financial reporting

Financial Reporting

Scott FurnissSr. VP/CFO

St. Agnes HealthCare, Inc.

March 30, 2012

Today’s Discussion

Finance Departments and Activities Accounting Concepts Common Issues Basic Accounting Transactions Basic Financial Statements Example Financial Statements Financial Ratios and Analysis Case Study

Finance Departments

Typical Finance Department

• General Accounting

• Accounts Payable

• Payroll

• Treasury

• Rates & Reimbursement

• Taxes

• Financial Analysis and Budget

• Financial Reporting

• All entities…. Hospital and Subsidiaries

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• Daily Account posting• Bi-weekly Payroll• Monthly Close (J/E’s, Reconciliations, etc.)• Monthly Compliance Reports (HSCRC)• Monthly/Quarterly Management-Board Reports• Quarterly Disclosure Reports• Plus…

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• Annual Budget• Annual Cost Reports (CMS, HSCRC, others)• Annual Tax Returns (IRS, PBGC, State)• Annual Financial Statements and Audit• All entities…. Hospital and Subsidiaries

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Accounting Concepts

Reporting Standards

• Generally Accepted Accounting Standards (GAAP)• Financial Accounting Standards Board (FASB)• Securities Exchange Commission (SEC)• Internal Revenue System (IRS)• Centers for Medicare & Medicaid Services (CMS)• Health Services Cost Review Commission (HSCRC)• Employee Retirement Income Security Act (ERISA)• Others….

Cash vs. Accrual Accounting

• Accrual basis– recognized when

event happens– earned– incurred

• Cash basis– recognized when cash

changes hands– received– paid

Two ways of recording transactions

Accrual Accounting Transactions

– 1/10 $1,000 of supplies ordered– 1/15 $600 of supplies arrive, no payment– 1/31 Books closed for January– 2/10 $400 of supplies arrive, no payment– 2/28 Books closed for February– 3/15 Invoice for $1,000 received and paid– 3/31 Books closed for March

Accrual TransactionsProper matching of revenue and expense transactions and

accounting periods

Valuation Methods

• Current Value: Cash, Vacation liabilities, inventories

• Market Value: Investments, Debt

• Historical Cost: Buildings and Equipment

• Net Realizable Value: Receivables, Payables

Accounts Receivable “Net Realizable Value”

• Contractual Adjustments – per contracts/agreements

• Charity Care – inability to pay known when served

• Bad Debt Expense – failure to pay after service

• Allowance for Uncollectible Accounts – impact of Contractual Adjustments and Bad Debt

“Net Realizable Value”

• Original charges vs. estimate of final collections

Accounts ReceivableAllowance For

Uncollectible Accounts

$12,000,000 $2,500,000

Net Realizable Value$9,500,000

A/R Valuation Analysis

Common Issues

Depreciation & Amortization

Systematic and rational allocation of the cost of a long-term asset over its estimated useful life

Used for both tangible and intangible assetsAllocation of Tangible Assets = DepreciationAllocation of Intangible Assets = AmortizationExamples:

• MRI - 10 years• Building - 40 years• Software - 5 years

Depreciation Methods

• Straight line method - primary

• Accelerated methods:– Units-of-production

– Sum-of-the-years’-digits

– Double-declining balance

• Tax implications for taxable entities

Straight Line Depreciation

Valuation of Property Assets(Straight Line Method)

Lease Accounting• Operating vs. Capital

• Operating: Are we just leasing it for a short period of time?

• Capital: Will we own it or use it up by the end of the lease?

