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Impact of Credit Losses (CECL) on Healthcare Organizations

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (ASC Topic 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. CECL requires an estimate of credit losses for the remaining estimated life of a financial asset using historical experience, current conditions, and reasonable and supportable forecasts. This standard has gone into effect for all nonpublic companies with fiscal years starting after December 15, 2022. This means all December 31, 2023, and June 30, 2024, nonpublic companies and nonprofit organizations are required to adopt this standard.

Financial assets that are impacted by this change are those that are measured on an amortized costs basis, such as trade receivables, loan commitments and receivables, and net investments in sales-type and direct financing leases. Examples of financial assets that are not impacted by this change include contribution receivables, available-for sale debt securities, and operating lease receivables.

As noted above, trade receivables are included within this scope, which for healthcare organizations means that net patient receivables would be impacted. However, healthcare organizations are already applying implicit price concessions against the patient accounts receivable balance, so how does this new standard impact net patient service accounts receivable balances? The answer – self-pay patient service accounts receivable balances; more specifically, the self-pay patient service accounts receivable in which the healthcare organizations perform credit checks over the patient’s ability to pay. Therefore, this mostly impacts those healthcare organizations that provide elective procedures.

The difference between implicit price concessions and provision for credit losses are that implicit price concessions reduce both patient service revenue and receivables, whereas the provision for credit losses is recognized as an expense and an allowance against the patient service receivable.

For healthcare organizations that do not perform credit checks on self-pay patients, there will not be a material impact to how net patient service receivables are being accounted for. The only significant change that will be seen is language updates in the financial statement disclosures relating to patient service accounts receivable.

For those that do provide elective procedures, CECL does not require any specific approach to estimating an allowance for expected credit losses. Therefore, the current methods that many healthcare organizations are performing, such as utilizing aging schedules or basing allowances on historical trends in credit quality indicators, will continue to be appropriate. The significant change from this standard is the balance sheet presentation of the allowance for expected credit losses. This allowance on financial assets measured at amortized cost must be presented on the balance sheet separately from the financial asset’s cost balance and there will be additional disclosures added to the financial statements.

If you have questions about the information outlined above, McKonly & Asbury’s experienced professionals are here to help. Learn more about our Healthcare practice by visiting our Healthcare industry page or by contacting the director of our Healthcare practice, Janice Snyder, Partner.

About the Author

Kady Hand

Kady joined McKonly & Asbury in 2016 and is currently a Manager with the firm. As a member of the Audit & Assurance Segment, she focuses on providing client services, particularly in the areas of healthcare entity audits and single… Read more

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