Accounting and auditing update 9.16.20

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Accounting and Auditing Update for
Healthcare Organizations
September 16, 2020

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Agenda
GAAP Accounting and Auditing Update
COVID-19 Financial Statement Impacts for Healthcare
Organizations
Remote Workplace Considerations
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GAAP ACCOUNTING AND AUDITING
UPDATE

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GAAP Update
Leases
Lessons Learned from Revenue Recognition Standards
Not-for-Profit Reporting of Gifts-In-Kind Project
Recent Accounting Standard Updates
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ASC 842 - Leases
• Effective dates and overview
• Significant changes
• Criteria for finance vs. operating lease
• Financial statement presentation and disclosures
• Impact to the healthcare industry
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ASC 842 – Leases
Effective dates:
 Public entities – fiscal years beginning after December 15, 2018
 Non-public entities – fiscal years beginning after December 15, 2021
 Transition: Entities have the option to not recast prior periods
Key Consideration: Under the new standard, there are two balance sheet
classifications:
Operating
Lease
Finance
Lease
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ASC 842 – Leases
Significant Changes Under the New Standard
• Lessee recognizes an asset and a liability on all leases (including
operating leases with a term of greater than one year)
 Asset description is “Right-of-Use Asset”
 Operating leases with a term of less than one year are to be expensed
(consistent with the former lease standard)
• Lessee should factor into the measurement of the asset and liability:
 The likelihood of exercising the option to continue or to not terminate
 Any optional payments to purchase the assets at the end of the lease term
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ASC 842 – Leases
Criteria for Finance Lease Classification:
If the lease does not meet one of the criteria above, it is classified as an
operating lease.
Lessee has option
to purchase
underlying asset
at lease-end and is
reasonably certain
to exercise the
option
Ownership of
underlying asset is
transferred to
lessee at end of
lease
Lease term
represents a
majority of the
underlying asset’s
estimated
remaining useful
life
Present value of
lease payments
equals or exceeds
substantially all of
the fair value of
the underlying
asset
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ASC 842 – Leases
Financial Statement Presentation
• Balance Sheet
 Finance and operating lease right-of-use assets presented separately from each other
and from other assets;
 Finance and operating lease liabilities presented separately from each other and from
other liabilities.
• Income Statement
 Finance leases – interest expense on lease liabilities and amortization of right-to-use
assets are not required to be presented as separate line items and shall be presented in
a manner consistent with how the entity presents interest expense and amortization of
similar assets;
 Operating leases – include lease expense within operating expenses, consistent with
historical presentation.
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ASC 842 – Leases
Required Financial Statement Disclosures
• General description of the entity’s leases
• Basis and terms and conditions on which variable leases are determined
• Terms of lease extension or termination
• Terms of residual value guarantees provided by the lessee
• Restrictions or covenants imposed by leases
• Finance lease cost, segregated between the amortization of the right-of- use assets and interest on the lease
liabilities
• Operating lease cost for the period
• Short-term lease cost, excluding expenses relating to leases with a lease term of one month or less
• Information regarding the significant assumptions and judgements made in applying the requirements of ASC
842
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ASC 842 – Leases
How does the standard impact the healthcare industry?
• The numbers:
 Leased assets may account for a significant percentage of total assets and total
liabilities under the new standard;
 In the healthcare industry, leased assets largely include buildings and
improvements and clinical equipment.
• The accounting department:
 Evaluating, measurement and recording of leases;
 Financial reporting;
 Could have a significant strain on current resources; consider whether your
entity can implement a system to evaluate each lease contract.
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Adoption of Revenue Recognition Standard
Lessons Learned
Effective January 1, 2019, private companies are required to comply with
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers. The new standard results in a five-step process to follow
when recording revenue:
1. Identify the contract
2. Identify separate performance obligations
3. Determine the transaction price
4. Allocate the transaction price to performance obligations
5. Recognize revenue as or when each performance obligation is
satisfied
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Lessons Learned
Many clients have found that certain revenue streams or contracts they thought
would be relatively easy to analyze have taken more time to analyze than anticipated.
Below are a few of the initial lessons we have learned.
