ASC 606, Revenue From Contracts with Customers Health Care: What to Expect

ASC 606, REVENUE
FROM CONTRACTS WITH
CUSTOMERS
HEALTHCARE:
WHAT TO EXPECT
January 30, 2018
WWW.CITRINCOOPERMAN.COM

PRESENTED BY
Mary Paladino, CPA
Partner
Michael E. Criscione, CPA
Partner
Vincent Abbruzzese, CPA
Director
Mary oversees the audit and
assurance services practice in the
firm’s White Plains, NY, office.
She brings more than 25 years of
experience providing audit,
accounting, and business consulting
services to her clients in a diverse
range of industries, including
manufacturing & distribution, health
care, technology, and not-for-profit.
Michael specializes in audit and
business advisory solutions for
healthcare entities such as home health
agencies, hospices, long-term care and
assisted living facilities, community
health centers, and health and human
service providers. He has over 30 years
of Medicare/Medicaid experience,
including assistance with the
preparation of third-party cost reports,
benchmarking reports, and financial
analysis.
Vincent has more than 14 years of
experience providing audit and business
advisory services to health-care clients
and clients in various other industries.
Vincent has a wealth of experience
auditing and providing advisory services
to large physician multi-specialty
practices as well as ambulatory surgery
centers. His experience effectively
managing the audit process and
understanding the nuances of the health
care industry enable him to assist clients
and provide feedback that allows clients
to improve business operations.

AGENDA
i. Primary Objectives
ii. Scope
iii. Are You Ready?
iv. Effective Dates
v. Transition Options
vi. Topic 606: The Core Principle
vii. Applying the Core Principle – The Five Step Model
viii. Practical Expedients – Using the Portfolio Approach
ix. Disclosure
x. Key Considerations for Transition

PRIMARY
OBJECTIVES
OF
ASC 606
The provisions of Topic 606 were designed and are
expected to:
 Provide a more robust framework for addressing
revenue recognition issues
 Improve comparability of revenue recognition
practices across industries, entities within those
industries, jurisdictions and capital markets
 Provide more useful information to investors
through enhanced disclosure requirements
ASC 606 is the culmination of more than 12 years of work in a joint
project between the FASB and the IASB, with an overall objective of
developing a unified, principle-based standard on accounting for
revenue from customers.

SCOPE
The guidance in Topic 606 is NOT applicable to the following contracts:
 Lease contracts within the scope of Topic 840, Leases.
 Financial Services—Insurance contracts within the scope
of Topic 944
 Financial instruments
 Guarantees (other than product or service warranties)
 Nonmonetary exchanges between entities in the same
line of business to facilitate sales to customers or
potential customers.

ARE YOU
READY? While Topic 606 is a unified, principle-based revenue
standard, the AICPA recognized that a one size fits all
approach to implementation would not work, and formed
16 Industry Task Forces, including a Health Care Task Force
(HCTF), to address industry specific implementation issues.
AICPA Revenue Recognition Task Forces are charged with
developing revenue recognition implementation issues that will
provide helpful hints and illustrative examples for how to apply the
new Revenue Recognition Standard.
The complex arrangements between healthcare providers, patients,
and insurance companies pose some of the most difficult issues for
the new standard.

ARE YOU
READY?
 Issues arising related to health care services provided to
self-pay patients, including uninsured and self-pay patient
balances arising from co-payments and deductibles.
 Accounting for third-party settlement and similar
estimates under ASC 606.
 Determining which promised goods and services in a
contract represent separate performance obligations.
 Several task force implementation issues related to
CCRC’s, which are not going to be covered in this webinar,
and thus are omitted.
Since implementation, the HCTF has identified 10 revenue recognition
implementation issues facing healthcare entities, including:
Many of the issues identified by the HCTF are complete, while others
remain out for exposure.

EFFECTIVE
DATES ARE
LOOMING
 Public companies, certain not-for-profit entities, and
employee benefit plans that file on Form 11-K must
apply the provisions of ASC 606 for annual periods
beginning after December 15, 2017.
Effective dates for public companies have passed! Effective dates for
private companies are looming, and planning for the transition needs to
start NOW!
 All other entities will apply the guidance for the first
annual period beginning after December 15, 2018, and
for interim reporting periods beginning after
December 15, 2019.
 All entities are permitted to adopt earlier.

