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Health Care Organizations — AICPA Audit and Accounting Guide

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Description

This Audit and Accounting Guide provides the latest information on accounting and auditing issues affecting the health care industry. Updated with conforming changes as of May 1, 2008, it includes guidance in planning and performing audits under the risk assessment standards (SAS Nos. 104-111). This edition of the guide has also been conformed to reflect the Defining Professional Requirements standard (SAS No. 102). Furthermore, it provides additional guidance on the auditor's responsibilities as set forth in SAS Nos. 112-114, including identifying and reporting internal control deficiencies, understanding the link between the auditor's consideration of fraud and the auditor's assessment of risk, dating of the management representation letter, and the auditor's communications with those charged with governance.

The guide summarizes applicable requirements and practices, and delivers "how-to" advice for handling audit and accounting issues common to the health care industry. It includes accounting requirements for fair value measurements, cash and investments, commitments and contingencies, net assets, providers of prepaid health care services, continuing care retirement communities and a discussion of the relevant financial statement considerations for the health care industry. Included in the appendices are illustrative financial statements and entire re-prints of SOP 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities that Include Fund Raising; SOP 99-1, Guidance to Practitioners in Conducting and Reporting on an Agreed-Upon Procedures Engagement to Assist Management in Evaluating the Effectiveness of Its Corporate Compliance Program; SOP 00-1, Auditing Health Care Third-Party Revenues and Related Receivables; and SOP 02-2, Accounting for Derivative Instruments and Hedging Activities by Not-for-Profit Health Care Organizations, and Clarification of the Performance Indicator. The guide covers the following new accounting pronouncements:

  • FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115
  • FASB Statement No. 157, Fair Value Measurements
  • An introduction to the newly issued FASB Statement Nos. 160, Noncontrolling Interests in Consolidated Financial Statements- an amendment to ARB No. 51, and FASB Statement No. 141(R), Business Combinations.

For a topical listing of subject matter by chapter, click on the Table of Contents tab.

