed at the reporting date• Record amount entity agreed to in its

arrangement with co-obligors.• Plus, any additional amounts expected to be

paid on behalf of co-obligors.• Disclosures of the nature and amounts of total

obligation and other related information.

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Contributed Services

• ASU 2013-06 – “Not-for-Profit Entities”

• Related to contributed serviced from an affiliate organization.

• Effective prospectively for periods beginning after June 15, 2014. Early adoption permitted.

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Contributed Services

• Recorded at cost of affiliate• If considered to over or understate value, an

election may be made for fair value.• For HC entities, should be reported as an

“equity transfer” (increase in net assets)• Related to services received from NFP and FP

affiliates

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Health Care Accounting Standards Update

GASB Updates

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GASB Codification

GASB Statement No. 62 – “Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements”

• Effective for periods beginning after December 15, 2011.

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GASB Codification

• The objective is to incorporate into the GASB statements, pronouncements issued on or before November 30, 1989• FASB Statements and Interpretations• Accounting Principal Board Opinions• Accounting Research Bulletins of the AICPA

• Removes GASB 20 accounting policy option

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GASB Codification

• Additional Topics Considered• Includes sections related to a variety of

transactions• From FASB and AICPA literature • Applies to governmental activities, business-type

activities, proprietary funds, but not all governmental funds

• 27 broad transactions were included

• Has not addressed:• Governmental combinations – GASBS 69• Fair value measurement – exposure draft anticipated

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GASB Codification

• Impacts• Cannot make accounting policy option• Need to ensure previous treatments under FASB

or other literature are consistent with GASB 62 or after

• If not in GASB, can utilize other guidance (FASB, etc.) or industry practice, but none are authoritative

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Reporting Entity and Component Units

GASB Statement No. 61 – “The Financial Reporting Entity: Omnibus an amendment of GASB Statements no. 14 and no. 34”

• Component Units Criteria • Financial Accountability• “Misleading to Exclude” the organization from

the financial statements

• Effective for periods beginning after June 15, 2012

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• Financial Accountability• Primary Government (PG) appoints voting

majority of board• The potential component unit (PCU) if fiscally

dependent• Does not set own budget• Others levy taxes or sets rates• Cannot issue bonded debt without approval

• Potential for the PCU to provide specific benefits to, or impose specific financial burdens, on the PG

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• Provide Specific Benefits To, or Impose Financial Burdens On…• PG can access PCU’s resources• PG is legally obligated and/or assumed the

obligation to finance the deficits of, or provide financial support

• PG is obligated for the debt

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• Amendments to the Major Component Unit Requirements• Based on the nature and significance of

relationship

• Blended Component Unit• CU is legally separate from the PG, but so

intertwined that is functions like a department of the PG• Amendment – CU total debt outstanding is expected

to be repaid entirely with resources of the PG

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• Blended Component Unit Reporting Requirements

• Clarifies that funds of a blended CU have the same financial reporting requirements as a fund of the PG

• Equity Interests in CU (formerly Investment Interests)• Investment, if used to derive income or profit

• Requires summarized CU f/s in the notes to the f/s

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• Impacts:• Potential change in entities which qualify and a

CU or blended CU• Reporting requirements – summarized blended

CU information• Changes will also impact MD&A

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Financial Reporting

GASB Statement No. 63 – “Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position”

• Effective for periods beginning after December 15, 2011

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Financial Reporting

• Identifies 5 elements that make up a statement of financial position (balance sheet)• Assets – resources with present service

capacity that the gov’t presently controls• Liabilities – present obligations to sacrifice

resources that the gov’t has little or no discretion to avoid

• Deferred outflows of resources• Deferred inflows of resources • Net position

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Financial Reporting

• Accounting Equations

• Governmental activities – Statement of Net Position

Assets + Deferred Outflows – Liabilities – Deferred Inflows = Net Position

• Governmental fund format – Balance Sheet

Assets + Deferred Outflows = Liabilities – Deferred Inflows + Fund Balance

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Financial Reporting

• Deferred Outflows of Resources• Consumption of net position by the government

that is applicable to a future reporting period• Positive effect on net position

• Deferred Inflows of Resources• Acquisition of net position by the government

that is applicable to a future period• Negative effect on net position

**Only 2 identified in GASBS 63

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Financial Reporting

• Net Position (previously net assets)• Residual of all elements presented in a

statement of financial position – presented in 3 types• Net investment in capital assets• Previously, “investment in capital assets, net

of related debt”• Restricted• Unrestricted

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Financial Reporting

Statement No. 65 – “Items Previously Reported as Assets and Liabilities”

