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Audit and Accounting Guide: Health Care Entities, 2018




Audit and Accounting Guide: Health Care Entities, 2018


ISBN: 978-1-948-30616-4 November 2018 720 Pages

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Considered the industry's standard resource, this guide helps accountants and financial managers understand the complexities of the specialized accounting and regulatory requirements of the health care industry. Updated for 2018, this edition has been prepared and reviewed by industry experts and provides hands-on, practical guidance for those who work in and with health care entities. A critical resource for auditors, this edition includes new accounting standards and relevant GASB and FASB updates (including those related to private companies).

Updates include:

  • FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
  • FASB ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities
  • FASB ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities
  • SAS No. 133, Auditor Involvement With Exempt Offering Documents
  • GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting)
  • GASB No. 83, Certain Asset Retirement Obligations

1 Overview and Unique Considerations of Health Care Entities 01-13

Purpose 01

Applicability 02-06

Classification of Health Care Entities 07-08

Regulatory Environment 09-13

Health Care Reform 12-13

2 General Auditing Considerations 01-119

Overview 01-02

An Audit of Financial Statements 03-09

Audit Risk 05-09

Terms of Engagement 10-14

Business Associate Agreements 14

Audit Planning 15-18

Group Audits 19-24

Multi-Location Audits Versus Group Audits 23

Complex Transactions 24

Materiality 25-30

Performance Materiality 29-30

Qualitative Aspects of Materiality 31-32

Use of Assertions in Assessment of Risks of Material Misstatement 33-34

Risk Assessment Procedures 35-57

Risk Assessment Procedures and Related Activities 37-43

The Entity and Its Environment 44-57

Additional Audit Considerations 58-99

Analytical Procedures 58-59

Accounting Estimates 60-62

Transactions Processed by Service Organizations 63-66

Compliance With Laws and Regulations 67-77

Going-Concern Considerations 78-92

Written Representations 93-99

Independent Auditor’s Reports 100-102

Single Audit Act and Related Audit Considerations 103-109

Statutory Reporting Considerations for Health Plans 110-119

Risk-Based Capital Requirements 114-115

Deficiencies in Internal Control 116

Communicating Internal Control Matters in an Audit 117

Communications With Regulators 118-119

3 Unique Financial Statement Considerations for Not-for-Profit Business-Oriented Health Care  Entities 01-43

Complete Set of Financial Statements 02-05

Balance Sheet 06-08

Statement of Operations 09-28

Performance Indicator 12-17

Other Intermediate Subtotals 18-20

Discontinued Operations and Accounting Changes 21-22

Revenues 23-25

Expenses 26-28

Statement of Changes in Net Assets (or Equity) 29-32

Statement of Cash Flows 33-37

Notes to the Financial Statements 38

Subsequent Events 39-41

Example Financial Statements 42-43

4 Cash, Cash Equivalents, and Investments 01-75

Cash and Cash Equivalents 01-11

Centralized Cash Management Arrangements 03-06

Cash From Restricted Donations 07

Other Restricted or Designated Cash Amounts 08-11

Investments 12-73

Fair Value Option 17-22

Investments in Debt Securities and Certain Equity Securities With a Readily Determinable Fair Value That Are Not Recorded Under the Fair Value Option 23-35

Investments in Certain Other Financial Instruments Without a Readily Determinable Fair Value That Are Not Recorded Under the Fair Value Option 36-38

Investment Pools 39-47

Fair Value Measurements 48

Impairment of Investments 49-59

Securities Lending Activities 60

Transfers of Assets to an NFP or Charitable Trust for Investment 61-63

Regulation 64

Other Financial Statement Presentation Matters 65-73

Auditing 74-75

5 Derivatives 01-44

Introduction 01-05

General Guidance 06-07

Accounting for Changes in Fair Value of Derivative Instruments 08-12

Fair Value Hedges 09

Cash Flow Hedges 10-11

Derivatives Not Designated as a Hedging Instrument 12

Hedge Accounting Requirements 13-28

Shortcut Method 20-28

Hybrid Instruments, Host Contracts, and Embedded Derivatives 29-37

Calls and Puts in Debt 33-34

Derivatives Embedded in Split-Interest Agreements 35-37

Other Matters 38-43

Changes in Fair Value of Hedged Item 38

Termination of Cash Flow Hedge by Debt Extinguishment 39

Additional Presentation and Disclosure Requirements for NFP Business-Oriented Health Care Entities 40-43