Table of Contents

  • Chapter 1 - Unique Considerations of Health Care Organizations
    • Overview
    • Classification of Health Care Organizations
    • Financial Reporting of Nongovernmental Health Care Organizations
    • Financial Reporting of Governmental Health Care Organizations
      • GASB Statement No. 34 and Related Pronouncements
      • Management's Discussion and Analysis
      • Measurement Focus and Basis of Accounting
      • Statement of Net Assets or Balance Sheet
      • Statement of Revenues, Expenses, and Changes in Net Assets/Equity
      • Statement of Cash Flows
    • Revenue From Health Care Services
    • Third-Party Payor Considerations
    • Classification and Reporting of Net Assets
    • Health Care Contracting
    • GAAP Hierarchy for Not-for-Profit Organizations
      • APB Opinion No. 16, Business Combinations
      • Provisions of Certain Pronouncements ConcerningFinancial Statement Display
    • GAAP Hierarchy for Governmental Organizations
    • Appendix A — Financial Reporting Pronouncements That Specifically Exempt Not-for-Profit Organizations From Their Application
    • Appendix B — Financial Reporting Pronouncements That, by the Nature of Their Subject Matter, Generally Do Not Apply to Not-for-Profit Organizations
    • Appendix C — Financial Reporting Pronouncements Whose Application to Not-for-Profit Organizations Is Subject to Additional FASB or AICPA Guidance
    • Appendix D — Financial Reporting Pronouncements Pertaining to Specialized Industry Practices of Business Enterprises
    • Appendix E — Financial Reporting Pronouncements Not Subsequently Superseded and Not Included in Appendixes A-D of This Chapter
    • Appendix F — All Financial Reporting Pronouncements, Cross-Referenced by Appendix
    • Appendix G — The Hierarchy of GAAP
  • Chapter 2 - General Auditing Considerations
    • Auditing Guidance in the Audit and Accounting Guide State and Local Governments
    • Registered Public Accounting Firms
    • Overview
    • Planning and Other Auditing Considerations
      • Audit Planning
      • Individual Practice Associations
      • Scope of the Engagement
      • Audit Risk
      • Planning Materiality
      • Use of a Specialist
    • Use of Assertions in Obtaining Audit Evidence
    • Understanding the Entity, Its Environment, and Its Internal Control
      • Risk Assessment Procedures
      • Analytical Procedures
      • Discussion Among the Audit Team
      • Understanding of the Entity and Its Environment
      • Understanding of Internal Control
    • Assessment of Risks of Material Misstatement and the Design of Further Audit Procedures
      • Assessing the Risks of Material Misstatement
      • Designing and Performing Further Audit Procedures
      • Evaluating Misstatements
      • Consideration of Fraud in a Financial Statement Audit
      • The Importance of Exercising Professional Skepticism
      • Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud
      • Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud
      • Identifying Risks That May Result in a Material Misstatement Due to Fraud
      • A Presumption That Improper Revenue Recognition Is a Fraud Risk
      • A Consideration of the Risk of Management Override of Controls
      • Assessing the Identified Risks After Taking Into Account an Evaluation of the Entity's Programs and Controls That Address the Risks
      • Responding to the Results of the Assessment
      • Evaluating Audit Evidence
      • Responding to Misstatements That May Be the Result of Fraud
      • Communicating About Possible Fraud to Management and Those Charged With Governance
      • Documenting the Auditor's Consideration of Fraud
      • Practical Guidance
    • Additional Audit Considerations
      • Accounting Estimates
      • Transactions Processed by Service Organizations
      • Illegal Acts
      • Clinical Coding Validations
      • Going-Concern Considerations
      • Audit Documentation
      • Dating of the Auditors Report
      • Audits Conducted in Accordance With PCAOB Standards
      • Communication of Matters Related to Internal Control
      • Communication With Those Charged With Governance
    • Single Audit Act and Related Audit Considerations
    • Statutory Reporting Considerations for Managed Care Organizations
      • Risk-Based Capital Requirements
      • Codification of Statutory Accounting Practices for Managed Care Organizations
  • Chapter 3 - Cash and Cash Equivalents
    • Accounting and Financial Reporting
    • Agency Funds
    • Definition of Fair Value
    • Valuation Techniques
    • Present Value Techniques
    • The Fair Value Hierarchy
    • Fair Value Option
    • Disclosures
    • Auditing
  • Chapter 4 - Investments
    • Accounting
      • Investments in Debt Securities and Certain Equity Securities
      • Transfers of Assets to a Not-for-Profit Organization or Charitable Trust for Investment
    • Financial Statement Presentation
      • Entities Subject to FASB Statement No. 115, FASB Statement No. 124, or GASB Statement No. 31
    • Auditing
  • Chapter 5 - Receivables
    • Rate Setting
    • Estimated Final Settlements
    • State Waiver Contingencies Under Medicare
    • Premiums and Stop-Loss Insurance Receivables
    • Promises to Give in Future Periods (Pledges)
      • Governmental Health Care Organizations
    • Financial Statement Presentation
      • Accounts Receivable
      • Interfund Receivables
      • Promises to Give in Future Periods (Pledges)
    • Auditing
      • Accounts Receivable Confirmations
  • Chapter 6 - Property and Equipment, Supplies, and Other Assets
    • Overview
    • Accounting
    • Financial Statement Presentation
    • Auditing
  • Chapter 7 - Current Liabilities, Tax Considerations, and Long Term Obligations
    • Overview
    • Accounting
    • Tax Considerations for Not-for-Profit Health Care Organizations
    • Tax-Exempt Entities
    • Private Inurement
    • Unrelated Business Income Tax
    • Financial Statement Presentation
    • Long Term Debt
    • Financing Authorities
    • Assets Whose Use is Limited
    • Advance Refundings
    • Arbitrage Rebate Liabilities
    • Auditing
  • Chapter 8 - Commitments and Contingencies
    • Overview
    • Medical Malpractice Claims
    • Accruing Malpractice Liabilities
    • Accounting for Claims-Made Insurance Policies and Tail Coverage
    • Accounting for Retrospectively Rated Premiums
    • Chapter Paragraph 8 Commitments and Contingencies — continued Accounting for Medical Malpractice Claims Insured by Captive Insurance Companies
    • Accounting for Trust Funds
    • Governmental Health Care Enterprises
    • Auditing Commitments and Contingencies
    • Auditing Medical Malpractice Loss Contingencies
    • Auditing Accounting Estimates
    • Use of Actuaries and Actuarial Methods
    • Risks and Uncertainties
    • Evaluating Lawyers' Responses
    • Auditing
  • Chapter 9 - Net Assets (Equity)
    • Investor-Owned Health Care Organizations
    • Not-for-Profit Health Care Organizations
    • Governmental Health Care Organizations
    • Auditing
  • Chapter 10 - Revenue, Expenses, Gains, and Losses
    • Conceptual Framework for Reporting Revenue, Expenses, Gains, and Losses
    • Distinguishing Charity Care From Bad Debt Expense or Allowance
    • Revenue
    • Expenses
    • Financial Statement Presentation
    • Auditing
  • Chapter 11 - The Reporting Entity and Related Organizations
    • Overview
    • Financial Reporting of Governmental Health Care Entities
    • Financial Reporting of Nongovernmental Health Care Entities
    • Transfers
      • Equity Transfers
      • Equity Transactions
      • Other Transfers
    • Related Fund-Raising Organizations
    • Disclosure
    • Business Combinations
    • Auditing
  • Chapter 12 - Independent Auditor's Reports
    • Overview
    • Unqualified Opinion
    • Qualified Opinion
    • Additional Information
    • Auditor Reporting on RSI and Supplementary Information for Governmental Health Care Entities
    • Special Reports
    • Corporate Compliance Programs
  • Chapter 13 - Financial Accounting and Reporting by Providers of Prepaid Health Care Services
    • Overview
    • Accounting for Health Care Costs
    • Accounting for Loss Contracts
    • Accounting for Stop-Loss Insurance
    • Accounting for Contract Acquisition Costs
  • Chapter 14 - Financial Accounting and Reporting by Continuing Care Retirement Communities
    • Overview
    • Types of Contracts
      • Type A Contracts
      • Type B Contracts
      • Type C Contracts
    • Types of Living Accommodations
    • Fees and Payment Methods
      • Advance Fee Only
      • Advance Fee With Periodic Fees
      • Periodic Fees Only
    • Accounting for Refundable Advance Fees
    • Accounting for Fees Refundable to Residents Only From Reoccupancy Proceeds of a Contract Holder's Unit
    • Accounting for Nonrefundable Advance Fees
    • Accounting for the Obligation to Provide Future Services and the Use of Facilities to Current Residents
    • Accounting for the Costs of Acquiring Initial Continuing-Care Contracts
    • Financial Statements
    • Auditing
  • Appendix A - Illustrative Financial Statements
  • Appendix B - Background Information and Basis for Conclusions
  • Appendix C - Statement of Position 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising
  • Appendix D - Statement of Position 99-1, Guidance to Practitioners in Conducting and Reporting on an Agreed-Upon Procedures Engagement to Assist Management in Evaluating the Effectiveness of Its Corporate Compliance Program
  • Appendix E - Statement of Position 00-1, Auditing Health Care Third-Party Revenues and Related Receivables
  • Appendix F - Statement of Position 02-2, Accounting for Derivative Instruments and Hedging Activities by Not-for-Profit Health Care Organizations, and Clarification of the Performance Indicator
  • Appendix G - Information Sources
  • Appendix H - References to AICPA Technical Practice Aids
  • Appendix I - Major Existing Differences Between AICPA Standards and PCAOB Standards
  • Appendix J - Comparison of Key Provisions of the Risk Assessment Standards to Previous Standards
  • Appendix K - Schedule of Changes Made to the Text From the Previous Edition
  • Glossary

