ACCOUNTANTS’ HANDBOOK VOLUM phần 6 pot

PPM can establish a controlling financial interest in a medical entity solely through contractual arrangements if, via the terms of the contractual arrangement, the PPM has both control over the medical entity and a financial interest in the medical entity that meets six requirements. The requirements are: a. The contractual arrangement between the PPM and the PC is either (i) the entire remaining life of the physician practice entity; or (ii) for a period of 10 years or more. b. The contractual arrangement is not terminable by the physician practice except in cases of gross negligence, fraud, or other illegal acts by the PPM, or upon bankruptcy of the PPM. c. The PPM has exclusive authority over all decision making related to ongoing, major, or central operations of the physician practice, except for the dispensing of medical services. d. The PPM has exclusive authority over all decision making related to total practice compensation of the licensed medical professionals, as well as the ability to establish and implement guidelines for the selection, hiring, and firing of them. e. The PPM must have a significant financial interest in the physician practice that is unilaterally salable or transferable. f. The PPM’s significant financial interest must provide the PPM with the right to receive income (both as ongoing fees and as proceeds from the sale of its interest in the physician practice) in an amount that fluctuates based on the performance of the operations of the physician practice and the change in the fair value thereof. Contract Term. The first threshold in determining controlling financial interest is to evaluate the “long-term nature of the relationship.” In order to be considered “long-term,” the contractual agreement between the PPM and the medical entity must be for a period of 10 years or more and may not be terminable by the medical entity except in the event of gross negligence, fraud, or other illegal activities, or bankruptcy of the PPM. The evaluation of whether the contractual arrangement can be considered long term should be based on substance as opposed to form. Therefore, both the original stated contract term and any renewal or cancellation provisions must be considered; for example, an agreement having an initial stated term of five years, with one five-year renewal option exercisable solely at the discretion of the PPM, is considered “long term” because it is collectively a 10-year contract. (Note: Defining “long term” as 10 years or more is specific to this particular EITF consensus. It is not intended that this definition be extended to the use of that term in other authoritative accounting literature.) Control over Medical Entity. The ability of a PPM to demonstrate control is directly affected by corporate practice of medicine laws. From a structuring perspective, it is generally believed that the most effective way to demonstrate control is through the use of the “nominee shareholder” model. 20 34.4 SPECIAL ACCOUNTING PROBLEMS OF SPECIFIC TYPES OF PROVIDERS 34 • 43 20 EITF Issue No. 97-2 provides the following description of a “nominee shareholder” arrangement: One or more shareholders whose relationship with the PPM (which can be either the PPM itself or its controlled subsidiaries) perpetually has all of the following characteristics: Time Frame: • The PPM can at all times establish or effect a change in the nominee shareholder. • The PPM can cause a change in the nominee shareholder an unlimited number of times, that is, changing the nominee shareholder one or more times does not affect the PPM’s ability to change the nominee shareholder again and again. Discretion: • The PPM has sole discretion without cause to establish or change the nominee shareholder. • The PPM can name anyone as a new nominee shareholder (that is, the PPM’s choice of an eligi- ble nominee is not limited). Impact: • The PPM and the nominally owned entity incur no more than a nominal cost to cause a change in the nominee shareholder. • Neither the PPM nor the nominally owned entity is subject to any significant adverse impact upon a change in the nominee shareholder. Therefore, the EITF provides a two-pronged approach to evaluating whether control exists, depending on whether or not the contractual arrangement uses the nominee shareholder model. When the contractual arrangement between the PPM and the medical practice is structured using the nominee shareholder model, and a majority of the outstanding voting equity instruments of the practice are owned by the nominee shareholder, there is an automatic presumption that the PPM has control over the medical entity. The presumption is rebutted if the PPM, either through a management agreement or through its nominee, has granted rights to others such that the PPM does not have “exclusive decision-making authority.” However, it cannot be rebutted if the PPM