Auditing 44

6 Property and Equipment and Other Assets 01-53

Overview 01-05

Capitalized Interest 06-11

Supplies, Rebates, and Discounts 12-13

Lessee Involvement in Fixed Asset Construction14-17

Asset Retirement and Environmental Remediation Obligations 18-20

Impairment or Disposal 21-31

Discontinued Operations 28-31

Nonreciprocal Transfers 32-34

Other Long-Lived Assets 35-43

Financial Statement Presentation 44-47

Auditing 48-53

7 Municipal Bond Financing 01-124

Introduction 01-13

Conduit Bonds That Trade in Public Markets 06-08

Credit Enhancement 09-11

Issuance of Municipal Bonds 12-13

Extinguishment and Modification Transactions 14-17

Calls and Mode Conversions 18-39

Defeasance 20-26

Modifications 27-31

Gain or Loss on Debt Extinguishment 32-33

Debt Issuance Costs Incurred in Connection With an Exchange or Modification of Debt Instruments 34-36

Puts or Tender Options 37-39

IRS Considerations 40-44

Financial Statement Presentation and Disclosure 45-72

Balance Sheet 45-63

Statement of Operations 64-65

Disclosures 66-72

Obligated Group Reporting 73-74

Interim Financial Reporting 75-76

Auditing 77-123

General 77-85

Auditor Involvement With Municipal Securities Filings 86-112

Letters for Underwriters and Other Requesting Parties 113-119

Reference to the Auditor as an "Expert" 120

Attestation Engagements Related to Municipal Securities Issuance 121-123

Appendix — Municipal Securities Regulation 124

8 Contingencies and Other Liabilities 01-129

Contingencies and Commitments 02-61

The Essentials of Recognition, Measurement, and Disclosure for Contingencies 03-09

Managing Risk of Loss 10-12

Medical Malpractice 13-47

Disclosures for Medical Malpractice 48-53

Physician Guarantees and Other Agreements With Physicians 54-61

Other Liabilities 62-86

Asset Retirement Obligations 62-64

Compensation and Related Benefits 65-76

Joint and Several Liability Arrangements 77-82

Agency Funds 83-84

Fees Paid to the Federal Government by Health Insurers 85-86

Tax Considerations for NFP Health Care Entities 87-101

Private Inurement and Intermediate Sanctions 94-95

Unrelated Business Income 96

State and Local Taxes 97

Tax Positions 98-99

Medicaid Voluntary Contribution or Taxation Programs 100-101

Risks and Uncertainties 102-108

Auditing Contingencies and Other Liabilities 109-127

Auditing Medical Malpractice Loss Contingencies 110-113

Auditing Accounting Estimates 114-119

Use of Actuaries and Actuarial Methods120-123

Evaluating Lawyers’ Responses 124-127

Income Taxes 128

Auditing Considerations 129

9 Net Assets (Equity) 01-38

Investor-Owned Health Care Entities 01

Not-for-Profit Entities 02-25

Net Asset Classes 05-18

Reclassifications 19-25

Classification of Donor-Restricted Endowment Funds 26-32

Disclosure 33-37

Auditing 38

10 Health Care Service Revenue and Related Receivables 01-61

Overview of the Health Care Environment 01-15

Rate Setting With Third-Party Payors 05-10

The Government Payor Environment 11-14

Charity Care 15

Types of Health Care Revenue 16

Types of Payment Methodologies 17

Patient (or Resident) Service Revenue 18-36

Revenue Recognition 18-29

Accounting and Financial Reporting Requirements 30-36

Premium and Capitation Revenues 37-40

Patient Receivables 41-45

Estimated Final Settlements 46-54

Auditing 55-60

Accounts Receivable Confirmations 58-60

Appendix — Implementation Guidance for Accounting Standards Update (ASU) No 2014-09, Revenue from Contracts with Customers (Topic 606) 61

11 Contributions Received and Made 01-66

Distinguishing Contributions From Other Transactions 03-08

Contributions Received 09-32

Expiration of Donor-Imposed Restrictions 12-14

Promises to Give in Future Periods (Pledges) 15-24

Contributions of Long-Lived Assets, the Use of Long-Lived Assets, or Resources to Acquire Them 25-27

Contributed Services 28-32

Reporting the Cost of Special Events and Other Fund-Raising Activities 33-40

Naming Opportunities 36-39

Investments Gain or Loss Related to Donor-Restricted Contributions 40

Transfers of Assets to an NFP or Charitable Trust That Raises or Holds Contributions for Others 41-48

