All medical laboratory companies and hospitals following GAAP must comply as early as 2018 and 2019; revenue and profit impact can be either beneficial or negative
There is a big change coming to clinical laboratory companies, hospitals, and other providers that report their organization’s financial performance under Generally Accepted Accounting Principles (GAAP). Such organizations will need to assess their contracts in a different way to comply with the upcoming implementation of the Financial Accounting Standards Board (FASB) ASC 606: Revenue Recognition Standard.
Simply said, ASC 606 makes fundamental changes in the way all contracts must be analyzed and reported each quarter. Every lab company and organization that follows GAAP in their financial rules, and which is audited by an outside CPA firm, must comply with ASC 606. Moreover, when your lab company undergoes an outside audit, the auditor will verify that all contracts are being handled according to the requirements of the FASB ASC 606.
Could Be Financially Disruptive to Clinical Laboratory Companies, Other Firms
How disruptive will compliance be with ASC 606? It may be substantial. No less an authority than the American Institute of CPAs (AICPA) states: “This standard has the potential to affect every entity’s day-to-day accounting and, possibly, the way business is executed through contracts with customers. The standard will eliminate the transaction and industry-specific revenue recognition guidance under current US GAAP and replace it with a principle-based approach for determining revenue recognition.”
Public clinical laboratory and genetic testing laboratory companies must comply with FASB ASC 606, effective January 1, 2018. All private lab companies, hospitals, and others that report their financial performance under GAAP must comply beginning on January 1, 2019. There is an option for organizations to adopt ASC 606 early.
Significant and Important Event
“This [ASC 606] is a significant and important event, as the standard affects virtually every entity that prepares financial statements in accordance with GAAP or IFRS [International Financial Reporting Standards],” declared Philip J. Santarelli, CPA, Partner at accounting and advisory firm Baker Tilly. “Moreover, the standard impacts what is arguably the most important number in financial statements: revenue!
“Although the impact on the revenue recognized will vary across a wide spectrum for different organizations and industries, for all there will be a need for significant changes in the process of how revenue is recognized, and a need for changes and modifications to internal controls, IT systems, contracts, and other business processes,” continued Santarelli. “Depending on the financial statement impact, there could be effects on compensation arrangements, loan agreements, etc., as well.”
FASB ASC 606: Elements of Revenue Recognition
What the CFOs and financial managers of medical laboratories and hospitals are learning is that ASC 606 defines a different structure through which all revenue transactions must be assessed. It consists of five elements, as follows:
1) Identify the contract with a customer;
2) Identify the performance obligations (promises) in the contract;
3) Determine the transaction price;
4) Allocate the transaction price to the performance obligations; and
5) Recognize the revenue when (or as) the reporting organization satisfies the performance obligations.
Because medical lab companies, hospitals, and health systems have large numbers of contracts with health insurers and Medicare Advantage plans, compliance with FASB ASC 606 has the potential to materially change the organizations’ financial performance. Every contract must be reviewed, and a reporting formula developed, for every class or type of contract. Clinical lab companies and hospitals/health systems with lab outreach programs will typically need to assess all contracts within these three types:
• Payer type: Private payers, Medicare, Medicaid, Medicare Advantage;
• Patient responsibility type: Uninsured, self-pay, by size of deductibles; and
• Self-pay type: Identify relevant sub-categories.
Although some CFOs of clinical laboratory companies, their financial advisors, and the CPA firms that audit them, are already preparing for implementation of ASC 606, they are in the minority. Experts state that only about 40% of companies and organizations required to comply with FASB ASC 606: Revenue Recognition Standard have taken the first steps to build the needed information collection tools and start analysis of this data.
Preparing Your Lab Company for ASC 606
To help CFOs and financial managers of clinical labs, hospitals, and health systems understand the requirements of FASB ASC 606 as they apply to contracts involving medical laboratory testing services, Dark Daily is conducting a valuable webinar that is the clinical laboratory industry’s first public presentation on this important development. The webinar, titled, “Preparing Your Lab Company or Hospital for Big Changes in Revenue Recognition Standards and Audits by Your CPA Firm,” will take place on Tuesday, May 30, 2017, at 1:00 PM EDT.
This webinar is tailored to the needs of every CFO and financial manager who is responsible for reporting managed care contracts that involve clinical laboratory testing, genetic testing, and similar diagnostic services. It is critical for any lab company following GAAP in its financial reporting, as well as the CFOs of hospitals and health systems that have sizeable lab outreach businesses.
The first expert presenter will be Casey Hayes, Audit Partner at Ernst & Young in San Diego. He will demonstrate what other diagnostics companies are doing to be ready to properly recognize revenue from contracts—including managed care contracts—as ASC 606 becomes effective.
Next, Hayes will explain the ‘Five-Step Model’ that medical lab companies, toxicology labs, and hospitals should follow to adhere to the new requirements. You will learn how to recognize revenue that accurately accounts for the transfer of promised goods or services to customers, in an amount that reflects the consideration (payment) for which your company expects to be entitled in exchange for those goods and services.
Given the complexities of each managed care contract for lab and diagnostic testing services, webinar participants will learn essential insights on how to get it right the first time and avoid the unpleasant financial consequences that might result when the CPA firm that does your accounting comes in for the GAAP-compliant audit and samples your financial team’s handling of various categories of payers, including health plans, self-pay patients, and others.
Next to present during this essential webinar is Roger Newman, Financial Analyst at XIFIN, Inc., also in San Diego. His company provides revenue cycle management to more than 200 lab clients, processes as many as 300 million lab test claims annually, and is electronically-interfaced to every health plan in the United States. This is all relevant because Newman will share the practical lessons learned as his company works with clients to prepare their compliance with the ASC 606-Revenue Recognition Standard. You’ll learn what approaches work best with the least cost and fewest resources.
Newman will also show the types of informatics toolsets that have been developed to make it easier to sort data from dozens or hundreds of different managed care contracts and payer types. These tools collect and assess data in ways that enable a faster, more accurate analysis of each contract and customer-type. This knowledge can help your financial team do a better job preparing to comply with ASC 606 with less effort and more confidence.
Newman will also explain the concept of the “collections waterfall” for analyzing individual contracts and customers to comply with ASC 606. This collections waterfall is unique to his company and, until this special webinar, has been mostly shown to clients, and not to the wider lab and diagnostics industry.
Because nearly all incoming revenue to medical laboratories and hospital lab outreach businesses comes from managed care contracts and patients’ payments, the FASB ASC 606-Revenue Recognition Standard is going to have a disproportionately greater impact on these labs and hospitals than other businesses in other industries.
Reporting Compliance Just Nine Months Away
Dark Daily is first within the clinical laboratory profession to call attention to this significant development. Because public lab companies must begin reporting their financials in compliance with ASC 606 during the first quarter of 2018, the lab industry is just nine months away from seeing how financial reporting will be changed by this new rule.
This is why it is timely for savvy CFOs and financial managers at the nation’s clinical laboratory companies, hospitals, and health systems that use GAAP for their financial reporting to do their homework on ASC 606. The May 30 webinar provides an invaluable introduction to this important development. You can register here (or copy and paste this URL into your browser: https://ddaily.wpengine.com/audio-conferences/webinar-preparing-your-lab-company-for-big-changes-coming-in-revenue-recognition-standards-and-audits-by-your-cpa-firm-53017.)