1. Gathering Data Takes Time
• The process of gathering the appropriate information took significantly longer
than expected. Deeper understanding of revenue contracts was needed so
performance obligations could be identified.
2. Contracts Spread over time Require New Thinking
• Companies are required to recognize revenue over the life of the contract and
contracts the expand over time may require additional analysis. Companies may
now have to budget for revenue differently because of this.
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Lessons Learned
3. Costs Associated with Obtaining a Contract Are Important
• A company may incur incremental costs to obtain a contract. If the costs are
expected to be recovered, they should be recorded as an asset and amortized
over the life of the contract if greater than one year.
• Companies are identifying assets for payments to consultants and other
vendors associated with obtaining the revenue contract. Analyzing these costs
must be done in addition to recognizing the revenue properly.
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Not-for-Profit Reporting of Gifts-in-Kind Project
 Gifts-in-Kind are donations of tangible and intangible personal property and
contributions of services made to a non-profit.
 Amendments will be effective for NFP annual reporting periods beginning after
June 15, 2021.
 The issues surrounding transparency and valuation of GIKs are relevant because:
• Not-for-profit entities may rely on GIKs to fulfill their missions and run their
programs which could be important information to users and something that
may not be clear in current financial reporting.
• The value of GIKs can impact key metrics for not-for-profit entities, such as
program expense ratio and liquidity/reserve ratios.
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The FASB is considering:
- Requiring a NFP to disclose the amount of contributed nonfinancial assets disaggregated
by category.
- Requiring a NFP to disclose its policy (if any) for monetizing rather than utilizing
contributed nonfinancial assets.
- The NFP does not need to disclose its intent for use of contributed nonfinancial assets.
- The NFP should disclose a description of any donor restrictions imposed.
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The FASB is considering:
- Requiring a NFP to provide a description of the valuation techniques and
inputs used to arrive at a fair value measure for contributed nonfinancial
assets.
- Requiring a NFP to disclose the principal market used to arrive at the fair
value measurement if it is a market in which the recipient NFP is prohibited
by donor restrictions from selling or using the contributed nonfinancial
asset.
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20
- Update 2020-06 Debt – Debt with Conversion and Other Options and Derivatives
and Hedging – Clarity for Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity
- Update 2020-05 – Revenue from Contracts with Customers and Leases – Effective
Dates for Certain Entities
- Update 2020-04 – Reference Rate Reform: Facilitation of the Effects of Reference
Rate Reform on Financial Reporting
- Update 2020-03 – Codification Improvements to Financial Instruments

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- Update 2020-02 – Financial Instruments – Credit Losses and Leases
- Update 2020-01 – Investments – Equity Securities, Investments Equity Method and
Joint Ventures, and Derivatives and Hedging – Clarifying the Interactions between
the Topics
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HEALTHCARE INDUSTRY COVID-19 AND
CARES ACT IMPLICATIONS

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CARES Act Provisions For Health Care Entities
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) attempted to
alleviate some of the financial strain on hospitals, physicians, and other health care
entities through a series of new policies that temporarily boosted Medicare and
Medicaid payments, allowed for added flexibility in treatment modalities, and
expanded the availability of advance or accelerated payments from Medicare.
In addition, the CARES Act established a Provider Relief Fund to be used for economic
support of health care entities in connection with health care related expenses or lost
revenues attributable to COVID-19 and treatment of uninsured COVID-19 patients.
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Accounting for Provider Relief Funds
Payments from the Provider Relief Fund were allocated for general distribution to entities
across the U.S. health system.
According to the U.S. Department of Health and Human Services (HHS), the general
distribution payments are subject to legal terms and conditions, including the following,
among others:
• The funds are to reimburse the recipient only for health care related expenses or lost
revenues that are attributable to COVID-19.
• The funds may be used only to prevent, prepare for, and respond to COVID-19.
• Noncompliance with the terms and conditions is grounds for the recoupment of some or all
of the payments by HHS.
• The recipient will not use the funds to reimburse expenses or losses that have been
reimbursed from other sources or that other sources are obligated to reimburse.
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Accounting for Provider Relief Funds
Recipients will be required to submit documentation to HHS
demonstrating that these payments were used for health care related
expenses or lost revenue attributable to COVID-19, and HHS has stated
that it will perform significant anti-fraud and auditing work.
