ASU 2011-06 [FASB ASC 720] + 2011-07 [FASB ASC 954]
Guidance For Health Insurers & Health Care Entities
By: Thomas A. Ratcliff, Ph.D., CPA
In July 2011, the FASB released new guidance that amends the FASB Accounting Standards Codiﬁcation
[FASB ASC] to address speciﬁc ﬁnancial reporting issues that needs to be implemented by health insurers
and health care entities. In one Accounting Standards Update [ASU], the guidance addresses questions
that have been raised about how health insurers should recognize and classify, in their statements of
income, fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care
and Education Reconciliation Act [collectively referred to herein as the Acts]. Then, in the other ASU,
guidance is provided to address how patient service revenue, the provisions for bad debts, and the related
allowance for doubtful accounts should be reﬂected in health care entity statements of operations.
The two amendments to the authoritative literature are as follows:
• ASU 2011-06, entitled Fees Paid to the Federal Government by Health Insurers. That guidance was
issued on Thursday, July 21, 2011 to amend FASB ASC Topic 720, entitled Other Expenses.
• ASU 2011-07, entitled Presentation and Disclosure of Patient Service Revenue, Provision for Bad
Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. That guidance was
issued on Monday, July 25, 2011 to amend FASB ASC Topic 954, entitled Health Care Entities.
Practice Note: The ASU 2011-06 amendments to FASB ASC 720 need to be implemented by reporting
entities that are subject to the fee imposed on health insurers by the Acts. Then, the ASU 2011-07
amendments to FASB ASC 954 need to be implemented by health care reporting entities that recognize
signiﬁcant amounts of patient service revenue at the time services are rendered even though those entities
do not assess patient ability to pay; all other health care entities would continue to present the provision
for bad debts, including bad debts associated with patient service revenue, as an operating expense.
ASU 2011-06 [FASB ASC 720]
Collectively, the Acts noted earlier impose an annual fee on health insurers for each calendar year beginning on/
after January 1, 2014. The health insurer portion of the annual fee is payable no later than September 30 of the
applicable calendar year, and those amounts are not tax deductible. The annual fee for the health care industry
will be allocated to individual health insurers based on the ratio of the amount of net premiums for each entity
that are written during the preceding calendar year to the amount of health insurance for any U.S. health risk that
is written during the preceding calendar year. A portion of the annual fee attributable to health insurers becomes
payable to the U.S. Treasury once the entity provides health insurance for any U.S. health risk for each applicable
The guidance includes the clear stipulation that the liability for the fee should be estimated and recorded in full
once the health care insurer provides qualifying health insurance in the applicable calendar year in which the fee is
payable. Then, there would need to be a corresponding deferred cost recognized that would need to be amortized
to expense using a straight-line method of allocation, unless another method more properly-allocates the fee over
the year that it is payable.
Practice Note: The above-noted fee does not meet the deﬁnition of an acquisition cost, as that deﬁnition was
modiﬁed by the guidance in ASU 2010-26, entitled Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts. ASU 2010-26 amended the guidance in FASB ASC 944, entitled Financial Services –
In ASU 2011-06, the conclusion was reached that the fee to be paid to the government by health insurers is similar
to the fee to be paid to the government by pharmaceutical manufacturers. As such, the conclusion was reached
that this type fee should be classiﬁed as an operating expense.
The guidance in ASU 2011-06 becomes effective for calendar years beginning after December 31, 2013. The
reason for this deferred effective date is to have implementation of the guidance coordinated with the point in time
that the fee initially becomes effective.
ASU 2011-07 [FASB ASC 954]
In the health care entity ﬁnancial reporting arena, some reporting entities recognize patient service revenue at the
time the services are rendered without regard to whether there is an expectation to collect amounts recorded. This
revenue recognition approach has raised concerns by stakeholders interested in ﬁnancial reporting by health care
entities, especially related to the fact that this accounting approach has the result of grossing-up patient service
revenue along with the related provision for bad debts.
Practice Note: Another concern that is addressed in the ASU 2011-07 guidance relates to the fact that, since
health care entities make their own judgments regarding adjustments to revenues and bad debts, those judgments
differ from one health care entity to another and comparability is impaired, making analyses difﬁcult for ﬁnancial
One of the more signiﬁcant provisions in the ASU 2011-07 amendments to FASB ASC 954 relates to how bad
debts will need to be reﬂected in statements of operations for certain health care entities. The new guidance now
includes the requirement for health care entities that recognize signiﬁcant amounts of patient service revenue at
the time the services are rendered even though patient ability to pay has not been assessed to reﬂect the provision
for bad debts related to the patient service revenue as a deduction from that revenue, net of contractual allowances
and discounts, in statements of operations.
