Accounting and Tax Update

1. Accounting and Tax Update Presented by: Bob Prill, CPA and Tori Bryson, CPA Hoffman, Stewart & Schmidt, P.C.

2. Session Objectives • Provide an update of recent activities among accounting standard setters • Financial Accounting Standards Board (FASB) • American Institute of Certified Public Accountants (AICPA) • U.S. Government Accountability Office (GAO) and Office of Management and Budget (OMB) • Discuss issues related to Internal Revenue Service Form 990

3. FASB Activities • Convergence with International Financial Reporting Standards (IFRS) • Joint project between FASB and IFRS • Goal of establishing a single set of accounting standards • Adoption uncertainty – and where do nonprofits fit in?

4. Accounting for Leases • Exposure draft issued in August, 2010 • Waiting for revised exposure draft – 2013? • Will change how entities report leasing activity

5. Accounting for Leases • Current methods: • Operating leases • Capital leases • Proposed method • Right of use model

6. Accounting for Leases

7. Accounting for Leases • Recognition models • Straight-line method • Front loaded method

8. Measuring Charity Care for Disclosure • Issue addressed by Accounting Standards Update (ASU) 2010-23 in August, 2010 • Effective for fiscal years beginning after December 15, 2010 • Intended to reduce diversity in practice regarding the measurement basis • Requires that healthcare entities use the cost basis of measurement for charity care disclosures – cost is defined as the direct and indirect costs of providing care

9. Measuring Charity Care for Disclosure • Entities should disclose a description of the method used to calculate cost • Use of estimates is permitted (for example – cost to charge ratio) • Entities should disclose reimbursements received intended to compensate for providing charity care

10. Charity Care – Sample Disclosure XYZ provides care to patients who are unable to pay for the health care services they receive. XYZ does not pursue collection of amounts determined to qualify as charity care, and accordingly, these amounts are not reported as net patient service revenue. The cost of providing these services was determined by [describe the method used] and totaled approximately $XX for the year ended December 31, 20XX. During the year ended December 31, 20XX, XYZ received $XX for the support of its charity care program.

11. ASU 2011-07 • Health Care Entities – Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities • Issued July, 2011 • For nonpublic entities, is effective for the first annual period ending after December 15, 2012. Early adoption is permitted

12. ASU 2011-07 • Some health care entities will display bad debt expense as a deduction from patient service revenue (net of contractual allowances), rather than as expense • ASU applies to health care entities with a significant “gross up” of revenue and bad debt associated with providing care • Bad debt expense related to non-patient service revenue will continue to be reported as an expense

13. ASU 2011-07 • Scope of the ASU • Limited to those entities that “recognize significant amounts of patient service revenue at the time the services are rendered even though the entities do not assess a patient’s ability to pay” • The ASU does not define the term “significant” • Is the entity required by law to provide services?

14. ASU 2011-07 • Expanded disclosure requirements • Policy for assessing collectibility with respect to the timing and amount of revenue recognized • Revenue (net of contractual allowances and discounts) before any provision for bad debt • Quantitative and qualitative information about significant changes in the allowance for doubtful accounts related to patient accounts receivable

15. ASU 2011-07 • Presentation on statement of activities:

16. ASU 2011-07 • Policy for assessing collectibility: Entity A recognizes patient service revenue associated with services provided to patients who have third-party payor coverage on the basis of contractual rates for the services rendered. Entity A recognizes significant amounts of patient service revenue at the time services are rendered event though it does not assess the patient’s ability to pay. For uninsured patients who do not qualify for charity care, Entity A recognizes revenue on the basis of its standard rates for services provided (or on the basis of discounted rates, if negotiated or provided by policy). On the basis of historical experience, a significant portion of Entity A’s uninsured patients will be unable or unwilling to pay for the services provided. Thus, Entity A records a significant provision for bad debts related to uninsured patients in the period the services are provided. Patient service revenue, net of contractual allowances and discounts (but before the provision for bad debts), recognized in the period from these major payor sources, is as follows:

17. ASU 2011-07 • FASB Codification 954-310-55-1 has an illustrative disclosure of the qualitative and quantitative information about changes in the allowance for doubtful accounts • Statement of activities display provisions applied retrospectively • Disclosure provisions of this ASU applied prospectively

18. Accounting for Costs Incurred During Implementation of ICD-10 • The U.S. health care system is scheduled to transition from International Classification of Diseases, 9th edition (ICD 9) to ICD 10 • Number of available codes to go from 24,000 to over 155,000 • Expected to provide the following benefits to health care entities: • Improved precision in documentation of clinical care • Higher quality and more specific data that can be used to improve disease management and clinical outcomes

19. Accounting for Costs Incurred During Implementation of ICD-10 • Applicable guidance • FASB ASC 350-40 (Internal Use Software) • FASB 720-45 (Business Project Reengineering) • AICPA Technical Practice Aid (TPA) 6400.48 • Generally, costs of modifying existing systems are expensed • Costs that add additional functionality can be capitalized

20. Accounting for Costs Incurred During Implementation of ICD-10 • “Functionality” factors • Extent and types of changes made to software design • Extent of additional coding required and software processes developed • Ability to use additional coding capabilities • Past history of system upgrades