possesses exclusive decision-making authority. If the nominee shareholder model is not used, the existence of “control” would be determined based on whether the contractual arrangement meets both of the following requirements: • The PPM has exclusive authority over all decision making related to total compensation of the licensed medical professionals as well as the ability to establish and implement guidelines for their selection, hiring, and termination. • The PPM has exclusive authority over all decision making related to ongoing, major, or central operations of the medical entity, other than the dispensing of medical services. This includes decision-making authority over scope of services, patient acceptance policy and procedures, pric- ing of services, negotiation and execution of contracts, and establishment and approval of operating and capital budgets. If debt financing is an ongoing, major, or central source of financing for the medical entity, the PPM must also have exclusive decision-making authority over issuance of debt. EITF Issue No. 97-2 also discusses whether certain common contractual provisions (e.g., binding arbitration, physician co-signing requirements) result in surrender of some or all of a PPM’s “exclusive decision-making authority” in critical areas. There also is discussion regarding the relationship of the “exclusive decision-making authority” requirements and state laws that might appear to impair that decision-making authority, such as patient antidumping laws. Financial Interest. As was the case with the “control” criterion, the EITF provided a two-pronged approach to determining whether a financial interest exists based on whether or not the contractual arrangement is based on the “nominee shareholder” model. If the nominee shareholder model is used, and the nominee shareholder owns a majority of the outstanding voting equity instruments of the practice and has exclusive decision-making authority, as discussed above, the PPM is presumed to have a financial interest in the medical entity, as long as the PPM has the power to—at will and for no or only nominal compensation—reset the terms of its financial interest in the physician practice to a basis that would meet criteria (e) and (f). If the nominee shareholder model is not used, then the PPM must demonstrate that it has a significant financial interest in the medical entity. The required “significant” level of financial interest of the PPM in the physician practice is intentionally not prescribed. This is meant to convey that what is “significant” must be determined in the context of the facts and circumstances. A financial interest in a physician practice is the right to share in the change in the fair value of that physician practice. This right must be economically similar to the right a shareholder must pos- sess. For purposes of the financial interest requirements contained in criterion (f), that change in fair value is viewed as consisting of two components: (1) the portion of the change that manifests itself as current operating results and (2) the remainder, which is the portion of the change that manifests itself only upon sale or liquidation of the physician practice. Criterion (f) requires that the PPM have rights to share in both components and that the amounts collectively derived constitute a significant portion of the total change in fair value. If the PPM’s arrangement with the physician practice will end before the physician practice is sold or liquidated, the PPM would need to have the right to share in the change in the fair value of the physician practice that arose during the PPM’s relationship with it in order to meet the requirement described in criterion (b). For purposes of determining compliance with criterion (f), the calculation of ongoing fees and the calculation of proceeds from sale are to be evaluated based on their substance as opposed to their form. Determining whether the requirements of criterion (f) are met will require the use of judgment. 34 • 44 PROVIDERS OF HEALTH CARE SERVICES (ii) Business Combination Issues. EITF Issue No. 97-2 also addresses whether such “acquisi- tions” of medical practices by PPMs qualify as business combinations. The EITF concluded that when a PPM acquires the net assets and enters into long-term management service agreements with the medical entity, the transaction is considered a business combination subject to APB No. 16 if both (1) the medical entity is a “business” that is, it has an existing patient base at the time of the transaction, 21 and (2) the PPM is required to consolidate the medical entity under No. 97-2’s consolidation criteria. (iii) Consolidation and Employee Status. EITF Issue No. 97-2 also addresses whether physicians employed by the medical practices should be considered employees of the PPM for purposes of determining the appropriate method of accounting for such individuals’ stock-based compensation. The EITF observed that that determination should depend on whether the PPM consolidates the physician practice. An employee of a physician practice that is consolidated by the PPM should be considered an employee of the PPM and its subsidiaries, and vice versa. (See also FASB Interpreta- tion No. 44, “Accounting for Certain Transactions Involving Stock Compensation.”) (iv) Financial Reporting Considerations. Prior to EITF Issue No. 97-2, one of the most perplex- ing problems faced by PPM companies was characterizing the scope of the company’s business in its financial statements. PPMs can own medical practices outright in states that do not prohibit corporate practice of medicine; in such situations, the PPM and the medical practices clearly are components of the same business, and the financial statements will reflect both the medical operations and the practice management operations. However, if a similar business is conducted in a state with corporate practice laws, the PPM legally cannot own stock of the medical practice. In those cases, the PPM will not be able to obtain a controlling financial interest in the usual way (i.e., ownership of more than 50% of the medical practice’s stock). However, the PPM may be able to determine the direction of the practice’s management and policies through the rights provided it in the management services agreement (MSA) contract. As discussed in (i), EITF Issue No. 97-2 provides a listing of criteria that, when applied to contractual arrangements between PPMs and medical practices, indicate whether or not the PPM should consolidate the assets and operations of the medical practice. The reporting status creates significant differences in the appearance of the PPM’s financial statements, particularly with regard to the income statement, depending on whether the PPM is a “consolidator” or “nonconsolidator.” • “Consolidator” PPMs—those that include the medical entities in their financial statements— characterize their primary business as providing medical care. The top line of their income statement will reflect the revenues derived by the medical practices for patient care. This presentation is based on the rationale that the balance of power (i.e., control) rests with the management company, which is outsourcing the provision of medical services to various medical practices that it controls. This reporting format is illustrated in Exhibit 34.1. • “ Nonconsolidators,” on the other hand, characterize their operations as providing business services. Consequently, they begin the income statement with the amount of fees earned under the management service agreement contracts. This presentation is based on the rationale that the balance of power rests with the medical entity, and the PPM is a supplier or vendor to whom the physicians are outsourcing the business functions associated with running their practice. This reporting format is illustrated in Exhibit 34.1. (v) SEC Reporting Issues Inclusion of Separate Financial Statements of Affiliated Medical Practices in IPO Filings. Separate financial statements of a medical practice with which a PPM will consummate, or has 34.4 SPECIAL ACCOUNTING PROBLEMS OF SPECIFIC TYPES OF PROVIDERS 34 • 45 21 For example, a dentist who recently graduated and has incorporated, but has yet to establish a practice, would not be considered a “business” for purposes of making this determination. 34 • 46 F ORMAT A— C ONSOLIDATED PRESENTATION F ORMAT B—U NCONSOLIDATED (STANDALONE ) PRESENTATION INCOME STATEMENT Net medical practice revenue $85,000 Expenses: Physician salaries (30,000) Provision for uncollectible accounts (3,000) Management services revenue $52,000 Clinic costs (49,000) Clinic costs (49,000) Net Income $0 3,000 Net Income $0 3,000 NOTES TO FINANCIAL STATEMENTS Note A. Basis of Presentation Note A. Basis of Presentation The consolidated financial statements include the accounts of GoodDocs Inc. (“GoodDocs”) and its beneficially owned subsidiary. In response to state corporate practice of medicine statutes, GoodDocs has executed a management service agreement (“MSA”) with its related professional corporation (“PC”), Prosperous Internal Medicine Associates. Through the terms of the MSA, GoodDocs has complete control over the PC with the exception of the direct provision of medical services. The MSA substantially restricts the business activities and the rights of the shareholders of the PC. The PC is consolidated because GoodDocs has a controlling financial interest in its assets and business operations and because, notwithstanding the lack of majority ownership, consolidation of the PC is neces- sary to present fairly the financial position and results of operations of GoodDocs due to the existence of a parent-subsidiary relationship by means other than majority ownership of the PC’s voting stock. GoodDocs effectively has perpetual control over