HHS has also stated that to avoid recoupment, recipients must be able to
demonstrate that total payments from the Provider Relief Fund (including
the general distribution payments) do not exceed their lost revenues and
increased expenses attributable to COVID-19 that have not or will not be
reimbursed from other sources.
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Not-for-Profit Health Care Entities
Because the general distribution payments are for the purpose of providing relief to
health care entities (rather than for the direct benefit of HHS), not-for-profit (NFP)
health care entities should account for them as nonexchange transactions in
accordance with the “contributions received” subsections of FASB Accounting
Standards Codification (ASC) 958-605, Not-for-Profit Entities—Revenue Recognition.
That model requires entities to first determine if a nonexchange transaction
(hereafter referred to as a contribution) is conditional or unconditional. If a recipient
is required to meet conditions imposed by the government to be entitled to receive or
keep the funds, then the contribution is conditional, and recognition of contribution
revenue is deferred until the conditions are substantially met.
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Not-for-Profit Health Care Entities
Because entitlement to the general distribution payments is conditioned upon having
incurred health care related expenses or lost revenues that are attributable to COVID-
19 (that is, a barrier to entitlement), and because noncompliance with the terms and
conditions is grounds for recoupment by HHS of some or all of the payments (that is,
a right of return), the general distribution payments would be considered conditional
contributions. Thus, contribution revenue would be recognized only to the extent that
health care related expenses or lost revenues have been incurred at that date, which
will not be reimbursed from other sources.
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For-Profit Health Care Business Entities
Because the general distribution payments are for the purpose of
providing relief to health care entities (rather than for the direct benefit of
HHS), health care business entities would account for them as
nonexchange transactions.
Government grants should be recognized in income when there is
reasonable assurance that a recipient:
a) will comply with the conditions associated with the grant, and
b) will receive the grant.
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For-Profit Health Care Business Entities
Once there is reasonable assurance that the conditions will be met, the earnings impact is recorded on
a systematic basis over the periods in which the entity recognizes, as expenses, the related costs for
which the grants are intended to compensate.
Thus, with respect to the general distribution payments, grant income would be recognizable only to
the extent that the health care business entity is reasonably assured that health care related expenses
or lost revenues attributable to COVID-19 that will not be reimbursed from other sources have been
incurred at a reporting date.
If the amount of general distribution payments received or receivable at a reporting date exceeds the
amount of grant for which the reasonable assurance threshold has been met, the difference is
reported as a refundable advance (that is, a liability).
A health care business entity with material grants should disclose its accounting policy for such grants
and the related impact to the financial statements.
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Recognition Uncertainties Associated With
Provider Relief Fund Payments
Uncertainty will exist with respect to evaluating the amount of contribution or grant income
that is recognizable at a given reporting date. Additionally, to avoid recoupment, recipients
must be able to demonstrate that total payments from the Provider Relief Fund (for example,
the general distribution payments, targeted distribution payments, and claims payments
received for treating uninsured patients) do not exceed lost revenues and increased health
care related expenses attributable to COVID-19 (excluding losses or expenses that have been
or will be reimbursed from other sources). Even for health care entities with a large amount
of cushion between what they believe to be reimbursable health care related expenses or lost
revenues and the amount of general distribution payments received, any payments to be
received from other allocations within the Provider Relief Fund, as well as potential
reimbursements from other sources (for example, the Federal Emergency Management
Agency (FEMA), business interruption insurance, and other CARES Act programs), would
need to be considered when making this assessment at a reporting date.
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Accounting for Uninsured Pool Portion of
Provider Relief Funds
A portion of the Provider Relief Fund was used to establish a program that will pay health care entities for
treatment of uninsured COVID-19 patients. This program is administered by the Health Resources and Services
Administration (HRSA), a division of HHS. Health care entities that enroll in the HRSA COVID-19 Uninsured
Program and agree to the conditions of participation are paid for the services at Medicare program rates.
Participation rules are similar to the Medicare fee-for-service program, with health care entities agreeing to
accept the program payment amount as payment in full (that is, they cannot bill patients for a remaining balance).