• Effective for periods beginning after December 15, 2012

• Retroactive application by restating financial statements, if practical, for all periods presented

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Financial Reporting

• Continue to Report as an Asset• Prepayments and Inventory• Circumstances in which a pension plan’s net

position exceeds the total pension liability

• Report as a Deferred Outflow of Resources• Deferred debit amounts resulting from the

refunding of debt – not related to issuance costs

• Net balance (debit) of direct loan origination costs, including any portion related to points, for mortgage loans held for resale prior to the point of sale

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Financial Reporting

• Report as Outflow of Resources• Debt issuance costs• Net balance (debit) of direct loan origination

costs…

• Report as a Liability • Resources received in advance in relation to a

nonexchange revenue transaction• Resources received in advance of an exchange

transaction

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Financial Reporting

• Report as Deferred Inflow of Resources• Resources received in advance in relation to

an imposed nonexchange transaction• Deferred credit amounts resulting from the

refunding of debt

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Financial Reporting

• Disclosures• Details of the deferred amounts, if aggregated

• Only if information is not displayed on the face of the financial statements

• Use of term “deferred” is only allowed to relate to deferred inflows or outflows or resources

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Financial Reporting

• Impacts• Potential change in recording certain

transactions• Debt refinancing• Property taxes• EHR incentive payments

• Change in financial reporting structure – not yet required, however.

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Pension Plans – employer accounting

• GASB Statement No. 68 – “Accounting for Financial Reporting for Pensions”• Effective for financial statements for fiscal

years beginning after June 15, 2014• Replaces existing guidance related to pension

plans that are administered through trusts or equivalent arrangements that meet certain criteria

• Purpose: Improve accounting and financial reporting by state and local governments for pensions.

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• Establishes standards for:• Measuring and recognizing items in the

statement of net position• Identifies methods and assumptions that

should be used to:• Project benefit payments• Discount projected benefit payments to actuarial

present value• Attribute that present value to periods of

employee service

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• Defined Benefit Plans• Measurement of liability

• Net pension liability = PV of projected benefit payments to current active and inactive employees attributed to their past periods of service minus the pension plan’s fiduciary net position

• Actuarial valuations liability required at least every two years• If not on report date, roll-forward procedures

required• Earlier actuarial valuation must be performed within

30 months and 1 day prior to the most recent year-end.

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• Projections of Benefit Payments• Based on benefit terms and legal agreements

existing at the measurement date.• Discounted to their actuarial present value

using the single rate that reflects• A long-term expected rate of return on plan

investments • A tax-exempt, high-quality municipal bond rate

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• Single and Agent Employer Plans• Recognize a liability equal to the Net Pension

Liability• Measured as of a date no earlier than the end of the

employer’s prior fiscal year (the measurement date).

• Pension expense = changes in the net pension liability• Current-period service cost• Interest on total pension liability• Changes of benefit terms • Projected earning on the pension plan’s investment -

included

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• Single and Agent Employer Plans• Notes to financial statements

• Benefits provided• Number of classes of employees• Sources of changes in the NPL for the current year• Significant assumptions and other inputs used to

calculate TPL• Date of actuarial valuation used in determination

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• Single and Agent Employer Plans• Required supplementary information

• Present for each of the 10 most recent years• Sources of changes in the net pension liability• Components of net pension liability• Actuarially determined contributions or statutorily or

contractually required contribution rates, contributions to the plan and related ratios

• Notes to the required supplementary information• Significant methods and assumptions used in calculating

the actuarially determined contributions• Factors that affect trends

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• Cost-Sharing Plans• Recognize liability for proportionate share of

NPL.• Employer’s portion of NPL is determined

consistently with contributions.• Recognize pension expense and deferred

outflows and inflows of resources relation to proportionate share.