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Excerpts

Preface

Purpose
This guide has been prepared to assist providers of health care services in preparing financial statements in conformity with generally accepted accounting principles (GAAP) and to assist independent auditors1 in auditing and reporting on those
financial statements.

Applicability
This guide applies to health care organizations that are either (a) investorowned businesses or (b) not-for-profit enterprises that have no ownership interest and are essentially self-sustaining from fees charged for goods and services, as defined in Financial Accounting Standards Board (FASB) Statement of Financial Accounting Concepts No. 4, Objectives of Financial Reporting by Nonbusiness Organizations, paragraph 8,2 or (c) governmental. This guide applies to organizations whose principal operations consist of providing or agreeing to provide health care services and that derive all or almost all of their revenues from the sale of goods or services; it also applies to organizations whose primary activities are the planning, organization, and oversight of such organizations, such as parent or holding companies of health
care providers.

This guide applies to the following types of health
care organizations:

  • Clinics, medical group practices, individual practice associations, individual practitioners, emergency care facilities, laboratories, surgery centers, and other ambulatory care organizations
  • Continuing care retirement communities
  • Health maintenance organizations and similar prepaid health care plans
  • Home health agencies
  • Hospitals
  • Nursing homes that provide skilled, intermediate, and less intensive levels of health care
  • Drug and alcohol rehabilitation centers and other rehabilitation facilities

This guide also applies to integrated delivery systems that include one or more of the above types of organizations.