Contributions Made 49

Other Considerations 50-58

Auditing  59-65

Appendix — Q&A Section 6400, Health Care Entities 66

12 The Reporting Entity and Related Entities 01-119

Overview 01-02

Reporting by NFP Health Care Entities 03-59

Relationships With Another NFP 06-25

Relationships With a For-Profit Entity 26-49

Special Entities 50-59

Reporting by Investor-Owned Health Care Entities 60-63

Presentation of Consolidated and Combined Financial Statements 64-74

Accounting for Transfers Between Related Entities 75-88

Equity Transfers 76-79

Equity Transactions 80-83

Other Transfers 84-88

Disclosure 89-90

Mergers and Acquisitions 91-117

Merger of NFPs 97-98

Acquisition by an NFP 99-111

Acquisition by an Investor-Owned Entity, Including a For-Profit Subsidiary of an NFP Health Care Entity 112-115

Disclosures 116

Acquired Entities 117

Auditing 118

Supplement — Flowcharts 119

13 Financial Accounting and Reporting for Managed Care Services 01-30

Overview 01-02

Recognition and Classification of Revenue 03-12

Capitation Arrangements 07

Accounting for Health Care Costs 08-12

Accounting for Loss Contracts 13-17

Consideration of Anticipated Investment Income 17

Accounting for Stop-Loss Insurance 18-19

General and Administrative Expenses 20

Acquisition Costs 21-22

Financial Statement Display Considerations 23-29

Balance Sheet 23-24

Income and Cash Flow Statement 25-29

Disclosures 30

14 Financial Accounting and Reporting by Continuing Care Retirement Communities 01-52

Overview 01-05

Types of Contracts 06-10

Advance Fees 08

Periodic Fees 09

Use Fees 10

Types of Living Accommodations 11-12

Fees and Payment Methods 13-15

Accounting for Refundable Advance Fees 16-20

Accounting for Fees Refundable to Residents Only From Reoccupancy Proceeds of a Contract Holder’s Unit 21-23

Accounting for Nonrefundable Advance Fees 24-25

Classification of Refundable Advance Fees 26-30

Accounting for the Obligation to Provide Future Services and the Use of Facilities to Current Residents 31-35

Accounting for the Costs of Acquiring Initial Continuing-Care Contracts 36

Financial Statements 37-43

Auditing 44-52

15 Unique Considerations of State and Local Government Health Care Entities 01-217

Introduction 01-02

Applicability of This Chapter 03-04

GAAP Hierarchy for Governmental Health Care Entities 05-11

Applicability of FASB and AICPA Pronouncements 09-11

Basic Financial Statements 12-33

Statement of Net Position 13-18

Statement of Revenues, Expenses, and Changes in Net Position 19-26

Statement of Cash Flows 27

Segment Reporting 28-29

RSI, Including MD&A 30-33

Measurement Attributes 34-35

Cash, Cash Equivalents, and Investments 36-58

Cash and Cash Equivalents 36-38

Investments and Certain Equity Interests 39-58

Derivatives 59-65

Property and Equipment and Other Assets 66-85

Capital Assets General 67-70

Capital Asset Impairment 71-73

Intangible Assets 74-76

Leased Assets 80

Service Concession Arrangements 81-84

Disclosures 85

Municipal Bond Financing and Other Long-Term Debt 86-94

Debt Defeasance and Extinguishment 89-92

Debt Issuance Costs 93

Disclosures 94

Contingencies and Other Liabilities 95-130

Insurance-Related Contingencies 95-101

Nonexchange Financial Guarantees 102-104

Asset Retirement and Pollution Remediation Obligations 105-106

Other Contingencies 107

Compensation and Related Benefits 108-126

Tax Considerations 127-128

Disclosures 129-130

Net Position 131-140

Financial Reporting of Net Position 139-140

Health Care Service Revenue and Receivables 141-144

Contributions and Other Nonexchange Transactions 145-155

The Reporting Entity and Related Entities 156-198

Identifying Component Units 158-162

Presentation of Component Units 163-170

Equity Interests 171-177

Institutionally-Related Foundations 178-183

Government Combinations 184-198

General Auditing Considerations for Governmental Health Care Entities 199-217

Independent Auditor’s Reports 206-207

Supplementary Information and Supporting Information,Including RSI 208-217

Supplement A—Statement of Position 00-1, Auditing Health Care Third-Party Revenues and Related Receivables


A Overview of Statements on Quality Control Standards

B References to Technical Questions and Answers

C The New Revenue Recognition Standard: FASB ASC 606

D Accounting for Financial Instruments

E Information Sources

F Category B Guidance

G The New Leases Standard: FASB ASC 842

H The New Not-for-Profit Financial Reporting Model Standards: FASB ASU No 2016-14

I Schedule of Changes Made to the Text From the Previous Edition


Index of Pronouncements and Other Technical Guidance

Subject Index