Using the guidance, certain health care entities will be required to change the display in statements of operations
by reclassifying the provision for bad debts associated with patient service revenue from operating expenses to a
reduction in patient service revenue, net of contractual allowances and discounts. For health care entities affected
by this guidance, the provision for bad debts associated with patient service revenue is required to be presented
on a separate line that reduces patient service revenue, net of contractual allowances and discounts, in statements
The new presentation for bad debts in statements of operations should result in an improvement in ﬁnancial
reporting in that the result will be the presentation of net patient service revenue, after the provision for bad debts,
that is more closely-aligned to the amount expected to be collected by health care entities.
In addition to the ﬁnancial statement display requirements, the ASU 2011-07 amendments to FASB ASC 954
include additional disclosures. Those enhanced disclosures will include information about health care entity
policies for recognizing revenue and assessing bad debts. Further, the guidance includes required disclosures
of patient service revenue, net of contractual allowances and discounts, as well as qualitative and quantitative
information about changes in the allowance for doubtful accounts. These new disclosures should be helpful to
end-users of ﬁnancial statements in their efforts to understand how health care entities recognize patient service
revenue and assess bad debts.
In complying with the new disclosure requirements, health care entities that recognize signiﬁcant amounts of
patient service revenue at the time the services are rendered without assessing patient ability to pay are required
to disclose both of the following in both interim and annual reporting periods:
• Their policies for assessing the timing and amount of uncollectible patient service revenue recognized as bad
debts by major payor source of revenue. Major payor sources of revenue are required to be identiﬁed by health
care entities and be consistent with how those entities manage their business [e.g., how assessments of credit
risk are addressed].
• Qualitative and quantitative information about signiﬁcant changes in the allowance for doubtful accounts related
to patient accounts receivable [e.g., signiﬁcant changes in estimates and underlying assumptions, amounts
of self-pay write-offs, amounts of third-party payor write-offs, and other unusual transactions impacting the
allowance for doubtful accounts].
Practice Note: In addressing the disclosure in the ﬁrst bullet-point above, an example might be where the
accounting system of one health care entity may include classiﬁcation of patient accounts receivable arising
from deductions and co-insurance as part of third-party receivables. Another health care entity may classify
deductibles and co-insurance as self-pay receivables. Then, another health care entity may classify deductibles
and co-insurance as either third-party or self-pay receivables on the basis of which party has the primary remaining
ﬁnancial responsibility. The required disclosure should enhance transparency related to this issue.
The ASU 2011-07 amendments to FASB ASC 954 contain some speciﬁc presentation requirements along with
some speciﬁc disclosure requirements. As noted earlier, some health care entities perform services for patients
where ultimate collection of all or a portion of amounts billed or billable cannot be determined at the time the
services are rendered. An example where this guidance might apply would be hospital emergency departments
where health care entities may be required by law to treat emergency conditions without consideration as to
whether patients have the ability to pay for the services they have received.
In the circumstances described in the previous paragraph, and where signiﬁcant amount of patient service revenue
is recognized at the time services are rendered without assessments being made related to the ability of patients to
pay all amounts due, health care entities are required to present all of the following as separate line-items on the
face of the statement of operations:
• Patient service revenue, net of contractual allowances and discounts.
• The provision for bad debts associated with the patient revenue, where that provision is required to be shown
as a deduction from patient service revenue.
• The resulting net patient service revenue, reduced by the provision for bad debts.
Practice Note: Certain bad debts still need to be presented as operating expenses in the statement of operations.
Those would be bad debts related to receivables from revenue other than patient service revenue along with those
related to receivables from patient service revenue when health care entities only recognize revenue to the extent
there is an expectation that amounts will be collected.
The ASU 2011-07 amendments to FASB ASC 954 are effective for public entities in ﬁscal years, and interim
periods within those ﬁscal years, beginning after December 15, 2011, with early implementation permitted. For
private entities, the amendments are effective for the ﬁrst annual period ending after December 15, 2012, and
interim and annual periods thereafter, with early implementation permitted. The amendments associated with the
presentation of the provision for bad debts related to patient service revenue in the statement of operations needs
to be applied retrospectively in ﬁnancial statements for all periods presented for comparative purposes. Then,
disclosures required by the ASU 2011-07 amendments need to be included in ﬁnancial statements for the period
of adoption and in subsequent reporting periods.
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PG - HC - 2011