This guide does not apply to voluntary health and welfare organizations, as defined in FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations. These organizations should follow the AICPA Audit and Accounting Guide Not-for-Profit Organizations. Related fund-raising foundations that meet the definition of a not-for-profit organization given in FASB Statement No. 117 also should follow the AICPA Audit and Accounting Guide Not-for-Profit Organizations.

When separate financial statements are issued for a state or local governmental health care organization that uses enterprise fund accounting and reporting, the accounting, reporting, and disclosure requirements set forth in this guide and by pronouncements of the Governmental Accounting Standards Board (GASB) apply. (See chapter 1 for a discussion of the application of GAAP.) GASB Statement No. 34, Basic Financial Statements — and Management's Discussion and Analysis — for State and Local Governments, replaces the previous definition with a new definition of enterprise funds. Based on paragraph 67 of GASB Statement No. 34, as amended, any activity that charges a fee to external users for goods or services may be reported as an enterprise fund. In addition, paragraph 67 requires governments to report activities in enterprise funds if any one of the following three criteria, as summarized below, is met:

  1. The activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of
    the activity.
  2. Laws or regulations require the activity's costs of providing services, including capital costs, to be recovered with fees and charges rather than with taxes or similar revenues.
  3. The pricing policies of the activity establish fees and charges that are designed to recover the activity's costs of providing services, including capital costs.

The primary focus of these criteria is on fees charged to external users. Also, paragraph 67 of GASB Statement No. 34 requires that these criteria should be applied in the context of the activity's principal revenue sources.

This guide is not the only industry-specific AICPA Audit and Accounting Guide that auditors should consider when performing an audit of a governmental health care entity. The Audit and Accounting Guide State and Local Governments, includes governmental health care entities in its scope and was cleared by the GASB. Therefore, certain accounting and financial reporting guidance in that guide constitutes category (b) guidance for governmental health care entities, and the auditing guidance in that guide should also be considered during an audit of a governmental health care entity that is included in the scope of this guide. In practice, auditors of governmental health care entities that issue separate financial statements using enterprise fund accounting and reporting may use this guide as the primary source of guidance because this guide addresses transactions that are unique to or prevalent in the health care industry. The Audit and Accounting Guide State and Local Governments, however, contains information about governmental accounting and financial reporting standards and other matters that are unique to or prevalent in government and not included in this guide.3

Many governmental health care entities are considered to be special-purpose governments as defined in GASB Statement No. 34, paragraph 134.4

Specialpurpose governments are legally separate entities, as that term is described in paragraph 15 of GASB Statement No. 14, The Financial Reporting Entity. They may be component units of another governmental entity or they may be other stand-alone governments. (Both terms component units and other stand-alone governments are also defined by GASB Statement No. 14.) Because GASB Statement No. 34 is written from the perspective of general-purpose governments, paragraph 138 of GASB Statement No. 34 discusses how those requirements apply to special-purpose governments engaged only in business-type activities, such as certain governmental health care entities. Governmental health care entities that are special-purpose governments engaged only in business-type activities should present only the financial statements required for enterprise funds. These financial statements are discussed further in paragraph 1.13 of this guide.

1 A member performing an attest engagement must be independent pursuant to Rule 101, Independence (AICPA, Professional Standards, vol. 2, ET sec. 101), of the AICPA Code of Professional Conduct. Other applicable independence rules and regulations may also apply to members and accountants while performing attest engagements (for example, Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), Government Accountability Office, and state licensing boards).

2 See paragraph 1.03 of this guide.

3 See paragraphs 1.21 and 12.11–.13 in the Audit and Accounting Guide State and Local Governments.

4 Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, does not provide guidance on separate reporting by individual enterprise funds of a government. Although this discussion of the guidance in GASB Statement No. 34 is written in terms of special-purpose business-type activities that are governmental health care entities, the accounting, financial reporting, and auditing considerations are usually equally applicable when the health care activity is conducted as a function or program of a general-purpose government and reported in an enterprise fund. See footnote 7 to the section heading "Specific Guidance for Special-Purpose Governments" in chapter 12 of the Audit and Accounting Guide State and Local Governments. Reporting guidance on separate reporting by individual enterprise funds of a government is provided in the Audit and Accounting Guide State and Local Governments.

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