TRANSITION
OPTIONS
Which Transition Option Makes the Most Sense for your Company?
The transition decision is an important one for all
entities as it will impact the level of effort needed to
adopt ASC 606. Companies have the following options:
 Full Retrospective
 Modified Retrospective

TRANSITION
OPTIONS
* The following chart summarizes the transition options available to entities
(based on a calendar fiscal year for U.S. privately held business entities)
Approach 2018 2019
Date of
cumulative effect
adjustment
Retrospective Restate for all
contracts
Apply to all contracts January 1, 2018
Retrospective with
practical expedients
Restate for all
contracts except
those covered by
practical expedients
Apply to all contracts
January 1, 2018
Modified
retrospective
No contracts restated Apply to all contracts January 1, 2019

POLLING QUESTION 1
How prepared are you for the implementation of ASC 606: Revenue From
Contracts With Customers?
1. Not prepared
2. Somewhat prepared
3. Fully prepared
4. Not sure

TOPIC 606 -
CORE
PRINCIPLE
The Core Principle is to recognize revenue to depict the
transfer of promised goods or services to customers in
an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those
goods or services.”
The FASB and the IASB established the Core Principle, which is the
foundation of ASC 606’s framework.
The Core Principle addresses the two most fundamental questions
concerning revenue recognition:
HOW MUCH AND WHEN?

Step 5
Satisfaction of performance obligations
Step 1
Identify the contract with the customer
Step 3
Determine the transaction price
Step 2
Identify the performance obligations in the contract
Step 1
Identify the contract with the customer
Step 4
Allocate transaction price to performance obligations
APPLYING THE CORE PRINCIPLE
THE FIVE STEP MODEL
The
Core Principle
is achieved
through the
FIVE STEP MODEL
This framework determines WHEN AND HOW MUCH revenue to recognize across all industries.

STEP 1
Step 1
Identify the
contract
with the
customer
However, if a separate
contractual arrangement
exists between the
provider and a third-
party payer, the terms of
that arrangement will
impact certain aspects of
the contracts with
patients covered by that
health plan.
For purposes of ASC 606
“CONTRACT WITH CUSTOMER”
refers to an arrangement between the
health care provider and the patient.

STEP 1
Step 1
Identify the
contract
with the
customer
Topic 606 defines a contract as an agreement between two or
more parties that creates enforceable rights and obligations.
Contracts can be written, oral, or implied by an entity’s customary
business practices.
 Does the patient sign forms, such as a patient
responsibility form, which could be considered a written
contract?
 Does the patient schedule health care services in
advance? This may be considered an oral or implied
contract.
Enforceability of rights and obligations in a contract is a matter of law.
Involvement of legal counsel may be necessary to determine when a
legally enforceable contract with patients is in place.
Does an Enforceable Contract exist between two or more parties?

Step 1
Identify the
contract
with the
customer
A contractual arrangement with a customer (patient) exists
only when all 5 of the above criteria are met.
1
Approved
by
committed
parties
2
Identify
each
party’s
rights
3
Identify
payment
terms
4
Contract
has
commercial
substance
5
Collection of
substantially
all
consideration
is probable
STEP 1
In addition to enforceable rights and obligations, a contract within the
scope of Topic 606 must include all of the following criteria:

STEP 1
Step 1
Identify the
contract
with the
customer
Specific facts and circumstances, including customary business practices,
need to be evaluated to determine if a contract exists with a patient.
When contracts with patients are oral or
implied, healthcare providers will need to
exercise judgment in determining whether
such contracts sufficiently identify the payment
terms, performance commitments, contract
prices, and rights and obligations.
A contract may exist for legal purposes, but not for accounting
purposes because other required criteria have not been met.

STEP 1
Step 1
Identify the
contract
with the
customer
The collectibility criteria requires providers to evaluate and
conclude that collection is probable, considering the
following:
 Does the patient have the ability and intent to pay; and
 Is it probable that the entity will collect substantially all
of the consideration to which it expects to be entitled?
To evaluate collectibility, the provider must determine the amount that
should be evaluated for collectibility.
The collectibility criteria is a new concept that will significantly impact
health care entities that recognize revenue for goods and services
provided regardless of a patient’s ability and intent to pay.

STEP 1
Step 1
Identify the
contract
with the
customer
 Determine the transaction price.
 To estimate the transaction price, a health care entity
should consider historical cash collections and all other
information that is reasonably available, including
historical, current, and forecasted information.
 Determine whether the health care entity can mitigate its
credit risk.
The transaction price will likely be less than the contract price due to
variable consideration (i.e., price concessions and discounts).
To evaluate collectibility, the provider must determine the amount that
should be evaluated for collectibility.