According to HRSA, payments received by health care entities under the program, are claims reimbursements and
should be treated in the same manner as reimbursements received from commercial insurance, Medicare, or
Medicaid. Consequently, the federal government is acting as a third-party payer and accordingly, the payments
would be considered patient service revenue. In light of the no-balance-billing requirement, differences between
an uninsured patient’s gross service revenue and the amount payable by the program would be considered
contractual allowances, rather than changes in the estimate of implicit price concessions.
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Accounting for Payments Received Under the Medicare
Accelerated and Advance Payment Program
Nongovernmental health care entities will generally reflect the advances received as
a contract liability. The contract liability will be reduced over time as revenue is
recognized for claims submitted for services provided after the recoupment period
begins. However, an assessment should be made to determine whether the health
care entity expects to fully settle the liability through providing future services to
Medicare patients. If an entity does not expect to have sufficient Medicare volume to
be able to settle the liability by providing services, it may be appropriate to reclassify
any amounts expected to be repaid to CMS from contract liability to a refund liability.
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Accounting for Temporary Increases in Medicare
and Medicaid Payments
The CARES Act attempts to alleviate some of the financial strain on hospitals, physicians, and
other health care entities through a series of new policies that temporarily boost Medicare
and Medicaid payments and allow for added flexibility. For example, it increases the Medicare
in-patient payment rate by 20 percent for treating COVID-19 patients, delays the annual 2
percent cut (sequester) in Medicare payments to health care providers, and reduces or delays
cuts in Medicaid Disproportionate Share Hospital (DSH) funding.
If a health care entity has adopted FASB ASC 606, such changes will affect its estimates of
variable consideration when determining the transaction price for services provided to
patients. Health care entities generally estimate the transaction price, including the related
explicit price concessions (contractual adjustments) and implicit price concessions, by using
historical portfolios of data (for example, by patient type, payor).
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FEMA Public Assistance Payments to NFP Health
Care Entities for Emergency Protective Measures
Through its public assistance (PA) program, FEMA provides assistance to governments and
certain NFPs in responding to major disasters or emergencies. Certain NFP health care
entities may be eligible for reimbursement of “extraordinary” costs associated with operating
emergency rooms and providing temporary facilities for emergency medical care or
expanding existing medical care capacity during the declared COVID-19 public health
emergency.
Because grants made to NFP health care entities under FEMA’s program are for the purpose
of reimbursing certain specific costs incurred in connection with the public health emergency
(rather than for the direct benefit of FEMA), they would be accounted for as nonexchange
transactions in accordance with the “contributions received” subsections of FASB guidance.
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Paycheck Protection Program (PPP) Loans
Some of the more significant risks related to PPP funds include:
• Ensuring the appropriate documentation is maintained for forgiveness;
• Ensuring the entity is not double-dipping against other programs (another
documentation issue)
• Being prepared to defend the entity’s certification of need as this has come
under scrutiny by the Small Business Administration (SBA) particularly if the
entity is receiving other funding sources
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PPP Loan Repayment
 For loans not reviewed by the SBA –
• Lender has 60 days from receipt of completed application to issue a decision to SBA
• SBA then has 90 days to render a decision to the lender
 Decision can be either –
• Approval in whole or in part
• Denial
 No payments of principal, interest and fees are due until the date the SBA issues
decision to lender and remits the loan forgiveness amount
• If borrower does not apply for loan forgiveness, then the deferral period ends 10
months after the end of its Covered Period
• If forgiveness is denied by the SBA, then the deferral period ends to the extent
repayment is due
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Documentation Requirements
 Payroll costs (cash payments and non-cash benefit payments)
• Bank account statements or third-party payroll service provider reports to show cash
payments;
• Tax forms (or equivalent third-party payroll service provider reports)
o Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941), and
o State quarterly business and individual employee wage reporting and unemployment
insurance tax filings reported, or that will be reported, to the relevant state;
• Payment receipts, cancelled checks, or account statements documenting the amount of any
employer contributions to employee health insurance and retirement plans that were
included in the forgiveness amount.