the PC and, upon termination of any such agreement by the physicians, GoodDocs intends to exercise its option to pur - chase the stock of the PC. Fees paid to GoodDocs approximate the operating income of the PC, as defined in the MSA. GoodDocs, Inc. (“GoodDocs“) provides management support to its related professional corporation, Prosperous Internal Medicine Associates (“PC”), under a 40-year management services agreement (MSA). Under the terms of the MSA, GoodDocs, among other things, bills and collects patient re- ceivables and provides all administrative support services to the PC in exchange for management fees. GoodDocs and the PC are related through common ownership and a common member on both GoodDocs’ and PC‘s Boards of Directors. GoodDocs and the PC structured their business enterprise to comply with state regulatory mandates requiring medical practices to be owned and operated by state-licensed medical professionals. Exhibit 34.1 Comparison of PPM financial presentation formats. Note B. Significant Accounting Policies Note B. Significant Accounting Policies Net Medical Practice Revenue Management Services Revenue Net medical practice revenue is reported at the estimated real- izable amounts from patients, third-party payers and others for services rendered. Revenue under certain third-party payer agreements is subject to audit and retroactive adjustments. Provisions for estimated third-party payer settlements and adjustments are estimated in the periods the related services are rendered and adjusted in future periods as final settlements are determined. During the year, X% of net revenue was received under the Medicare program and X% under the Medicaid program. The Medicare and Medicaid programs pay physician services based on fee schedules which are established by the related government agency. GoodDocs has numerous agreements with managed care organizations to provide physician services based on negotiated fee schedules; however, no individual managed care organization is material to the company. Management service revenue approximated the operating income of the PC, as defined in the MSA. The following repre- sents amounts included in the determination of management service revenue: Gross medical billings $100,000 Contractual allowances (15,000) Net medical practice revenue 85,000 Provision for uncollectible accounts (3,000) 82,000 Amounts retained by physicians (30,000) Management services revenue $ 0 52,000 Intangible Assets Intangible Assets Intangible assets include the excess of cost over the fair value of net assets of assets acquired (goodwill), the fair value of acquired third-party payer contracts, and amounts assigned to noncompete agreements. All intangibles are amortized on a straight-line basis with lives between 20 and 40 years for goodwill, 3 to 7 years for payer contracts, and the lives of the agreements for specific noncompete arrangements. Intangible assets related to the management service agreement consist of the costs of purchasing the rights to manage the medical practice. Theses costs are capitalized and amortized over the initial noncancelable 40-year terms of the related management service agreement. 34 • 47 (Continued) Exhibit 34.1 Continued. F ORMAT A— C ONSOLIDATED PRESENTATION F ORMAT B—U NCONSOLIDATED (STANDALONE ) PRESENTATION Note C. Contingencies Note C. Contingencies In addition to the general liability and malpractice insurance carried by the individual physicians, GoodDocs is insured with respect to general liability and medical malpractice risks on a claims-made basis. Management is not aware of any claims against the company. In addition, GoodDocs has not accrued a loss for unreported incidents or for losses in excess of insur - ance coverage, as the amount, if any, cannot be reasonably estimated and the probability of an adverse outcome cannot be determined at this time. It is the opinion of management that the ultimate resolution of any unasserted claims will not have a material adverse effect on GoodDocs’ financial position or results of operations. No disclosures related to medical malpractice would be included in the financial statements. The discussion of the business contained in the Form 10-K filed by GoodDocs would probably contain a statement similar to the following: “The provision of medical services by the physician group with which GoodDocs contracts entails an inherent risk of professional liability claims. GoodDocs does not control the practice of medicine by physicians or the compliance with certain regulatory and other requirements directly applicable to physicians and physician groups.” 