STEP 1
Step 1
Identify the
contract
with the
customer
If a health care entity determines that the patient or other
payor does not meet the 5 criteria for a contract pursuant to
Topic 606, then a contract with a patient does not exist. This
initial determination should be evaluated on an ongoing basis
and may change as additional information become available.
In order for a failed contract to subsequently be recognized as
revenue, one of the following events must occur:
All or substantially all of the consideration expected
has been received and is nonrefundable
The contract has been terminated, and any
consideration received from the customer is
nonrefundable
When the 5 Criteria are Not Met

STEP 2
Identification of Performance
Obligations (Promises) in a
Contract is Critical to Appropriately
Identifying the Unit of Accounting
for Purposes of Allocating the
Transaction Price (Step 4).
Step 2
Identify the
performance
obligations
in the
contract

STEP 2
A performance obligation is a promise to provide a “distinct” good or
service to a patient. At contract inception, a health care provider must:
1. Determine which promised goods or services are included in a
contract with the patient, and
2. Determine if those goods or services should be accounted for
separately or if they should be grouped together. Examples of
promised goods or services might include:
 physician or nursing services,
 room and board,
 dietary,
 housekeeping,
 medical supplies and
 ancillary services.
Step 2
Identify the
performance
obligations
in the
contract

STEP 2
This step is critical because performance
obligations become the “Unit of Accounting”
for applying the new standard, and will
ultimately be used to determine when and
how much revenue is recognized!
A good or service that is not distinct should be combined with
other promised goods or services until the entity identifies a
bundle of goods or services that are distinct.
Performance Obligations: The Unit of Accounting
Step 2
Identify the
performance
obligations
in the
contract

STEP 2
1. The good or service is capable of being distinct, i.e., the
patient can benefit from the good or service either on its own
or together with other resources that are readily available to
the patient;
2. The health care entity’s promise to transfer the good or
service to the patient is separately identifiable from other
promises in the contract.
A good or service is distinct if both of the following criteria are met:
AND
Step 2
Identify the
performance
obligations
in the
contract

STEP 2
The objective is to determine whether the nature of the promise,
within the context of the contract, is to:
Separately Identifiable (Distinct Within the Context of the Contract)
i. transfer each of those goods or services individually
or, instead,
ii. transfer a combined item or items to which the
promised goods or services are inputs.
It is necessary to determine which goods or services represent separate
performance obligations in order to identify the units of account for
purposes of determining when to recognize revenue (Step 5).
Step 2
Identify the
performance
obligations
in the
contract

STEP 2
Step 2
Identify the
performance
obligations
in the
contract
Factors that indicate that two or more promises to transfer goods or
services to a customer are not separately identifiable include, but are not
limited to, the following:
Separately Identifiable
a. The entity provides a significant service of integrating
goods or services with other goods or services promised
in the contract into a bundle of goods or services that
represent the combined output or outputs.
b. One or more of the goods or services significantly
modifies or customizes, or are significantly modified or
customized by, one or more of the other goods or
services promised in the contract.
c. The goods or services are highly interdependent, or
highly interrelated.

STEP 2
Step 2
Identify the
performance
obligations:
Example 1
Doctor X provides goods and services to a patient during an annual physical exam that
includes the following:
 performing inquiry with the patient
 obtaining certain vital statistics
 performing certain lab tests and
 providing any additional goods and services as necessary.
Doctor X concludes that the goods and services provided during this exam represent a
single performance obligation even though the underlying tasks performed in each
patient’s annual physical exam will vary by patient.
Performance Obligation: Outpatient Health Care Services – Discrete Visit
During the physical exam, since it was the beginning of flu season, Doctor X inquired if
the patient had obtained a flu shot. Because a flu shot is not part of the standard
protocol for the annual physical exam and the patient could obtain a flu shot from
Doctor X or from a different source entirely unrelated to Doctor X, the flu shot was
viewed as a separate performance obligation.

STEP 2
Traditional Skilled Nursing Facility (TSNF) provides nursing home care to Resident A. As
part of Resident A’s care, TSNF provides the following on a daily basis:
 Room and board,
 administration of medications,
 program activities and,
 in-house physical therapy services (on certain days).
The length of Resident A’s stay at TSNF is not determinable as the discharge date is
based on patient progress; however, the contract is for a 30-day period, with
automatic renewal.
Resident A may terminate the contract on a daily basis with no penalty. The amount
billed for the services are based on a daily rate to be paid by Resident A (or its third-
party payor) based on the actual days for which care is provided.
Step 2
Identify the
performance
obligations:
Example 2
Performance Obligation: Skilled Nursing Facility Services

