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The Financial Accounting Standards Board (FASB) rules for recognizing revenue are changing, and leaders of healthcare organizations should understand how the new requirements may affect their financial modeling and reporting.
Net patient service revenue is one of the most important and highly scrutinized measures used to assess a healthcare entity's financial performance. However, the accounting standards that healthcare providers must follow when recognizing revenue are changing. Organizations should understand the impact new recognition requirements will have and be prepared to implement them.
Given that nearly all healthcare organizations already struggle to address competing priorities, their financial leaders may find the idea of implementing changes to current processes daunting. Furthermore, the one-year postponement of the effective dates for the new revenue recognition standards-coupled with the subjectivity of the guidance in certain areas- might encourage procrastination. Nevertheless, to achieve the objectives of the new standards, organizations must plan ahead.
The 5 Steps to Revenue Recognition and Net Revenue Modeling Considerations
In May 2014, the FASB released Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the International Accounting Standards Board issued International Financial Reporting Standard 15.a These converged standards, which share the same title, represent a shift from industry-specific guidance to a single, global revenue recognition model and require significant judgment to implement and execute.1'
Finance executives and managers in health systems, physician practices, hospice facilities, long-term care facilities, and other healthcare-related entities should understand not only what rules are changing but also how the updated standards may affect financial modeling and reporting. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects in exchange for those goods and services.
The FASB has outlined five steps entities should follow to comply with the core principle. Each step and the changes associated with it may affect the way healthcare organizations and their finance leaders approach net revenue modeling.
Step 1: Review contracts with customers. One of the first steps healthcare organizations should take to prepare for the new guidance is to review their current contracts with customers in the context of the updated standard. ASU 2014-09 requires...