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FASB Issues Accounting Standard Update for Certain Health Care Entities

August 15, 2011

By Christine DiMenna, CPA

In July 2011, the FASB issued Accounting Standard Update 2011-07 – Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (ASU 2011-07).  Although it will not impact operating results, ASU 2011-07 will change the way that many healthcare entities present the provision for bad debts in their financial statements. Healthcare entities affected by this update include certain continuing care retirement communities, clinics, hospitals, home health agencies, nursing homes and rehabilitation facilities.  These organizations will have to review their revenue recognition and reserving practices in order to determine whether these changes will apply to them, as discussed further in this article.

The ultimate collectability of revenues that are recorded when services are rendered is often unknown at the time the service is actually rendered.  Most healthcare organizations record an allowance for doubtful accounts based on an estimate of future write-offs.  The allowance is judgmental and may be based, for example, on historical collection rates. In addition, many organizations record patient-specific allowances for doubtful accounts based on facts that become known at a point in time well after the actual services were rendered.  ASU 2011-07 requires healthcare entities that record revenue for services rendered prior to the time that collectability is ultimately determined to report bad debt expense as a separate financial statement line as a deduction from net patient service revenues. 

Currently, bad debt expense is reported as a component of operating expenses.  The FASB’s rationale is that the provision for bad debts is inherently judgmental and that recording it as a component of operating expenses impairs the comparability of financial statements.  Showing the provision as a deduction from revenue will more clearly present the amount of revenue that an organization actually expects to collect, thereby improving the quality and comparability of the financial statements.

New disclosure requirements will include enhanced disclosures regarding revenue recognition policies and how the entity assesses their bad debts.  In addition, disclosures will be expanded to include both qualitative and quantitative information regarding changes in the allowance for doubtful accounts. These disclosures, which will be made by payor class, will include:

  • A description of the policy for assessing the timing and amount of uncollectible patient service revenue by major payor source
  • Qualitative and quantitative information about significant changes in the allowance for doubtful accounts

Healthcare organizations will have to assess whether they perform services for which the ultimate collection of all or a portion of the amounts billed cannot be determined at the time services are rendered.  If so, the changes outlined above will apply.  If not, the changes required by this update may not apply.

This update is effective for fiscal years and interim periods beginning after December 31, 2011 for public entities and for the first fiscal year ending after December 15, 2012 for non-public entities.  Early adoption is permitted.  The amendments regarding the presentation of bad debt expense on the income statement must be applied retrospectively to all prior periods presented.  The new disclosure requirements will be provided for the period of adoption and all subsequent periods.

Christine DiMenna, CPA, is a Manager with BlumShapiro, based out of the company’s West Hartford office and specializing in accounting and auditing services for healthcare organizations.  BlumShapiro is the largest regional accounting, tax and business consulting firm based in New England, with offices in West Hartford and Shelton, CT and Boston and Rockland, MA.  The firm serves as business advisors for today’s leading middle market companies, non-profit organizations and government entities, working to strategically tailor and consistently deliver tested solutions for unlocking an organization’s full potential.  For more information about BlumShapiro, visit


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