CECL Standard To Impact Healthcare Entities

Transactions falling into the scope of CECL include amounts due from Medicaid and Medicare, as well as loan receivables, held-to-maturity debt securities, and loan commitments.

AAFCPAs would like to make clients aware that the Financial Accounting Standards Board (FASB) has pronounced a shift in credit loss accounting within ASC 326, which is commonly referred to as Current Expected Credit Losses (CECL). The effective date of the new pronouncement went live for all reporting periods beginning on or after December 15, 2022. AAFCPAs advises that healthcare clients prepare for several changes under the new standard.

Below, we answer critical questions for healthcare clients.

To which specific types of financial assets does CECL apply?

CECL applies to entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. For healthcare entities, the most common transactions under the scope of the new standard will be patient or trade service-related receivables, which does include amounts due from Medicaid and Medicare. From a technical standpoint, these transactions are subject to ASC 606 and, as a result, fall under the new CECL standard. Other transactions falling into the scope of CECL implementation include loan receivables, held-to-maturity debt securities, and loan commitments.

How would this impact my day-to-day accounting?

Implementation of CECL will require further analysis on unpaid amounts related to patient-related services provided, with the most impactful analysis likely effecting any amounts from self or private payors. This would also include any co-payment amounts from the patient. Under legacy accounting, any needed reserves to patient receivables were largely driven off management’s estimates. However, under the new CECL standard, such an allowance or further adjustment is required to be substantiated or corroborated by historical data by contract/payor. In addition to historical data and related payor trends being a contributing factor to properly stating patient receivables, CECL also welcomes the opportunity to introduce reasonable and supportable forecasts.

What should I be doing now?

To properly implement CECL and to ensure proper documentation is in place, we advise that clients conduct a historical review of payor trends over a relevant time horizon to assess the measurement of risk of credit losses and to assess the probability that the entity will collect substantially all consideration to which it is entitled. Once this data has been gathered and analyzed, management can then compare payor trend data to the current methodology that is in place along with any qualitative adjustments, ensuring that accounting records are both accurate and CECL-compliant.

How will this impact financial reporting for current receivables?

Aside from the internal analysis, the most impactful effects on financial statements will include a transition in terminology from allowance for doubtful account and bad debt expense to allowance for credit losses and credit loss expense, respectively, along with a narrative within the notes to the financial statements discussing any relevant credit quality adjustments. Any material allowances established as a result of credit impairment will also require disclosure on the face of the financial statements along with a roll-forward table within the notes to the financial statements. If a healthcare entity has any other type of financial assets, there are additional disclosure requirements.

How We Help

With any new Accounting Standards Update, AAFCPAs assembles an in-house task force dedicated to studying and interpreting the impact of the new standard. This includes analysis of how each ASU affects each sector, each style of operations, and each revenue model. These task forces are responsible for ensuring that our team of more than 325 advisors are updated on the latest strategies and insights to enhance their ability to provide you with guidance. We also know how to navigate the clear boundaries between consulting and independent auditing roles. We ensure all our clients, including those we audit, are well-informed and equipped to implement new accounting standards with ease and confidence.

AAFCPAs has advised clients in the healthcare space since 1973, helping provider organizations navigate financial, operational, and regulatory matters. This includes guidance on internal controls and federal, state, local, and government funding compliance. Our comprehensive approach unites financial statement auditors with tax attorneys, consulting CFOs and controllers, business process and system architects, data analysts, and IT security professionals.

If you have questions, please contact Robert Constantino, CPA, MSA, Director at 774.512.4213 or rconstantino@nullaafcpa.com, Matthew Hutt, CPA, CGMA, Partner at 774.512.4043 or mhutt@nullaafcpa.com—or your AAFCPAs Partner.