FASB Approves EITF090H2 as Final Standard

The Financial Accounting Standards Board (“FASB”) has approved EITF090H2, Health Care Entities (Topic 954): Presentation and Disclosure of Net Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts, as a final standard.

When Will These Apply?

Private companies won’t have to apply the changes to Health Care Entities (Topic 954) until 2013, although earlier adoption is permitted.

What Changes Will Be Required?

The amendments to Health Care Entities (Topic 954) would require a health care entity to change the presentation of its statement of operations by reclassifying the provision for bad debts from an operating expense to a reduction from revenue (net of contractual allowances and discounts). Additionally, a health care entity would be required to provide enhanced disclosures about how it considers collectability in determining the amount and timing of revenue and bad-debt expense. The amendments also would require disclosures of revenue (net of contractual allowances and discounts) as well as a reconciliation of the activity in the allowance for doubtful accounts by major payor type.

Why the Changes?

The amendments change the presentation of the statement of operations and add new disclosures that are not required under current GAAP. FASB believes the change in the presentation of the statement of operations would be an improvement from current GAAP because it would result in the presentation of an amount of net revenue (after any provision for bad debts) that is closer to the amount that the health care entity ultimately expects to collect. The provision for bad debts still would be required to be disclosed on a separate line as a reduction from revenue (net of contractual allowances and discounts) in the statement of operations. The new disclosures would assist users of financial statements to better understand how a health care entity has considered collectability and customer credit risk in applying its revenue recognition policies.