Revenue Recognition Considerations for Healthcare Organizations

As they head into the new year, long-term care providers should be finalizing their approach for implementation of ASU 2014-09. 

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As they head into the new year, long-term care providers should be finalizing their approach for implementation of ASU 2014-09. 

As they head into the new year, long-term care providers should be finalizing their approach for implementation of ASU 2014-09. 

ASU 2014-09, Revenue from Contracts with Customers, will take effect for annual reporting periods beginning after December 15, 2018. Therefore, for December 31 and June 30 year ends, the effective dates are December 31, 2019 and June 30, 2020, respectively. For public entities, the implementation dates were December 31, 2018 and June 30, 2019, respectively.  

The guidance provides an in-depth analysis for revenue recognition using a clear five-step methodology. But, before we get into those five steps, it’s important to understand the objectives of the new guidance. 

The Objectives of the New Guidance Are To:

  • Establish principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. 
  • Remove inconsistencies and weaknesses in existing revenue requirements.
  • Provide a more robust framework for addressing revenue issues.
  • Improve comparability of revenue recognition practices across entities and industries.
  • Provide more useful information to users of financial statements through enhanced disclosures.
  • Simplify the preparation of financial statements.
  • Recognize revenue to depict the transfer of promised goods or services to customers/consumers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 

The five-step methodology for revenue recognition – along with some particular considerations that are specifically relevant to long-term care providers – is outlined below. 

Step 1: Identification of the Contract With a Patient or Resident


The “contract” is the agreement between the provider and resident that creates enforceable rights and obligations, which may be written, oral or even implied by the providers customary business practices.  

In the context of the new regulations, a contract exists when all the following criteria are met: 

  • The agreement is approved by both the provider and resident.
  • The provider’s obligation to provide services can be clearly identified. These may include daily room and board, nursing, dietary, laundry, therapy and other similar services.
  • The payment terms for the services can be identified. Long-term care services provided will be paid on a daily per diem rate.
  • The agreement has commercial substance. As a result of the services provided, the provider expects that its future cash flows will change as a result of providing the services to the resident.
  • It is probable that the provider will collect the consideration to which it is entitled. It is important to identify credit assessments completed to determine the resident’s ability to pay for services. This assessment includes having the resident disclose all sources of income and assets in order to determine their ability to pay for the services provided. 

This first step is critical. If a contract does not meet the above criteria, the provider would continue to reassess the criteria until they are met; only then will the provider be able to recognize the revenue. 

Step 2: Identify the Separate Performance Obligations in the Contract 

Providers shall identify the services promised in the contract with a resident. Long-term care providers generally provide a series of distinct services for a resident in which they will receive daily room and board care, dietary, laundry and nursing services on a per diem basis, or various other ancillary services that can be provided, such as physical therapy, occupational therapy and speech therapy. 

Step 3: Determine the Transaction Price 

The transaction price is the amount of consideration/payment that the provider expects to be entitled in exchange for providing services.  

As part of determining the transaction price, the provider needs to assess if there are any variable considerations of payment. This is an important step since providers are expected to net all price concessions as part of recognizing revenue. Third-party payor settlements are considered to be a variable consideration. Under the new standard, providers will need to address the process for estimating settlements based on expected or most likely outcomes.  

As an example, a third-party payor starts paying 98% (payment assumes a 2% hold for readmission measures) for services, subject to adjustment based on readmissions with potential for up to a 2% bonus (102% of normal fixed fee). Without strong history to support recognizing anything greater than 98% of the fixed fee, the 98% would be recognized (nothing additional) due to uncertainty regarding potential reversal of revenue. The additional 2% or 4% of revenue would be recognized at the point that the certainty of its realizability has occurred. 

Providers may offer explicit or implicit price concessions. An explicit price concession would be a clearly identified pricing discount on services. As an example, upon admission, a resident will receive a 10% discount on room and board services after six months of services retroactive to the admission date.  

Implicit price concessions are not so clearly defined and can be unstated or suggested. Some questions to ask in determining implicit price concessions may include:  

  • Does a provider have a customary business practice of accepting less than the contractual amounts regardless of whether the discount is explicitly stated in the contract? 
  • Does the provider provide charity care?
  • Does the resident have an expectation that the provider will accept less than the stated price?
  • Will the provider continue to provide distinct services for the resident when there is a business practice pattern that indicates that the resident will and intends to pay less than the stated per diem rate?   

Step 4: Allocation of the Transaction Price to the Performance Obligation 

The transaction price should be allocated to each distinct service in an amount that depicts the amount of payment the provider expects to be entitled for providing the service to the resident.  

 For providers of long-term care services, the standalone daily per diem rate (transaction price) and the daily resident care services (performance obligations) usually occur simultaneously. Since the resident care services are transferred to the resident at the same time, no allocations are likely. 

Step 5: Recognition of Revenue when the Provider Satisfies the Performance Obligation 

Revenue is recognized when (or as) the distinct provider services (performance obligations) are satisfied by providing the resident care services to the resident. Performance obligations may be satisfied either at a point in time or over a period of time. 

Long-term care facilities satisfy the delivery of resident healthcare services’ performance obligations over time (daily). 

Certain ancillary services (barber, beauty) are recognized at a point in time once the service has been rendered.  

As part of the implementation of ASU 2014-09, enhanced disclosures of financial statements will be required. The objective of the disclosure requirements is to encourage a provider to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with residents. 

The implementation of ASU 2014-09 does require the collaboration of your management team in reviewing its policies and procedures on how revenue will be recognized. blumshapiro has developed a revenue recognition tool to assist your team in the implementation process. Please contact us if you need assistance in the adoption of the new ASU 2014-09 standard. 

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