STEP 2
TSNF considers if the room provided to the resident includes a lease component. That
is, TSNF assesses if control of the identified asset (the room) transfers to Resident A
for a specified period of time.
If a lease component is identified, that component would be accounted for in
accordance with FASB ASC 840 or 842, and any non-lease components would be
accounted for in accordance with FASB ASC 606. In this case, TSNF concludes there is
not a lease of the room to the resident.
Step 2
Identify the
performance
obligations:
Example 2
Although Resident A could benefit from some of the individual goods or services (for
example, room, meals, drugs) provided as part of the individual plan of care, the
nature of TSNF’s promise to Resident A is to transfer a combined item (skilled nursing
facility services) to which the promised goods or services noted above are inputs.
TSNF is responsible for the overall provision of care, which includes identifying goods
or services to be provided, including how much skilled nursing care is necessary,
which drugs to administer, meal, supplies, etc.

STEP 2
TSNF concludes that each day that Resident A receives services represents a separate
contract and performance obligation since Resident A has the unilateral right to
terminate the contract after each day with no penalty or compensation due. If a
contract can be terminated by either party at any time without compensating the
other party for the termination, the duration of the contract does not extend beyond
the goods or services already transferred. That is the case whether or not the
contract has a specified contract period.
TSNF determined that the daily renewal is an option in which there is not a material
right as the price of the renewal is a price consistent with the price for the initial day.
As a result, TSNF would account for the renewal when exercised by Resident A.
Because the patient simultaneously received and consumed the benefits of the
services provided, TSNF concluded that the revenue should be recognized over time.
Step 2
Identify the
performance
obligations:
Example 2

STEP 3
Step 3
Determine
the
transaction
price
As performance obligations are
satisfied, revenue is recognized for
the amount of the transaction price
that is allocated to that
performance obligation.

STEP 3
Step 3
Determine
the
transaction
price
For health care entities, the transaction price will often
be less than the contract or standard price due to
variability from:
 Discounts
 Price concessions
 Contractual allowances
 Third-party settlements
 Risk-sharing arrangements
 Other
The table on the following page demonstrates the components that
must be considered in determining the transaction price.
The transaction price is the amount of consideration a provider
expects to be entitled in exchange for providing services.

STEP 3
Step 3
Determine
the
transaction
price
TRANSACTION PRICE
Fixed
Consideration
(+)
Variable
Consideration
(+/-)
Significant
Financing
Component
(+/-)
Non-
Cash
Consideration
(-)
Consideration
Paid to
Customers
(-)
Sales
Tax
=
Variable
consideration may
result from
discounts, rebates,
refunds, credits,
price concessions,
incentives,
performance
bonuses, penalties,
contingency based
on the occurrence
or nonoccurrence
of a future event,
etc.
The effects of the
time value of
money if the
timing of payments
agreed to by the
parties to the
contract provides
the customer or
the entity with a
significant benefit
of financing the
transfer of goods
or services to the
customer.
Step 3 requires
companies to
measure the
estimated fair
value of all
non-cash
consideration
at inception of
the contract in
determination
of the
transaction
price.
Consideration
payable to a
customer includes
cash amounts that
an entity pays, or
expects to pay, to
the customer,
including credits
or other items
such as coupons
or vouchers that
can be applied
against amounts
owed to the
entity.
Or other
amounts
collected on
behalf of
third parties
Cash flows in a
contract with a
customer that
are known as
of contract
inception and
do not vary
during the
contract.

STEP 3
Step 3
Determine
the
transaction
price
The existence and estimation of implicit price concessions may affect the
amount of revenue and bad debts recognized by a health care entity.
Variable Consideration
Discounts, price concessions and contractual allowances may be
explicit or implicit. Health care entities generally intend to offer an
implicit price concession if:
 Health care services are typically provided to a patient
without first performing a credit assessment, and/or
 The health care entity continues to provide health care
services to a patient (or patient class) despite historical
evidence that shows it is not probable the patient will
pay substantially all of the discounted charges in a
contract.

STEP 3
Step 3
Determine
the
transaction
price
Variable Consideration – Implicit vs. Explicit
EXPLICIT – i.e., contract discount, risk-based contracts
A health care entity policy to provide uninsured self-pay patients
a 70% discount off its standard rates for the services represents
an explicit price concession.
IMPLICIT – i.e., price concessions – portfolio approach, denials/
probes
An implicit price concession is when the health care entity places
an uninsured self-pay patient in a billing and collection category
for which it expects to only collect 10 percent of the discounted
rate (the standard rate less the 70 percent discount).