34 • 48 recently consummated, a significant management agreement generally are not required in an IPO filing if the PPM does not consolidate the practice and does not guarantee any minimum practice income, extend unusual credit terms, or fund operating losses. However, if the PPM is expected to have a material dependence on the PC, separate financial information about the practice would be material to investors. For example, if the management fee from the practice is expected to generate more than 20% of the PPM’s revenues in the next 12 months, the SEC has requested audited financial statements of the practice. However, the SEC has accepted only unaudited summary financial information about the practice for the three most recent fiscal years if audited financial statements are not readily available and its owners are not promoters of the offering being registered. Historical information about the practice for any period before its ownership by the current owners would not be requested unless the PPM is of the view that a change in an owner does not funda- mentally change the underlying business. If the owners of a practice generating 20% or more of the PPM’s revenues own 10% or more of the PPM at the time of its IPO or are promoters of the offering, audited financial statements of that practice for at least its most recent fiscal year ordinarily would be required, unless effects of providing the management services to the practice have been included in the PPM’s audited financial statements for at least nine months. If financial information of a managed practice is presented, care should be taken to avoid the impression that an investor is obtaining an interest in the practice or that the historical results are indicative of future results under the altered incentive structure and management affiliates established with the PPM. Disclosure Issues. The SEC staff expects PPM registrants to clearly and accurately describe their business and contractual relationships. Financial statement disclosures should address the following: W HAT IS THE NATURE OF THE PPM’S BUSINESS? • Describe the contractual relationship among the PPM and the medical practices. Describe the PPM’s rights and limitations under the contracts. • Disclose how the PPM’s fees are determined. If the fees are based on a percentage of certain items, what are those percentages, or what is the range of the percentages? What items affect the calculation? • Even if the PPM combines the operations of the medical practice group for financial statement purposes or has consolidated subsidiaries that provide the medical services, the PPM must clearly distinguish the services it provides from the practice of medicine. W HAT IS THE PPM’S RELATIONSHIP WITH MANAGED CARE PROVIDERS? • Disclose whether the PPM (or an assignee) enters into direct contracts with managed care companies or whether the physician groups contract directly with the managed care companies. • Identify the party who assumes the risk under managed care contracts (i.e., the PPM or the physician group). If the PPM assumes the contracts, are there any issues relating to medical li- censing? • Who assumes the risk associated with capitated payment contracts? If the PPM assumes the risk, does this subject it to regulation as an insurance company? I S THE PPM SUBJECT TO ANY STATE OR FEDERAL REGULATIONS? • Describe any state prohibitions on the corporate practice of medicine, and discuss the impact upon the PPM. • Is the PPM subject to regulation as an insurer? • What is the effect of federal antikickback and self-referral restrictions? 34.4 SPECIAL ACCOUNTING PROBLEMS OF SPECIFIC TYPES OF PROVIDERS 34 • 49 34.5 FINANCIAL REPORTING PRACTICES (a) USERS OF FINANCIAL STATEMENTS. The primary users of health care companies’ general purpose financial statements are providers of capital who make rating and investment decisions in competitive capital markets (including investors in tax-exempt debt securities); suppliers of goods and services to the industry with whom health care companies maintain credit relationships; stockholders and other owners; the Securities and Exchange Commission; and regulators such as state De- partments of Insurance and other oversight groups. (b) BASIC FINANCIAL STATEMENTS. Investor-owned and not-for-profit health care providers generally prepare four financial statements: 1. Balance sheet 2. Income statement/statement of operations 3. Statement of changes in stockholders’ equity/statement of changes in net assets 4. Statement of cash flows Not-for-profit health care entities are required to follow the financial reporting requirements contained in FAS No. 117, Financial Statements of Not-for-Profit Organizations, as modified by certain requirements contained in Health Care Organizations. Generally speaking, FAS No. 117 provides broad standards of financial reporting with which all not-for-profit organizations (including not-for- profit health care organizations) must comply. However, the FASB permitted the AICPA to provide industry-specific implementing guidance for FAS No. 117 through its audit and accounting guides. Although technically the guidance in Health Care Organizations stands lower in the GAAP