 FTE (average # of FTEs/month during borrower’s the reference period)
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 Nonpayroll costs
• Business mortgage interest payments
• Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments
from the Covered Period (CP); or
• Lender account statements from February 2020 and the months of the CP through one month
after the end of the CP verifying interest amounts and eligible payments.
• Business rent or lease payments
o Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from
the CP; or
o Lessor account statements from February 2020 and from the CP through one month after the end of
the CP verifying eligible payments
• Business utility payments
o Copy of invoices from February 2020 and those paid during the CP; and
o Receipts, cancelled checks or account statements verifying those eligible payments
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 Documents each borrower must maintain, but is not required to submit to its lender:
• PPP Schedule A Worksheet;
• Documentation supporting the information in the Worksheet, including salary/wage data of included and excluded
employees and FTE levels;
• Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and
written requests by any employee for reductions in work schedule.
 All records relating to the loan, including:
• Documentation submitted with the loan application;
• Documentation supporting the borrower’s certifications as to the necessity of the loan request and its eligibility for a
loan
• Documentation necessary to support the borrower’s loan forgiveness application; and
• Documentation demonstrating the borrower’s material compliance with PPP requirements.
 Borrower must retain all documentation in its files for 6 years after the date the loan is forgiven or
repaid in full.
 Borrower must permit authorized representatives of SBA, including representatives of its Office of
Inspector General, to access such files upon request
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Is a Single Audit Required?
Recently, the SBA issued guidance stating that PPP loan funding specifically will not be subject to the single audit requirements
of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit
Requirements for Federal Awards (Uniform Guidance) for not-for-profit entities. However, the similar Economic Injury Disaster
Loans (EIDLs) are direct from the SBA, rather than through independent lenders, and do qualify as federal assistance for that
reason. Therefore, EIDLs are subject to OMB Uniform Guidance Single Audit Requirements for not-for-profit entities.
In late July 2020, the U.S. Department of Health and Human Services (HHS) provided a definitive answer regarding the audit
requirements for nonfederal entities and for-profit entities expending funds under the new Provider Relief Fund (PRF) program.
The PRF program (CFDA 93.498) is the second largest new federal program established by the Coronavirus Preparedness and
Response Supplemental Appropriations Act. HHS has provided funding under this program to thousands of hospitals and other
health care providers that are nonfederal entities (that is, states, local governments, and not-for-profits) as well as for-profit
entities.
HHS decided that for-profit entities that expend $750,000 or more of these funds during the entity's fiscal year will be subject to
an audit as described in Section 75.216 of HHS's adoption of the Uniform Guidance. That section discusses two options for audit
of commercial organizations: (1) a financial related audit of a particular award or multiple HHS awards in accordance
with Government Auditing Standards, or (2) a full single audit that meets the requirements contained in Subpart F of the Uniform
Guidance. The Governmental Audit Quality Center (GAQC) Executive Committee is currently discussing best practices for
performing these for-profit engagements and will consult with HHS, as well.
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What will my Auditors do to Test this?
Auditors of financial statements will likely look at funds in varying degrees based on the
amounts received (materiality) and any additional risk they present to the audit overall.
Generally, if considered significant to the audit, auditors will be looking to audit the amounts
received and ensure they were accounted for properly.
Auditors will likely want to see documentation from the lender that the loan has been
forgiven, if the entity is recording a gain on extinguishment, or if the entity has recorded the
funds as a government grant and forgiveness occurs prior to the date of the auditor’s report.
Auditors would also likely perform more extensive audit procedures on the transaction if the
entity opts to record it as a government grant to ensure that the funds are being used for
qualifying purposes, and loan forgiveness has not occurred prior to the date of the auditor’s
report.
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How to track expenses, so you don’t double-dip
with funding from HHS, FEMA, or others?
Although it may not be reasonable for all organizations, some have opted to set up a distinct bank
account for funds in order to keep them separate. At a minimum, organizations should establish some
form of tracking mechanism for the flow of funds (that is, Excel or equivalent) that shows the funds and
each qualifying expense for which they were used. Additionally, the entity should maintain backup for
each qualifying expense. For payroll, this could be in the form of third-party payroll processing reports,
tax filings, internal payroll reports, and so on. For other qualifying expenses, backup in the form of
invoices, receipts, bank statements, or check stubs, for example, are all useful to maintain.
