By: Greg Uszak, CPA, CHFP, Senior Healthcare Advisor
Revenue is a key performance indicator for all organizations and a critical component in long-term success. New accounting standards under ASC 606 regarding revenue recognition will undoubtedly make organizations reevaluate the way they measure their performance and adjust their operating procedures to document their compliance with the new standard. While this can be a challenging task for most organizations, those within the healthcare industry will face several hurdles in meeting their responsibilities.
What is the new standard?
ASC 606 requires entities to recognize revenue at the amount that reflects the consideration in which they expect to receive in exchange for goods or services provided to customers.
This standard can require entities to evaluate their revenue on a contract by contract basis or through a portfolio approach. Under either methodology, the process will include:
- Identifying the various contracts held with customers.
- Identifying the performance obligations in each contract.
- Determining the aggregate transaction price for the contract.
- Allocating the transaction price to the identified performance obligations within the contract.
- Recognizing revenue when a performance obligation has been satisfied.
Public companies were required to implement this standard for annual and interim periods beginning after December 15, 2017, while all other entities are to implement the standard for annual and interim periods beginning after December 15, 2018.
What does this mean for my business?
ASC 606 will affect some industries more than others, and the standard may not significantly adjust the amount of revenue an entity must recognize on their financial statements. The real challenge in applying ASC 606 is determining the necessary adjustments to your financial operations to document your compliance with the standard.
How do I apply ASC 606 to my operation?
Generating an estimate of the revenue you expect to receive will require thoughtful evaluation. In a healthcare setting, this can be particularly challenging, as patient service revenue generally includes multiple parties, various forms of consideration, price concessions, and a multitude of performance obligations. Some questions that you will need to consider are:
- At what point do I have a contract with a patient?
- Does an offered service have the capability of being distinct and have identifiable value, or should it be bundled with other services as part of another performance obligation?
- How does payment history or the type of payer influence the estimate of the contract value?
- How do I allocate value to performance obligations?
- Do I have the policies, procedures, and resources in place to obtain the information necessary to comply with ASC 606?
What else should I know?
The new revenue recognition standards will require regular review and evaluation by both management and accounting professionals. The application will require the use of estimates and judgments that will require disclosure in the financial statements and will be regularly scrutinized by auditors. The time, effort, and resources necessary to apply this standard will be substantial, but adequate preparation can alleviate your burden going forward. Holbrook & Manter has been working with healthcare organizations for decades. We can help you get the process started. Contact us today.