hierar- chy than does the FASB guidance, the FASB expects not-for-profit health care organizations to apply the requirements of FAS No. 117 in the manner specified by the Audit Guide. Generally speaking, those modifications are intended to keep the financial statements of not-for-profit providers comparable to those of investor-owned providers. Governmental health care entities are required to follow the financial reporting requirements prescribed by GASB No. 34, “Basic Financial Statements—and Management’s Discus- sion and Analysis—for State and Local Governments.” (GASB No. 34’s phased-in effective date is discussed at Section 32.11.) For purposes of applying GASB No. 34, the governmental health care organizations included within the scope of the AICPA audit and accounting guide Health Care Organizations are considered “special purpose governments engagement in business-type activities.” Those entities should present financial statements required for enterprise funds, which consist of: • Management’s Discussion and Analysis (as RSI) • Statement of net assets (balance sheet) • Statement of revenues, expenses, and changes in net assets • Statement of cash flows • Notes to financial statements • RSI other than MD&A (if applicable) Although GASB No. 34 establishes eight required elements of MD&A, many of those elements are not applicable to governmental health care entities. Consequently, MD&A discussion should be limited to only the elements that are applicable. Health Care Organizations provides illustrative financial statements for investor-owned, tax- exempt, and governmental health care organizations. Those statements illustrate the application of the reporting practices contained in the Guide. Specific types of health care organizations are presented, but only to illustrate a wide diversity of reporting practices. It is not intended that these illustrations represent either the only types of disclosure nor the only statement formats that would be appropriate. More or less detail should appear in the financial statements or notes, depending on the circumstances. 34 • 50 PROVIDERS OF HEALTH CARE SERVICES (c) BALANCE SHEET. All health care organizations must prepare classified balance sheets which segregate assets and liabilities between current and noncurrent categories. 22 Special considerations related to balance sheet reporting of not-for-profit and governmental providers are discussed below. (i) Not-for-Profit Providers. Restricted assets and liabilities should not be carved out and presented separately in the balance sheet. Because donor restrictions generally relate to limitations on the use of net assets rather than specific assets (i.e., the provider normally is not required to physi- cally maintain restricted resources separately from unrestricted resources), “cash is cash” regardless of whether it was received as a specific-purpose gift or generated through operations. As a result, the provider’s obligation to use unexpended donor-restricted contributions in accordance with the donor’s wishes is reflected by structuring the equity section of the balance sheet into three broad classes: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. If the amount of unexpended donor-restricted contributions is material, the nature of restrictions should be disclosed in the notes to the financial statements. The accounting and reporting requirements for donor-restricted contributions is discussed at Subsection 34.3. Limitations on the use of assets arising from sources other than donor restrictions are high- lighted by using the balance sheet caption “assets whose use is limited.” These are discussed at Subsection 34.3(b)(i). (ii) Governmental Providers. A governmental provider’s balance sheet may be prepared using either the traditional balance sheet format or a net assets format (assets less liabilities equal net assets). The equity section of the balance sheet is structured into three broad classes of net assets: unrestricted; invested in capital assets, net of related debt (i.e., capital assets reduced by accumulated depreciation and by any outstanding debt incurred to acquire, construct or improve those assets); and restricted (differentiated between expendable and nonexpendable). The provider’s obligations to use certain resources for specific purposes is reflected in the balance sheet by (1) presenting those assets separately and (2) reporting any difference between those assets and their related liabilities as “restricted net assets.” The word “restricted” is not required to be used in labeling the assets themselves; however, the descriptions used on the face of the balance sheet should make it clear that such assets cannot be used to satisfy the organization’s current liabilities (other than any current liabilities that are intended to be satisfied with the restricted assets). Under GASB No. 34, assets are reported as restricted when