STEP 3
Step 3
Determine
the
transaction
price
Variable Consideration – Implicit Price Concession
A hospital that is required to provide emergency services
regardless of a patient’s ability to pay treats a patient with an
emergency condition.
The hospital determines that the patient qualifies for the
hospital’s uninsured discount policy and grants the patient a 75
percent discount (explicit price concession).
The standard charges for services provided are $40,000. Upon
billing, the hospital discounts the charges by 75 percent, or
$30,000, based on its uninsured discount policy.
The discounted charges for services provided to the patient are
$10,000, and a bill is sent for this amount. However, based on
experience with similar patients, the hospital only expects to
collect $1,000.
Therefore the hospital determines that $1,000 is the
transaction price (implicit price concession). The hospital
concludes that it is probable that it will collect the $1,000 and
records patient revenue and accounts receivable of $1,000.
Transaction
Price
Standard Charge $ 40,000
Explicit Price
Concession (75%) (30,000)
Discounted Price
to Patient 10,000
Implicit Discount (9,000)
Patient Revenue
Recognized $ 1,000

STEP 3
Step 3
Determine
the
transaction
price
Bad Debt vs. Adjustment to Implicit Discount (Revenue)
Continuing with the example on
the previous slide:
Subsequently, the hospital collects
only $900 of the $1,000 it
expected to collect. The difference
of $100 is accounted for as an
increase in the implicit price
concession (reduction of patient
service revenue), if there has been
no patient-specific event indicating
the patient no longer has the
ability and intent to pay.
Alternatively, if there was a
patient-specific event that is
known to the hospital
suggesting that the patient no
longer has the ability and
intent to pay the amount due
(e.g., the patient lost their
job), the change in the
estimate of variable
consideration ($100) would be
recognized as bad debt
expense.

STEP 3
Step 3
Determine
the
transaction
price
Separate contractual arrangements often exist between healthcare providers
and third-party payors which establish amounts the third-party payor will
pay on behalf of a patient for covered services rendered.
Variable Consideration – Third-Party Settlements
 These separate contractual agreements are not considered
“contracts with customers” under ASC 606, however, they should
be considered in determining the transaction price for services
provided to a patient covered by that third-party payor.
 Payments made under third-party payor agreements often
include an ability for the payor to retrospectively adjust the rates
it pays. This represents a variable element of the transaction
price that requires healthcare providers to estimate the future
cash flows expected to be received or paid.

STEP 3
Step 3
Determine
the
transaction
price
If a contract includes a variable component, an entity must estimate the
amount of consideration to which it will be entitled using either the
Expected Value Method or the Most Likely Amount Method.
 The expected value method — is the sum of probability-weighted
amounts in a range of possible consideration amounts (generally
used for a large number of contracts with similar characteristics).
 The most likely amount method — is the single most likely
amount in a range of possible consideration amounts (generally if
the contract has only two possible outcomes).
The healthcare entity must use whichever method better predicts the
amount of consideration to which the entity will be entitled.
The same method must be used consistently throughout the life of the
contract when estimating the effect of an uncertainty on an amount of
variable consideration to which the entity will be entitled.

APPLYING THE CORE PRINCIPLE – STEP 3
Constraining Estimates
 In an effort to limit the number of subsequent downward adjustments to
revenue-related variable consideration, Topic 606 introduced the concept
of “constraining estimates.”
 This concept allows revenue from variable consideration to be included in
the transaction price only to the extent that it is probable that a
significant reversal in the amount of cumulative revenue recognized will
not occur when the uncertainty associated with the variable
consideration is subsequently resolved.
 In assessing whether it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur, an entity must
consider both the likelihood and the magnitude of the revenue reversal.
Step 3
Determine
the
transaction
price
Variable Consideration

Step 3
Determine
the
transaction
price
Illustrative Use of the Expected Value Method – Medicare Program
Possible
Settlement Probability
Probability
weighted
$ - 20% $ 0
1,000 55% 550
3,000 15% 450
5,000 10% 500
100% 1,500
Unadjusted Transaction Price $ 50,000
Adjusted Transaction Price $ 48,500
• Hospital X participates in a Medicare program
and accepts Medicare’s rates as payment in full
for services rendered to beneficiaries during a
cost report year.
• It may take two or more years from the year that
services are rendered by Hospital X for Medicare
to validate the claims and issue a notice of final
program settlement.
• Management estimates the potential program
adjustments and accrues a third party settlement
asset or liability for Hospital X to adjust the
estimated revenue (variable consideration).
• Transaction price before adjustment = $50M.
• Management identifies four possible outcomes
for the potential program adjustments that
would reduce the amount of variable
consideration.