21. Accounting for Costs Incurred During Implementation of ICD-10 • Specific facts and circumstances will need to be evaluated • Much of the cost will likely be expensed • Some costs associated with “upgrades/enhancements” may qualify for capitalization

22. AICPA Risk Alert • Risk alert identifies several risk areas: • Collectibility of receivables • Rising costs • Staffing concerns/segregation of duties • Violations of regulatory requirements • Industry trend towards consolidation

23. Accounting for Combination of NFP’s • Many entities may be applying the guidance in FASB ASC 958-805 for the first time • Merger vs. acquisition • Merger – two or more organizations cede control of those entities to create a new nonprofit organization • Acquisition – An organization obtains control of one or more nonprofit organizations or activities • Proper accounting depends on type of transaction

24. Accounting for Combination of NFP’s • Merger should be accounted for using the “carryover” method (similar to the pooling of interest method) • Assets and liabilities of merged entities brought in from their separate GAAP basis financial statements • Acquisition should be accounted for at fair value • Fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date

25. AICPA Audit Guide – Health Care Entities • Issued in 2011 – replaced the 1996 edition • Scope remains unchanged • Organized into 15 chapters • Contains expanded disclosure and commentary • No longer contains illustrative financial statements • Health Care Guide vs. Not-for-Profit Guide

26. AICPA Audit Guide – Not-for-Profit Entities • Major overhaul in process – exposure draft issued • Expect final version to be released soon • Enhancements made to minimize diversity in practice in several areas: • Reporting relationships with other entities • Measurement and reporting of gifts-in-kind • Income tax considerations • Net assets and reporting of expiration of donor-imposed restrictions

27. AICPA Clarity Project • Designed to make audit standards easier to read, understand, and apply • Effective for periods ending on or after December 15, 2012 • Extensive revisions to existing audit literature – although there are not many substantial changes • Requires changes to the independent auditors’ report

28. GAO Developments • 2011 revision of Government Auditing Standards (Yellow Book) released in December, 2011 • Effective for periods ending on or after December 15, 2012 • Stated purpose is “to promote the modernization of auditing standards, to streamline Government Auditing Standards to other standard setters, and to address issues that the GAO has observed • Most significant change in the 2011 revision relates to auditor independence

29. Single Audit • Single audit required when Federal expenditures exceed $500,000 within the fiscal year • Vendor vs. subrecipient status • Loans with continuing compliance requirements • Interest subsidies

30. Single Audit • Auditee responsibilities (A-133 Subpart C) • Preparation of the financial statements and the Schedule of Expenditures of Federal Awards (SEFA) • Maintain internal control over Federal programs • Compliance with laws, regulations, provisions of contracts and grants • Ensure Single Audit is performed and submitted when due • Follow-up and take corrective action on audit findings

31. Single Audit • Low-risk auditees must have 25% of Federal expenditures audited each year vs. 50% for non-low risk auditees • Various criteria must be satisfied in order to be considered low-risk • Major program determinations – watch out for clusters

32. Single Audit • Compliance supplement • Updated annually • http://www.whitehouse.gov/omb/circulars/a133_compliance_supplement_2012 • Gives auditors authoritative guidance on how to conduct an audit under Circular A-133 • Gives auditees and auditors guidance on the specific requirements by Federal program

33. Single Audit • Common single audit deficiencies • Failure to accurately identify and test all major programs • Failure to meet the percentage coverage rule • Notes not included with the SEFA • SEFA missing certain required information

34. Single Audit • February, 2012 proposal by OMB • New 3 tiered single audit threshold • Expenditures of Federal awards under $1 million • No single audit • Expenditures of Federal awards between $1 to $3 million • 2 compliance requirements • Allowable costs and as determined by Federal agency • Expenditures over $3 million • Full single audit

35. Single Audit • Proposed reforms to cost principles • Consolidation of cost circulars (A-21, A-81, A-122) into a single document • Indirect cost changes – option of flat rate rather than negotiated rate • Exploring alternatives to time and effort reporting requirements for salaries and wages

36. IRS Form 990 • Form 990 is the main source of information about your governance, operations and programs that is publicly available • Form 990 underwent major overhaul effective for fiscal year 2008 filings • Core form consists of 12 pages, with up to 16 supplementary schedules that may need to be completed

37. IRS Form 990 • In addition to financial information, core form focuses on governance and transparency • Conflict of interest policy • Whistleblower protection policy • Document retention and destruction policy • Compensation of key executives

38. IRS Form 990 • Form is due 5 ½ months after fiscal year-end • Automatic 3 month extension by filing page 1 of Form 8868 • Additional 3 month extension available (not automatic) by filing page 2 of Form 8868 • Must provide reason for second extension request

39. Questions?

40. Thank You! Bob Prill, CPA rprill@hss-cpas.com Tori Bryson, CPA tori@hss-cpas.com Hoffman, Stewart & Schmidt, P.C. 4900 Meadows Road, Suite 200 Lake Oswego, Oregon 97035 (503) 220-5900