If an entity is receiving funds under multiple programs, it would be important to have a similar tracking
mechanism in place for each funding source to ensure that no qualifying expense is hitting the same
funding source, and no double-dipping has occurred.
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REMOTE WORKPLACE CONSIDERATIONS

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Remote Workplace
- In many organizations, the work environment has changed and has become
more remote or a hybrid of remote and on-site.
- A recent survey by Gartner found that nearly 23% of CFOs plan to shift 20%
or more of finance employees to work remotely permanently.
- Another recent survey by PWC suggested that 54% of companies planned to
make remote working a permanent option for various roles.
- If proper technology and resources are in place, many business leaders are
reporting positive experiences working remotely during the pandemic.
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Remote Workplace
 Downsides - One on one and team training that typically took place in the
office is not the same as remote.
 Disconnect between the office and home, individuals working morning to
night from home.
 Tips for working remotely:
• Take time to build an appropriate work-station from home.
• Use a webcam so you can interact using video with others
• Improve WIFI Connections
• Declutter your digital workspace
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Remote Auditing: Overcoming Site Visit
Limitations in the Pandemic
• During the pandemic, auditors are performing more audits remotely. Auditors
have traditionally relied on physically being at the client for extended periods of
time to accomplish our audit objectives.
• Although some states are beginning to transition out of stay-at-home orders and
travel restrictions, uncertainty persists over the permissibility and safety of travel.
Auditors must adapt to the obscurity of what lies ahead by embracing remote
auditing methodologies.
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Remote Auditing
• CPAs have an ever-growing arsenal of technological means to perform an audit remotely.
As we have seen with computer-assisted audit techniques, electronic workpaper software
systems, email, robotics, and the dawn of data analytics, technology has allowed auditing
to be more efficient while retaining its effectiveness relevant to the audit objectives. With
these resources, auditors can now perform site visits virtually.
• Furthermore, generally accepted auditing standards (GAAS) establish measures of the
sufficiency and appropriateness of audit evidence in order to reduce audit risk to an
acceptably low level. In fact, GAAS rarely dictates or limit how audit evidence is obtained.
GAAS accounts for the differing nature and circumstances of each audit, and the design of
audit procedures is generally deferred to the auditor’s professional judgment.
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Remote Auditing
• Site visits produce evidence obtained directly by the auditor. If used
properly, audit evidence obtained through telecommunications, as well as
video or photographic means, can be just as reliable.
• Site visit objectives vary, but mostly they are conducted to perform
transaction cycle walk-throughs, to inspect facilities, to observe physical
controls (e.g., system security) or other control activities, to attend physical
inventory counts, and to test fixed assets.
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Remote Auditing
• Walk-throughs are performed to obtain evidence of transactions from start to finish. Walk-throughs involve
inquiry, observation, examination/inspection, and reperformance procedures. Any one of these procedures
can generally be performed through video conferencing or other forms of interactive media, including
observation. Inspections of facilities can likewise be performed virtually.
• Physical inventory counts are performed to evaluate and observe management’s controls and procedures
related to its inventory process, as well as inspect the inventory and perform test counts. Application guidance
for AU-C Section 501, Audit Evidence — Specific Considerations for Selected Items, specifies the use of
“alternative audit procedures,” specifically for when attending physical inventory counts is impractical or
unsafe, and such guidance should be referenced during this pandemic period.
• Fixed asset testing on-site involves a variety of procedures mostly to test management’s assertions related to
existence and completeness. Existence testing through video or photographs can be used if certain measures
are taken to ensure its accuracy. Such methods can include time-stamp photographs, such as digital camera
date displays, or requesting management to frame in an artifact provided by the auditors, such as that day’s
newspaper. Completeness testing can also be accomplished by requesting a video tour of warehouses or
business premises, and auditors can make real-time test counts.
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Questions? Contact Presenters
Michael A. Serluco, CPA
Partner, Healthcare Services
mserluco@withum.com
732-759-6821
Ryan Miller, CPA
Manager, Healthcare Services
rmiller@withum.com
267-949-7203

Accounting and auditing update 9.16.20

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