Step 3
Determine
the
transaction
price
Illustrative Use of the Expected Value Method – Constraining Estimates
Don’t forget to
consider
constraints on
your estimate!
Constraining Estimates
Consider the following when assessing whether it is
probable that a significant reversal of cumulative revenue
recognized will not occur:
 To what extent is the third-party settlement affected by
factors not within the health care entity’s control?
 How much experience does the health care entity have
with the third-party payor?
 How long does it take for the third-party settlement
adjustment to be finalized?
 To what extent does the health care entity offer price
concessions to the third-party payor or otherwise change
the payment terms?
 How broad is the range of possible third-party settlement
adjustments captured in the health care entity’s
historical information for the third-party payor?

Step 3
Determine
the
transaction
price
Reassessment of Variable Consideration
Topic 606 requires that, at the end of each reporting
period, the estimated transaction price (including its
assessment of whether an estimate of variable
consideration is constrained) must be updated to
represent faithfully the circumstances present at the
end of the reporting period and the changes in
circumstances during the reporting period.

POLLING QUESTION 2
2. What will be the most significant variable consideration?
a. Price concessions
b. Collectability/time value of collections
c. 3rd-party denials and adjustments or
d. Other
e. We don’t expect to have any variable consideration

STEP 1
Identified the Contract
with the Customer
STEP 2
Identified Performance
Obligations
STEP 3
Determined the
Transaction Price
WHERE WE HAVE BEEN:
WHERE WE ARE GOING:
STEP 4
Allocate the Purchase
Price to Performance Obligations
STEP 5
Satisfaction
of Performance
Obligations

Step 4
Allocate the
transaction
price to the
performance
obligations
OBJECTIVE
The objective is for an entity to
allocate the transaction price to
each performance obligation in
an amount that depicts the
amount of consideration the
entity expects to be entitled in
exchange for transferring the
promised goods or services.

Step 4
Allocate the
transaction
price to the
performance
obligations
To meet this objective, the transaction price must be allocated to each
performance obligation on a relative stand-alone selling price basis.
 The stand-alone selling price is the price at which an entity
would sell a good or service separately to a customer.
 If the stand-alone selling price is not directly observable, it
should be estimated in an amount that depicts the amount
of consideration the entity expects to be entitled.
 Stand-alone selling prices are determined at contract
inception and are not updated to reflect changes between
contract inception and when performance is complete.

Step 4
Allocate the
transaction
price to the
performance
obligations
Allocate the Transaction Price
In estimating the stand-alone selling price, all
information that is reasonably available, including
market conditions, entity-specific factors, and
customer specific factors must be considered.
Suitable methods for estimating the stand-alone selling price of a
good or service include, but are not limited to, the following:

Step 4
Allocate the
transaction
price to the
performance
obligations
Estimating the Stand-Alone Selling Price
a. Adjusted market assessment approach — An entity could
evaluate the market in which it sells goods or services and
estimate the price that a customer in that market would be
willing to pay.
b. Expected cost plus a margin approach — An entity could
forecast its expected costs of satisfying a performance
obligation and then add an appropriate margin for that good or
service.
c. Residual approach — An entity may estimate the stand-alone
selling price by reference to the total transaction price less the
sum of the observable stand-alone selling prices of other goods
or services in the contract (restrictions to this approach apply).

Step 4
Allocate the
transaction
price to the
performance
obligations
Exceptions to the Stand-Alone Selling Price Method
The guidance provides for two exceptions to the Stand-
Alone Selling Price Method for allocating the transaction
price to performance obligations:
 When observable evidence exists that inherent
discounts relate to only one or more, but not all,
performance obligations in a contract, the entity
should allocate the inherent discount to the
performance obligations to which the discount
relates.

Step 4
Allocate the
transaction
price to the
performance
obligations
Exceptions to the Stand-Alone Selling Price Method
Variable consideration may be allocated to one
performance obligation (or one distinct portion of a
series) if the following criteria are met:
 The terms of a variable payment relate
specifically to the specific performance
obligation, and
 Is consistent with the allocation objective
when considering all of the performance
obligations and payment terms in the
contract.

Step 5
Satisfaction
of
performance
obligations
A company may recognize revenue
only when (as) it satisfies a
performance obligation by transferring
a promised good or service to the
customer. A good or service is
considered to be transferred when the
customer obtains control.