limitations on their use is externally imposed (e.g., by creditors, grantors, contributors, or the laws or regulations of other governments). Restricted assets should be presented separately in the balance sheet. Internally imposed limitations (such as specific-purpose designations imposed management or the board) are included in unrestricted net assets. (d) OPERATING STATEMENT. Appendix A of the Guide provides illustrative income statements for investor-owned, not-for-profit, and governmental health care organizations. These statements are not intended to establish standards but merely to illustrate the reporting conven- tions discussed in the Guide. Although income statement reporting requirements differ signifi- cantly based on whether a provider is investor owned, not-for-profit, or governmental, all allow flexibility in the amount of detail that is provided. Some providers choose to present a great deal of detail; others present statements that are highly condensed with details, if any, provided in the notes. The Guide allows each provider to determine the level of detail that provides the most meaningful disclosure within the broad parameters established by GAAP. 34.5 FINANCIAL REPORTING PRACTICES 34 • 51 22 For not-for-profit providers, this is a modification of the guidance provided in FAS No. 117, which requires information about liquidity of assets and liabilities be provided in “some fashion” (e.g., by sequential ranking) within the balance sheet. Significant differences exist in the presentation of extraordinary items, discontinued operations, and cumulative effect of changes in accounting principles depending on whether a provider is investor owned, not-for-profit, or governmental, as follows. Presentation of Type of Provider Extraordinary Items Discontinued Operations Cumulative Effect Investor-owned Just before net income Just before net income Just before net income Not-for-profit Just before change in Just before change in Just before change in unrestricted net assets, unrestricted net assets, unrestricted net assets, with subtotal with subtotal with subtotal Governmental Below nonoperating revenue See discussion Adjustment of beginning fund balance GASB No. 34 is silent on how discontinued operations should be reported. Based on informal dis- cussions with GASB staff, the author believes that reporting of discontinued operations would be part of the detail required by GASB No. 34 for the “Operating revenue” and “Operating expense” sections of the statement of changes in revenues, expenses, and changes in net assets, because both continuing and discontinued operations are part of a health care organizations operating activity. The “Operating revenues” section would contain one or more lines identified as “revenue from discontinued operations,” with a similar presentation of “expenses from discontinued operations” provided in the “Operating expenses” section. Any gain or loss on disposal of an operation would be reflected as nonoperating revenue or expense (similar to the treatment of other types of gains/losses under GASB No. 34). (i) Requirements for Investor-Owned Providers. The income statement reporting requirements for investor-owned health care providers are similar to those for other types of investor-owned service providers. Providers that are SEC registrants sometimes will receive comment letters from the SEC requesting that their income statements display operating expenses at a level of detail “consis- tent with the AICPA audit guide for health care providers.” As stated previously, the sample financial statements included in the Guide are illustrative and are not intended to establish a practice that would require a certain level of disclosure. (ii) Requirements for Not-for-Profit Providers. The income statement requirements for not-for- profit health care entities were established by FAS No. 117, as modified by certain requirements contained in Health Care Organizations. Those modifications are as follows: FAS No. 117 Requirement Presentation of a “statement of activity” that combines the information traditionally presented in an income statement with the information traditionally reported in the statement of changes in net assets. Reporting of results of operations (i.e., net income) is permitted but not required. Contributions of property, plant, and equipment (or of funds expended to purchase such assets) are reported as increases in unrestricted net assets in the statement of activities. Modification provided in Health Care Organizations Subdivides “statement of activity” into two required statements: a “statement of operations” (i.e., income statement) and a “statement of changes in net assets.” Must provide “performance indicator” subtotal 23 within the statement of operations. Such contributions should be reported below the “performance indicator” (i.e., excluded from net income) in the statement of operations. 