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Health Care Entities, September 2017

Health Care Entities, September 2017


ISBN: 978-1-945-49847-3

Oct 2017

592 pages



It is critical that auditors understand the complexities of the specialized accounting and regulatory requirements of the health care industry. This guide is considered the industry standard resource and the 2017 update contains practical, "how-to" guidance for accounting and auditing of health care entities. Prepared and reviewed by industry experts to provide hands on, practical guidance for those who work in and with health care entities, this 2017 edition includes relevant GASB and FASB updates (including those related to private companies), and auditor involvement with municipal securities findings. Further, SAS No. 133, Auditor Involvement With Exempt Offering Documents will be important in this industry. The clarification made by this standard will be very helpful to auditors in understanding their requirements related to public offering documents that include audited financial statements.

Table of Contents xix

Chapter Paragraph

1 Overview and Unique Considerations of Health Care Entities .01-.14

Purpose .01

Applicability .02-.06

Classification of Health Care Entities .07-.08

Regulatory Environment .09-.14

Health Care Reform  .12-.14

2 General Auditing Considerations .01-.116

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-.96

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-.89

Written Representations   .90-.96

Independent Auditor’s Reports    .97-.99

Single Audit Act and Related Audit Considerations .100-.106

Statutory Reporting Considerations for Health Plans .107-.116

Risk-Based Capital Requirements .111-.112

Deficiencies in Internal Control  .113

Communicating Internal Control Matters in an Audit     .114

Communications With Regulators .115-.116

Chapter Paragraph

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 Construction .14-.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-.107

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

Chapter Paragraph

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-.106

General .77-.85

Auditor Involvement With Municipal Securities Filings    .86-.96

Letters for Underwriters   .97-.103

Attestation Engagements Related to Securities Issuance  . .104-.106

Appendix—Municipal Securities Regulation    .107

8 Contingencies and Other Liabilities .01-.128

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-.85

Asset Retirement Obligations  . .62-.64

Compensation and Related Benefits .65-.76

Joint and Several Liability Arrangements     .77-.81

Agency Funds    .82-.83

Fees Paid to the Federal Government by Health Insurers  . .84-.85

Tax Considerations for NFP Health Care Entities  .86-.100

Private Inurement and Intermediate Sanctions  .93-.94

Unrelated Business Income    .95

State and Local Taxes .96

Tax Positions     .97-.98

Medicaid Voluntary Contribution or Taxation Programs  . .99-.100

Risks and Uncertainties .101-.107

Auditing Contingencies and Other Liabilities    .108-.126

Auditing Medical Malpractice Loss Contingencies   .109-.112

Auditing Accounting Estimates  .113-.118

Use of Actuaries and Actuarial Methods     .119-.122

Evaluating Lawyers’ Responses  .123-.126

Income Taxes   .127

Auditing Considerations .128

Chapter Paragraph

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-.60

Overview of the Health Care Environment     .01-.15

Rate Setting With Third-Party Payors .05-.10

The Government Payer 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

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-.118

Overview .01-.02

Reporting by NFP Health Care Entities .03-.58

Relationships With Another NFP .06-.25

Relationships With a For-Profit Entity .26-.48

Special Entities    .49-.58

Reporting by Investor-Owned Health Care Entities .59-.62

Presentation of Consolidated and Combined Financial

Statements   .63-.73

Accounting for Transfers Between Related Entities .74-.87

Equity Transfers    .75-.78

Equity Transactions  .79-.82

Other Transfers    .83-.87

Disclosure .88-.89

Mergers and Acquisitions   .90-.116

Merger of NFPs  . .96-.97

Acquisition by an NFP .98-.110

Acquisition by an Investor-Owned Entity, Including a

For-Profit Subsidiary of an NFP Health Care Entity    .111-.114

Disclosures   .115

Acquired Entities  . .116

Auditing .117

Appendix—Flowcharts .118

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-.49

Overview .01-.05

Types of Contracts  . .06-.10

Advance Fees    .08

Chapter Paragraph

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-.49

15 Unique Considerations of State and Local Government Health Care Entities .01-.206

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

Excess Consideration Provided in a Governmental Acquisition (Known as Goodwill in Nongovernmental Entities)   .77-.79

Leased Assets    .80

Service Concession Arrangements .81-.84

Chapter Paragraph

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-.122

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-.118

Tax Considerations  .119-.120

Disclosures   .121-.122

Net Position .123-.132

Financial Reporting of Net Position .131-.132

Health Care Service Revenue and Receivables  .133-.136

Contributions and Other Nonexchange Transactions   .137-.147

The Reporting Entity and Related Entities   .148-.190

Identifying Component Units  . .150-.154

Presentation of Component Units .155-.162

Equity Interests    .163-.169

Institutionally-Related Foundations .170-.175

Government Combinations    .176-.190

General Auditing Considerations for Governmental Health Care Entities     .191-.204

Independent Auditor’s Reports  .197-.198

Supplementary Information and Supporting Information, Including RSI  . .199-.206

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 AICPA 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 ASU No. 2016-02

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 anOther Technical Guidance

Subject Index