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Bad Debt Expense for Health Care Entities

Many health care entities recognize patient service revenue (PSR) at the time the services are rendered regardless of whether or not the entity expects to collect that amount. Such accounting practices could result in a gross-up of PSR and the related provision for bad debts. Because health care entities make their own judgments regarding adjustments to revenue and bad debts, those judgments are different from one health care entity to another, making analysis difficult for financial statement users.

The recent Financial Accounting Standards Board (FASB) Update No. 2011-07 provides financial statement users with greater transparency about a health care entity's net PSR and the allowance for doubtful accounts. This amendment changes a health care entity's classification of the provision for bad debts related to PSR from an operating expense to a deduction from PSR on a separate line on their statement of operations (net of contractual allowances and discounts). Additionally, those health care entities will be required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. For public entities, the amendments are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for the first annual period ending after December 15, 2012, and interim and annual periods thereafter, with early adoption permitted.

Source: FASB Update No.2011-07 Health Care Entities (Topic 954)

For more information, contact Partner Katherine G. Watts at kathy.watts@horne-llp.com or call 731.664.3712.