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• Cost-Sharing Plans• Recognized in pension expense in a systematic

and rational manner of a closed period• Changes in the employer’s proportion of the

collective NPL• Differences between the employer’s contributions

and proportionate share of the total of contributions from employers included in the collective NPL during the measurement period.

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• Defined Contribution Pensions• Pension expense

• Contributions to employees’ accounts • Net of forfeited amounts that are removed from

employees’ accounts• A change in the pension liability is recognized for the

difference between amounts in expense and amounts paid by the employer to the plan

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• Defined Contribution Pensions• Notes to financial statements

• Descriptive information• Contribution rates and how they are determined• Amounts attributed to employee service and

forfeitures for the current period

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Other GASB Updates

GASB Statement No. 64 – “Derivative Instruments: Application of Hedge Accounting Termination Provisions – an amendment to GASB Statement No. 53”

• Effective for periods beginning after June 15, 2011

• Objective: clarify whether an effective hedging relationship continues after the replacement of a swap counterparty

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Other GASB Updates

GASB Statement No. 67• Effective for financial statements for fiscal

years beginning after June 15, 2013• Replaces current guidance related to pension

plans that are administered through trusts or equivalent arrangements that meet certain criteria

• Purpose: improve the usefulness of pension information included in the general purpose external financial reports of state and local governmental pension plans for making decisions and assessing accountability

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Lease Proposal

• Proposed ASU was issued in August 2010• Announced in July 2011 it will be re-exposed

• June 13, 2012 – IASB and FASB last agreed on additional changes to draft

• Released Exposure Draft – May 16, 2013

• Effective date, if passed (which is expected), ???• Expected 2015 or 2016

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Lease Proposal

• Lessee accounting• Leases over 1 year will be recorded on the

balance sheet at present value of lease payments• Right-of-use asset and liability• Recorded as separate assets and liabilities on the

balance sheet

• Lease term• “The non-cancellable period for which the lessee has

contracted with the lessor to lease the underlying asset, together with any options to extend or terminate the lease when there is a significant economic incentive for an entity to exercise an option to extend the lease, or for an entity not to exercise an option to terminate the lease.”

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Lease Proposal

2 Types of Leases• Type A – other than property

• Discount on lease as interest and amortization of asset separately

• Type B – property – land and/or building or part of a building• Discount on the lease• Amortization of asset• Total to equal single “lease cost” on a straight-line

basis

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Lease Proposal

• Impacts• Additional assets and liabilities on the balance

sheet• If treated as long-term debt:

• Decreases debt service coverage ratio (negative)• Increases long-term debt to capitalization ratio

(negative)• Increases days cash on hand (positive)

• Potentially significant amount of time identifying and recording existing lease contracts

• Allows for different leasing options as treatment will be the same if over 1 year

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Proposed Single Audit Changes

• Proposed changes to single audits – no effective dates, but preliminarily expected to be 6/30/14

• Single audit threshold to increase from $500,000 to $750,000

• Type A/B program determination to increase from $300,000 to $500,000

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• Change in major program determination• High-risk Type A program requirements• Small Type B programs considered to be 25% of

Type A/B program threshold• Reduction in high-risk Type B programs required to

be tested from 50% of Type A’s selected to 25%

• Percentage of coverage to reduce from 50% (normal) and 25% (low-risk) to 40% and 20%, respectively

• Low-risk auditee modifications

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• Increased detail in reported audit findings

• Increase in questioned cost threshold for reporting from $10,000 to $25,000

• Streamline existing OMB circulars• A-21, A-87, A-89, A-102, A-110, A-122, A-133 into

one document• A-50 superceded

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• Change in compliance requirements to be tested – from 14 to 61. Activities Allowed or Unallowed and Allowable

Costs/Cost Principles (potentially also including period of availability and matching)

2. Cash Management3. Eligibility4. Reporting5. Subrecipient Monitoring6. Special Tests & Provisions (removed

requirements may show up in this area, however)

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??? Questions ???

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Presenter

Tyler Bernier, CPA Senior Manager Eide Bailly LLP Minneapolis, MN [email protected] 612.253.6568

Economy & Finance

hfma hospital financial management