Step 5
Satisfaction
of
performance
obligations
Control is defined as an entity’s ability to direct the use of
and obtain substantially all of the remaining benefits of an
asset. Control should be viewed from the customer’s
perspective.
Concept of Control
The FASB and the IASB achieved a key objective of creating a
single framework, based on CONTROL, to determine when to
recognize revenue.

In order to determine WHEN to recognize revenue, at contract
inception, each performance obligation identified in Step 2 must be
assessed to determine whether it is satisfied –
 Over time; or
 At a Point in Time.
If an entity does not satisfy a performance obligation over time, the
performance obligation is satisfied at a point in time.
Goods are generally transferred at a point in time, while services are
generally transferred over time. However, this is not always the case!
Contract terms will need to be carefully assessed to make the proper
determination of when control is transferred to the customer!
Performance Obligations - Satisfied Over Time or at a Point in Time?
Step 5
Satisfaction
of
performance
obligations

The entity’s
performance does not
create an asset with an
alternative use to the
entity, and the entity
has an enforceable
right to payment for
performance
completed to date.
The entity’s
performance creates
or enhances an asset
that the customer
controls as the asset is
created or enhanced
(i.e., property
renovations or
hardware integration
at customer location.)
The patient
simultaneously
receives and consumes
the benefits provided
by the entity’s
performance as the
entity performs (i.e.,
physician visits).
Performance Obligations - Satisfied Over Time or at a Point in Time?
Health care services will generally be provided over time. Control of a good
or service transfers over time, and therefore satisfies a performance
obligation and recognizes revenue over time, if one of the following criteria
is met:
Step 5
Satisfaction
of
performance
obligations

Closing the loop on Example 1 in Step 2: Remember Dr. X performed an annual
physical examination on a patient, and gave the patient a flu shot. Dr. X concluded
that the physical and the flu shot were two separate performance obligations.
services provided in the physical exam, Doctor X concluded that revenue should be
recognized over time; however, because all of the goods and services were provided
when the exam was performed, the revenue recognition would be the same as point
in time because all of the goods and services were provided the same day.
services provided by the flu shot, the revenue from the flu shot should be recognized
over time. However, the recognition would be the same as point in time for this
particular service since the length of the service was only a few minutes.
Step 5
Satisfaction
of
performance
obligations

Measuring Progress toward Complete Satisfaction
of a Performance Obligation
For each performance obligation satisfied over time, an entity shall
recognize revenue over time by measuring the progress toward
complete satisfaction of that performance obligation. The objective
when measuring progress is to depict an entity’s performance in
transferring control of goods or services promised to a customer
(that is, the satisfaction of an entity’s performance obligation).
An entity shall apply a single method of measuring progress for each
performance obligation satisfied over time, and the entity shall apply
that method consistently to similar performance obligations and in
similar circumstances.
Step 5
Satisfaction
of
performance
obligations

Portfolio Approach
 Only if doing so is not reasonably expected to result in materially
different outcomes compared to individually accounting for the
contracts (or performance obligations).
 The practical expedient may be applied to none, some or all of a
health care entity’s contracts (or performance obligations).
Electing the practical expedient to account for a portfolio
of contracts is not the same as using a portfolio of data to
make an estimate for an individual contract.
Topic 606 provides an option to use a Practical Expedient that allows an
entity to apply the guidance to a portfolio of similar contracts.
PRACTICAL
EXPEDIENTS
USING THE
PORTFOLIO
APPROACH

Portfolio Approach
 What type of service(s) do the contracts cover?
 Who is the payor?
 To what extent is the patient responsible for payment?
 During what timeframe were services provided under the contract?
 Are the contracts processed using different billing systems?
 Do the contracts have similar collection or reimbursement rates?
 Is the payor for the contracts unknown because, for example, the
health care entity is attempting to qualify the patients for Medicaid?
For purposes of determining whether accounting for a portfolio of contracts
will not result in materially different outcomes versus individually
accounting for the contracts, a health care entity should determine whether
it has a sufficient homogeneous patient data. Considerations include:
PRACTICAL
EXPEDIENTS
USING THE
PORTFOLIO
APPROACH

Portfolio Approach
To the extent a health care entity expects to apply the practical expedient to
account for a portfolio of contracts, it should:
Once a portfolio of contracts to which the practical expedient will be applied
is identified, it should be monitored to determine whether any changes or
unexpected trends develop that draw into question whether the contracts in
the portfolio continue to be similar, and the health care entity should:
PRACTICAL
EXPEDIENTS
USING THE
PORTFOLIO
APPROACH
 Add contracts with similar characteristics to the portfolio and
 Remove contracts that develop dissimilar characteristics from
the portfolio.
 Ensure it has documented the analysis showing that the
portfolio approach is not reasonably expected to result in
materially different outcomes compared to individually
accounting for the contracts, and
 Ensure that controls are in place to monitor the portfolios on
an ongoing basis.

