financial reporting scott furniss sr. vp/cfo st. agnes healthcare, inc. march 30, 2012
TRANSCRIPT
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Financial Reporting
Scott FurnissSr. VP/CFO
St. Agnes HealthCare, Inc.
March 30, 2012
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Intro
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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
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Finance Departments
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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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Typical Finance Department
• 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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Typical Finance Department
• 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
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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….
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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
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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
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Accrual TransactionsProper matching of revenue and expense transactions and
accounting periods
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Valuation Methods
• Current Value: Cash, Vacation liabilities, inventories
• Market Value: Investments, Debt
• Historical Cost: Buildings and Equipment
• Net Realizable Value: Receivables, Payables
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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
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“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
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A/R Valuation Analysis
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Common Issues
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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
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Depreciation Methods
• Straight line method - primary
• Accelerated methods:– Units-of-production
– Sum-of-the-years’-digits
– Double-declining balance
• Tax implications for taxable entities
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Straight Line Depreciation
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Valuation of Property Assets(Straight Line Method)
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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
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Transaction Data Pyramid
Daily Transactions & Journal Entries
General Ledger
Trial Balance
Departmental Reports
Financial
Statements
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Basic Accounting Transactions
Transaction based activity:
• Accounts Payable – invoices/payments
• Purchasing Activity – supplies and services
• Patient Charges
• Payroll
• Collections on receivables
• Investment and Debt activity
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Basic Accounting Transactions
Journal Entry Activity:• Depreciation expense
• Bad Debt Expense
• Accrual adjustments
• Reconciliation adjustments
This can be a manual activity, data “upload”, or an interface…
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Example Activity Entries
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Trial Balance
• List of all account BALANCES
• Total debits = total credits
• Preliminary to preparation of financial statements
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Basic Accounting Transactions
• 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
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Departmental Reports
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Basic Financial Statements
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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
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Basic 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
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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
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Balance Sheet
Current Assets
Long-Term Assets
Current Liabilities
Long-Term Debt
Equity
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Current Assets
• Will be consumed within 12 months
• Listed in order of liquidity:– Cash
– Short-term investments
– Accounts receivable
– Inventories
– Prepaid expenses
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Current Assets
• Cash – checks and money on deposit– credit card receipts
• Short-term investments – marketable securities– certificates of deposit– other investment instruments
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Current Assets
• Accounts receivable– funds owed to the company– government and insurance payors– individual patients– other
• Inventories– Medical, surgical and office supplies– Fuel, food
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Current Assets
• Prepaid expenses – prepaid insurance– prepaid rent and supplies– prepaid interest and property taxes
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Fixed (Long-Term) Assets
• Useful life > 1 year • Long-term assets include:
– Property, plant and equipment
– Natural resources
– Intangible assets
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Property, Plant & Equipment
• Land improvements– parking lots, sidewalks, landscaping
• Buildings• Fixed equipment
– Boilers, HVAC • Major equipment
– MRI, Linear Accelerators
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Intangible Assets
• Items of value which lack physical characteristics– Goodwill– Patents/Trademarks– Franchises/Licenses– Customer lists– Computer software
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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
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Long-Term Liabilities
• Repaid over a period > 1 year– bonds and notes payable– bank loans– pension liability
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Equity
• Net assets of the company• Owners’ claims on the company assets
– stock– contributed (or paid in) capital– accumulated profits/losses
• Restricted and Unrestricted
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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
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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
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Unique to Health Care
LIABILITIES AND NET ASSETS:
• Advances from third-party payors
• Temporarily and permanently restricted Net Assets
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Statement of Operations
Operating Revenues
Operating Expenses
Net Operating Income
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Basic Financial Statements
STATEMENT OF OPERATIONS:
• Revenues and Gains
• Expenses
• Other Income and Expenses
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Unique to Health Care NFP’s
OTHER REVENUES:
• Separate from Patient Revenue…
• Contributions
• Net Assets Released from Restrictions
• Rental Income
• Parking/Cafeteria Sales
• Grants
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Basic Financial Statements
STATEMENT OF CHANGES IN NET ASSETS:
• Operating income
• Grants
• Contributions
• Net assets released from restrictions• For operations
• For property and equipment
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Basic Financial Statements
STATEMENT OF CASH FLOWS:
• Operating activity
• Investing activity
• Financing activity
• Unrestricted and Restricted
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Notes to Financial Statements
Significant Accounting Policies Major Assets and Liabilities Detail Commitments and Contingencies Other Information
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Notes to Financial Statements
SIGNIFICANT ACCOUNTING POLICIES:
• Organizational structure
• Charity Care
• Revenue Methodology
• Asset Valuations
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Notes to Financial Statements
ASSET AND LIABILITIES DETAIL:
• Investments – Cost vs.. Current Value
• Property and Equipment
• Debt and Assets Held by Trustee
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Notes to Financial Statements
COMMITMENTS AND CONTINGENCIES:
• Pension and Post-Retirement Benefits
• Malpractice
• Outstanding Litigation
• Credit Risk/Payor Mix
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Notes to Financial Statements
OTHER INFORMATION:
• Related Party Transactions
• Credit Risk/Payor Mix
• Functional Expenses– Healthcare services
– General and administrative
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Financial Ratios and Analysis
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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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Financial Ratios and Analysis
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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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Financial Ratios and Analysis
67
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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Financial Ratios and Analysis
68
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
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Questions?