34 • 52 PROVIDERS OF HEALTH CARE SERVICES 23 The FASB has objected to use of the term “net income” to refer to the results of operations of not-for-profit health care organizations. Therefore, Health Care Organizations uses the generic term “performance indicator” to describe the operating measure. [...]... Accounting Guide New York, 19 96 , “Checklists and Illustrative Financial Statements for Health Care Organizations,” 19 96 34.7 SOURCES AND SUGGESTED REFERENCES 34 57 • , “Providers of Health Care Services (Section 64 00).” Technical Practice Aids, 1997 Healthcare Financial Management Association, (P&P Board Statements and Issue Analyses are available from HFMA at 1-800-252-4 362 , ext 420.) “Accounting and... changes required to implement a new standard, the description must be provided within 60 days of the date of award of the contract requiring the change For any other change, it is required not less than 60 days before the effective date of the proposed change For noncompliance, the written description must be provided within 60 days after the date of agreement of such noncompliance Other dates for providing... Educational Institutions 9904.401, 9904.402 9904.403, 9904.410, 9904.418, 9904.420 9904.404, 9904.409 9904.414, 9904.417 9904.408, 9904.412, 9904,413, 9904.415 9904.405, 9904.4 06, 9904.407, 9904.411, 9904.4 16 9905.501, 9905.502 9905.505, 9905.5 06 Consistency in Estimating, Accumulating, and Reporting Costs (9904.401 and 9905.501) The purpose is to ensure consistency in each of the contractor’s cost accounting... of All MajorityOwned Subsidiaries, and APB Opinion No 16, Business Combinations, to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements,” EITF Issue No 97-2 Norwalk, CT, 1997 , “Accounting for Contributions Received and Contributions Made,” Statement of Financial Accounting Standards No 1 16, 1993 , “Financial Statements of Not-for-Profit Organizations,”... Coverage (ii) Price Adjustments (iii) Disclosure Statements (iv) The Standards (d) Contract Changes and Terminations (i) Contract Changes (ii) Contract Terminations 10 10 10 11 12 12 13 15 17 18 20 26 26 27 35.1 UNIQUE ACCOUNTING REQUIREMENTS FOR FEDERAL CONTRACTORS The federal government operates within a formalized statutory and regulatory framework when it acquires products and services That process... for various strata For example, a high-cost, specialized electronic component may be put in a stratum that requires 100% accuracy, whereas an inexpensive bolt may be in a stratum that requires 60 % accuracy A potential result of using multiple strata is that inaccuracy in one strata may cause the accuracy of the entire inventory to fall below the 95% level; however, using multiple strata may make it... notification of potential cost overruns Boards of contract appeals and the courts have ruled in numerous instances that inadequate 35 8 • ACCOUNTING FOR GOVERNMENT CONTRACTS accounting or project management systems are not valid excuses for not providing the notice required by the clauses (e) BILLING SYSTEMS (i) Cost-Reimbursement Contracts The “Allowable Cost and Payment” clause (FAR 52.2 16- 7) provides... proceedings Deferred research and development costs Goodwill Cost of alcoholic beverages Asset valuations resulting from business combinations Exhibit 35.1 FAR 31.205 selected costs -1 -3 -4 -6 -7 -8 -10 -11 -12 -13 -14 -15 - 16 Allowability Status Substantially unallowable Unallowable Generally allowable Allowable with restrictions Unallowable, with regard to conditions that cannot be measured with reasonable... Allowable Allowable with restrictions -17 -18 Unallowable Unallowable Allowable (gains limited to depreciation taken) Allowable with restrictions Allowable -19 -20 -21 -22 -23 -24 -25 - 26 -27 -28 -29 -30 -31 -32 -33 -34 -35 - 36 -37 -38 -39 -40 -41 -42 -43 Allowable with restrictions Unallowable Allowable with restrictions Unallowable Unallowable Allowable Allowable Allowable, with restrictions Unallowable... exempt (“Cost Accounting Standards—Educational Institution,” FAR 52.230-5) requires an educational institution to: • • • Comply with 9905.501, 9905.502, 9905.505, and 9905.5 06 (comparable to 9904.401, 9904.402, 9904.405, and 9904.4 06) Disclose in writing their cost accounting practices when required Consistently follow their cost accounting practices Agree to an adjustment of contract price or cost allowance . York, 19 96. , “Checklists and Illustrative Financial Statements for Health Care Organizations,” 19 96. 34 • 56 PROVIDERS OF HEALTH CARE SERVICES , “Providers of Health Care Services (Section 64 00).”. Accident and Health Contracts,” No. 55, “Unpaid Claims, Losses and Loss Adjustment Expenses,” No. 66 , “Retrospectively Rated Insurance Contracts,” No. 73, “Health Care Delivery Assets—Supplies,. Ac- counting Standards No. 124, 1995. 34.7 SOURCES AND SUGGESTED REFERENCES 34 • 57

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