DISCLOSURE
Reason for change:
 Existing revenue disclosures have been lacking
 Provide the reader with qualitative and quantitative information
Objective:
 “Enable financial statement users to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from
contracts with customers.”
 Disaggregation of revenue
 Significant judgments
 Contract balances
 Performance obligations
 Costs to obtain or fulfill a contract
The Objective
of the
Disclosure
Requirement
Changes

DISCLOSURE
 Quantitative disclosures:
 Timing of transfer of goods or services - at a point in time or
over a period of time.
 (e.g., inpatient and outpatient services)
 Qualitative disclosures:
 type of customer (e.g., government and non-government
customers)
 geographical location of customers
 and type of contract (e.g., percent of charges, cost, fixed or
capitated)
Disaggregation
of
Revenue
Requirement for non-public entities:

DISCLOSURE
 The timing of satisfaction of performance obligations.
 Method used to recognize revenue
 The transaction price and the amounts allocated to
performance obligations.
 Assess whether an estimate of variable consideration is
constrained
Significant
Judgments
An entity shall disclose the judgments, and changes in the judgments, used in
determining both:

DISCLOSURE
 An entity is required to disclose the opening and closing
balances of receivables, contract assets, and contract
liabilities from contracts with customers, if not otherwise
separately presented or disclosed.
Contract
Balances

DISCLOSURE
 When the entity typically satisfies its performance
obligations:
 as services are rendered, or upon completion of service
 The significant payment terms:
 when payment typically is due,
 significant financing components,
 when consideration amount is variable, and whether the
estimate of variable consideration is typically constrained
Performance
Obligations
An entity shall disclose information about its performance obligations in
contracts with customers, including a description of all of the following:
Continued

DISCLOSURE
 The nature of the goods or services that the entity has
promised to transfer, highlighting any performance
obligations to arrange for another party to transfer goods
or services (that is, if the entity is acting as an agent)
 Obligations for returns, refunds, and other similar
obligations
 Types of warranties and related obligations
Performance
Obligations
(Continued)
An entity shall disclose information about its performance obligations in
contracts with customers, including a description of all of the following:

POLLING QUESTION 3
Which step of ASC 606 do you feel will be most challenging to assess?
1. Step 1 – Identify the contract with the customer
2. Step 2 – Identify the performance obligations in the contract
3. Step 3 – Determine the transaction price
4. Step 4 – Allocate the transaction price to the performance
obligations
5. Step 5 – Satisfaction of performance obligations

KEY CONSIDERATIONS FOR TRANSITION
Changes in the process of
how revenue is recognized
Changes to internal
controls
Changes to
IT and billing systems
Contracts
Perspective of impact in
the eyes of investors and
shareholders
Tax implications Disclosures Other business processes

HELPING
YOU FOCUS
ON WHAT
COUNTS
citrincooperman.com
Mary Paladino, CPA
Partner
914.949.2990
mpaladino@citrincooperman.com
Michael E. Criscione, CPA
Partner
401.421.4800
mcriscione@citrincooperman.com
Vincent Abbruzzese, CPA
Director
914.949.2990
vabbruzzese@citrincooperman.com
This presentation includes excerpts from the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers
(“Topic 606”); and the American Institute of Certified Public Accountants (“AICPA”) implementation guidance on Topic 606 found on their website at AICPA.ORG. These materials
provided by Citrin Cooperman & Company, LLP, are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s)
and are not intended to be a substitute for reading the legislation or accounting standards themselves, or for professional judgment as to adequacy of disclosures and fairness of
presentation. The materials are being provided with the understanding that the information contained therein should not be construed as legal, accounting, tax or other professional
advice or services. Before making a decision or action that may affect your business, you should consult with Citrin Cooperman & Company, LLP, or another qualified professional
advisor. The materials and the information contained therein are provided as is, and Citrin Cooperman & Company, LLP, makes no express or implied representations or warranties
regarding these materials or the information contained therein. Without limiting the foregoing, Citrin Cooperman & Company, LLP, does not warrant that the materials or information
contained therein will be error-free or will meet any particular criteria or performance or quality. In no event shall Citrin Cooperman & Company, LLP, its affiliates, officers, principals
and employees be liable to you or anyone else for any decision made or action taken in reliance on the information provided in these materials. The information and content provided in
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ASC 606, Revenue From Contracts with Customers Health Care: What to Expect

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