• Default = Operating… unless it meets specific criteria

• Why care? …. Operating = Lease expense

• Capital = Depreciation and interest expense

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Capital Leases

4 Ways to become a Capital Lease:Title passes to Lessee at end of lease term

Bargain purchase option ($1 buy-out)

Lease term is > 75% of estimated useful life (AHA guidebook)

NPV of lease payments >90% of property leased

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Donor Restricted Funds

• Unrestricted – can be used for any purpose to support entity

• Temporarily Restricted – restricted by donor for specific purpose

• Permanently Restricted – only income on investments can be used for purpose determined by the donor

• Uniform Prudent Management of Institutional Funds Act (UPMIFA) rules can limit annual spending

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Allocation of Costs

• Benefits• Depreciation• Overhead• Support Services• Other

• Purpose = reflect “total” cost of business at Department level

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Capitalized Expenses

Costs to make items operational• Shipping

• Installation

• Calibration & Testing

• System “build” (but not data conversion)

Training costs are not capitalized

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Basic Accounting Transactions

Transaction Data Pyramid

Daily Transactions & Journal Entries

General Ledger

Trial Balance

Departmental Reports

Financial

Statements


Transaction based activity:

• Accounts Payable – invoices/payments

• Purchasing Activity – supplies and services

• Patient Charges

• Payroll

• Collections on receivables

• Investment and Debt activity


Journal Entry Activity:• Depreciation expense

• Bad Debt Expense

• Accrual adjustments

• Reconciliation adjustments

This can be a manual activity, data “upload”, or an interface…

Example Activity Entries

Trial Balance

• List of all account BALANCES

• Total debits = total credits

• Preliminary to preparation of financial statements


• Double-entry bookkeeping• Debits & Credits• Cash Transactions• Journal Entries• Subsidiary records

– Accounts Receivable– Accounts Payable– Payroll– Purchase Orders

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Example Trial BalanceExample Trial Balance

Departmental Reports

Basic Financial Statements


• Balance Sheet

• Statement of Operations (Income Statement)

• Statement of Changes in Net Assets

• Statement of Cash Flows

• Notes to the Financial Statements


• Balance Sheet – Shows assets, liabilities and equity

(Assets = Liabilities + Equity)– Statement of position - a snapshot in time– Always as of a date, not for a period of time

Balance Sheet

Assets - items of value to which a company has a legal claim

Liabilities - amounts owed by company

Equities - ownership’s net claim on the assets

Balance Sheet

Current Assets

Long-Term Assets

Current Liabilities

Long-Term Debt

Equity

Current Assets

• Will be consumed within 12 months

• Listed in order of liquidity:– Cash

– Short-term investments

– Accounts receivable

– Inventories

– Prepaid expenses

Current Assets

• Cash – checks and money on deposit– credit card receipts

• Short-term investments – marketable securities– certificates of deposit– other investment instruments

Current Assets

• Accounts receivable– funds owed to the company– government and insurance payors– individual patients– other

• Inventories– Medical, surgical and office supplies– Fuel, food

Current Assets

• Prepaid expenses – prepaid insurance– prepaid rent and supplies– prepaid interest and property taxes

Fixed (Long-Term) Assets

• Useful life > 1 year • Long-term assets include:

– Property, plant and equipment

– Natural resources

– Intangible assets

Property, Plant & Equipment

• Land improvements– parking lots, sidewalks, landscaping

• Buildings• Fixed equipment

– Boilers, HVAC • Major equipment

– MRI, Linear Accelerators

Intangible Assets

• Items of value which lack physical characteristics– Goodwill– Patents/Trademarks– Franchises/Licenses– Customer lists– Computer software

Current Liabilities

• Payable within 12 months– trade accounts payable (invoiced)– salaries, wages, payroll taxes payable, accrued

vacation – accrued liabilities (known, but not yet invoiced)– advances from third-party payers– interest payable

Long-Term Liabilities

• Repaid over a period > 1 year– bonds and notes payable– bank loans– pension liability

Equity

• Net assets of the company• Owners’ claims on the company assets

– stock– contributed (or paid in) capital– accumulated profits/losses

• Restricted and Unrestricted

Unique to Not-For-Profits

• Assets limited as to use• Contributions receivable• Advances from 3rd party payors• Third party settlements• Restricted net assets• No Tax expense/liability

Unique to Health Care

ASSETS:

• Assets Limited as to Use– Proceeds from tax-exempt bond issues

• Construction Fund

• Debt Service Reserve Fund

– Board Designated

– Donor Restricted

• Contributions

Unique to Health Care

LIABILITIES AND NET ASSETS:

• Advances from third-party payors

• Temporarily and permanently restricted Net Assets

Statement of Operations

Operating Revenues

Operating Expenses

Net Operating Income


STATEMENT OF OPERATIONS:

• Revenues and Gains

• Expenses

• Other Income and Expenses

Unique to Health Care NFP’s

OTHER REVENUES:

• Separate from Patient Revenue…

• Contributions

• Net Assets Released from Restrictions

• Rental Income

• Parking/Cafeteria Sales

• Grants


STATEMENT OF CHANGES IN NET ASSETS:

• Operating income

• Grants

• Contributions

• Net assets released from restrictions• For operations

• For property and equipment


STATEMENT OF CASH FLOWS:

• Operating activity

• Investing activity

• Financing activity

• Unrestricted and Restricted

Notes to Financial Statements

Significant Accounting Policies Major Assets and Liabilities Detail Commitments and Contingencies Other Information


SIGNIFICANT ACCOUNTING POLICIES:

• Organizational structure

• Charity Care

• Revenue Methodology

• Asset Valuations


ASSET AND LIABILITIES DETAIL:

• Investments – Cost vs.. Current Value

• Property and Equipment

• Debt and Assets Held by Trustee


COMMITMENTS AND CONTINGENCIES:

• Pension and Post-Retirement Benefits

• Malpractice

• Outstanding Litigation

• Credit Risk/Payor Mix


OTHER INFORMATION:

• Related Party Transactions

• Credit Risk/Payor Mix

• Functional Expenses– Healthcare services

– General and administrative

Financial Ratios and Analysis


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Average Age of Plant Accumulated Depreciation/Depreciation Expense

Average Daily Census Patient Days/365Bad Debt Expense/Total Operating Revenue

Bad Debt Expense/(Net Patient Revenue + Other Operating Revenue)

Cash Flow Net Income + Depreciation & Amortization

Cashflow/Total Liabilities(Net Income + Depreciation & Amortization)/Total Liabilities

“Cushion” Ratio Cash/Maximum Annual Debt Service

Days Cash on HandCash/(Operating Expenses - Depreciation & Amortization)/365)

EBIDA (Earnings Before Interest, Depreciation & Amortization) Net Income + Interest, Depreciation & Amortization


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EBIDA Margin EBIDA/Total Revenue

Interest CoverageNet Income Available for Debt Service/ Interest Expense

Long Term Debt/CapitalizationLong Term Debt/(Unrestricted Net Assets + Long Term Debt)

Maximum Annual Debt Service (MADS) Coverage Net Income Available for Debt Service/MADS

Operating Margin Net Operating Income/Total Operating Revenue

Operating Cash Flow Margin EBIDA/Total Operating Revenue

Payment PeriodCurrent Liabilities/(Total Operating Expense - Depreciation & Amortization)


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Sample Hospital - Key Financial Metrics Report

Fiscal Year End 2007 2008 2009 2010 2011

Income Statement and Cash Flow

Operating margin (%) 1.46 1.69 0.41 1.81 1.13

Excess margin (%) 3.79 3.96 3.11 1.06 2.70

EBIDA margin (%) 10.75 10.83 9.44 7.75 9.18

Cash flow/total liabilities (%) 16.9 18.1 16.2 11.6 14.6

Debt

Max debt service coverage (x) 3.93 5.30 4.82 4.06 5.01

Maximum debt service-to-total revenue (%) 2.72 2.04 1.96 1.91 1.83


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Sample Hospital - Key Financial Metrics Report

Fiscal Year End 2007 2008 2009 2010 2011

Balance Sheet

Days cash on hand 163 179 154 128 140

Unrestricted cash/debt (%) 130 166 160 126 145

Cushion ratio (x) 14.9 21.8 19.8 17.2 19.3

Long-term debt/capitalization (%) 32.9 27.6 27.6 32.4 30.5

Average age of plant (years) 11.4 11.5 12.7 12.5 11.1

Questions?

financial reporting

Documents

accrual accounting entry6001

accrual accounting entries

accrual accounting approach0

receivable value

accrual accountingaccrual

equipmentnet realizable

inventoriesmarket value

debthistorical cost