Accounting Rules Changes for Patient Service Revenue, Bad Debts and the Allowance for Doubtful Accounts
By Mike Rowe, CPA, Audit Partner
Accounting Standards Update (ASU) No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities was issued in July and requires health care entities to (1) present the provision for doubtful accounts as a deduction from patient service revenue in the statement of operations, rather than as an operating expense, and (2) provide enhanced disclosures concerning their policies for recognizing revenue and assessing bad debts.
Governmental hospitals already record the provision for bad debts as a reduction of revenues. Non-governmental hospitals currently reflect the provision for bad debts as an operating expense.
ASU No. 2011-07 will result in non-governmental hospitals reflecting the provision for bad debts in a manner consistent with the existing method for governmental hospitals.
Following is a discussion of the principal amendments to the FASB Codification resulting from ASU No. 2011-07.
FASB ASC 954-605, Health Care Entities – Revenue Recognition
FASB ASC 954-605-45 has been amended to require entities that recognize significant amounts of patient service revenue at the time services are entered without consideration of patients’ ability to pay to present the following as separate line items on the face of the statement of operations.
• Patient service revenue (net of contractual
allowances and discounts).
• The provision for bad debts.
• The resulting net patient service revenue.
FASB ASC 954-605-50 has been amended to require health care entities to disclose the following information by major payor source of revenue:
• The entity’s policy for assessing collectibility in
determining the timing and amount of patient
service revenue recognized as bad debts.
• The amount of patient service revenue (net of
contractual allowances and discounts) before
taking into account the provision for bad debts.
FASB ASC 954-310, Health Care Entities – Receivables
FASB ASC 954-310-50 has been amended to require the following disclosures:
• By major payor revenue source, the entity’s policy
for assessing the timing and amount of
uncollectible patient service revenue recognized as
bad debts by major payor source; note that such
identified sources should be consistent with the
way in which the entity manages its business
(e.g., how it assesses credit risk).
• Qualitative and quantitative information about
significant changes in the allowance for doubtful
accounts relating to patient accounts receivable;
such information could include significant changes
in estimates and underlying assumptions,
the amount of self-pay write-offs, the amount of
third-party payor write-offs, and other unusual
For non-public entities, the amendments are effective for the first annual period ending after December 15, 2012, with early adoption permitted. The presentation of the provision for bad debts relating to patient service revenue in the statement of operations should be applied retrospectively to all periods presented. The new disclosures should be made for the period of adoption and subsequent reporting periods (i.e., comparative disclosures are not required for periods before initial adoption).
If reading this article gave you more questions than it answered, please contact us and we'd be glad to help you understand what it all means for your healthcare entity.
Mike Rowe, CPA, Audit Partner. Click Here for Mike's bio.
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