Sample Not-for-Profit Hospital - DOC

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					       SUPPLEMENTAL MATERIALS FOR AcSEC DISCUSSION – FAS 133 SOP
                    (NOT PART OF SOP DOCUMENT)

                                      Transition Illustrations
Assumptions: Interest payments related to the Hospital’s 1997 series debt are based on LIBOR plus a
spread. To hedge the risk of increasing interest rates, the Hospital entered into a $20 million notional
principal interest rate swap during 2001 that effectively converted the floating rate LIBOR-based
payments to fixed payments at 6.805% plus the spread calculated under the debt agreement. The interest
rate swap will terminate on December 31, 2006.

FYE 12/31/2001 – The Hospital adopted FAS 133 in accordance with the guidance in the footnote to the
audit guide. Although the derivative in question was an economic hedge of variable interest payments,
proper designation and documentation were not employed as the Hospital believed activity would be
below the performance indicator whether hedge accounting was achieved or not. The fair value of the
derivative liability on December 31 was $50,000.

FYE 12/31/2002 – The Hospital continued its same derivative accounting from 2001. The fair value of
the derivative liability on January 1 was $50,000; as of December 31, 2002 the fair value was $125,000.
The adjustment to interest expense resulting from the swap was $23,000 (debit) for the year.

The Hospital recorded the following entries:

Dr.     Change in fair value of interest rate swap               $75,000
        Cr.    Derivative liability                                        $75,000

Dr.     Interest expense                                         $23,000
        Cr.      Change in fair value of interest rate swap                $23,000

FYE 12/31/2003 -- The Hospital was required to adopt SoP 02-XX. Effective January 1, 2003 the
Hospital properly designated and documented the instrument as a cash flow hedge; the hedging
relationship was fully effective during 2003. As of December 31, 2003 the fair value of the derivative
liability had decreased to $48,000. The adjustment to interest expense resulting from the swap was
$12,000 (debit) for the year.

The Hospital recorded the following entries:

Dr.     Derivative liability                                     $77,000
        Cr.     Change in fair value of interest rate swap                  $77,000

Dr.     Interest expense                                         $12,000
        Cr.      Change in fair value of interest rate swap                 $12,000




ISSUE: How would this activity be reported in the Hospital’s Statement of Operations for
the years ended December 31, 2003 and 2002 if the SOP: (a) allowed retroactive
restatement; (b) required a cumulative effect adjustment; or (c) allowed prospective
application?




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                                                             CUMULATIVE EFFECT EXAMPLE



                               Sample Not-for-Profit Hospital
                                 Statement of Operations
                                      (In thousands)
                                                                         2003            2002
                                                                                      As restated
                                                                                       (note A)
        Net patient service revenue                                     $ 348,398       $ 276,766
        Expenses:
           Salaries and benefits                                          223,516         185,686
           Other operating expenses                                       103,177          63,302
            Interest expense                                                4,279           2,154
            Change in net unrealized losses on derivatives                     ----            52
              (Note A)
            Depreciation                                                    4,000           4,000
              Total expenses                                              334,972         255,194
        Operating income                                                   13,426          21,572
        Other income                                                        1,415           1,870
        Excess of revenues over expenses                                   14,841          23,442
        Change in net unrealized gains (losses) on other-than-trading
        securities                                                           155             140
        Change in net unrealized gains on derivatives (Note A)                89               --
        Increase in unrestricted net assets                             $ 15,085        $ 23,582


Note A Derivatives and Hedging (addressing transition only)

As discussed in Note X, the Hospital utilizes an interest rate swap to hedge the variable
cash flows associated with its 1997 series debt. When the Hospital adopted FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, in its
fiscal year ended December 31, 2001, it did so in accordance with guidance in the 2000
edition of the AICPA audit and accounting guide Health Care Organizations. That
guidance indicated that the derivative gains and losses other than those associated with
fair value hedges should be reported below the excess of revenues over expenses.
Although the derivative in question was an economic hedge of variable interest
payments, proper designation and documentation necessary to report the swap as a cash
flow hedge were not employed, as the Hospital believed activity would be reported below
the excess of revenues over expenses whether hedge accounting was achieved or not

In Month 2002, the AICPA issued Statement of Position No. 02-XX, Accounting for
Derivative Instruments and Hedging Activities by Not-for-Profit Health Care
Organizations. Among other matters, the SoP clarifies how not-for-profit health care
organizations should report the gains or losses on hedging and nonhedging derivative
instruments under FASB Statement No. 133. The SOP is effective for fiscal years
beginning after December 15, 2002.




                                                                                           2
                                                          CUMULATIVE EFFECT EXAMPLE


Upon its adoption of SoP 02-X, the Hospital has documented and designated the hedge as
a cash flow hedge. The Hospital elected to adopt the provisions of the SoP retroactively
as of January 1, 2002. The effect of the change for 2002 was to decrease the excess of
revenues over expenses by $52, with a corresponding increase in other changes in
unrestricted net assets. Consequently, there was no effect on the overall change in
unrestricted net assets for 2002.
                     Sample Not-for-Profit HospitalStatement of Operations
                                          (In thousands)
                                                                     2003         2002
         Net patient service revenue                               $ 348,398    $ 276,766
         Expenses:
             Salaries and benefits                                   223,516       185,686
             Other operating expenses                                103,177        63,302
             Interest expense                                           4,279        2,154
             Depreciation                                               4,000        4,000
             Total expenses                                          334,972       255,142
         Operating income                                             13,426        21,624
         Other income                                                   1,415        1,870
               Excess of revenues over expenses                       14,841        23,494
         Change in net unrealized gains on other-than-trading
         securities                                                       155          140
         Change in net unrealized gains (losses) on derivatives
         (Note A)                                                           89         (52)
               Change in net assets before cumulative effect of a
               change in accounting principle                          15,085       23,582
         Change in accounting principle (Note A):
           Impact on prior year’s excess of revenues over expen-
            ses of change in method of accounting for derivatives         (52)           --
           Impact on other changes in net assets for prior year of
            change in method of accounting for derivatives                  52           --
            Cumulative effect adjustment, net                               -0-          --
         Increase in unrestricted net assets                       $ 15,085      $ 23,582


Note A Derivatives and Hedging (addressing transition only)

As discussed in Note X, the Hospital utilizes an interest rate swap to hedge the variable
cash flows associated with its 1997 series debt. When the Hospital adopted FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, in its
fiscal year ended December 31, 2001, it did so in accordance with guidance in the 2000
edition of the AICPA audit and accounting guide Health Care Organizations. That
guidance indicated that the derivative gains and losses other than those associated with
fair value hedges should be reported below the excess of revenues over expenses.
Although the derivative in question was an economic hedge of variable interest
payments, proper designation and documentation necessary to report the swap as a cash
flow hedge were not employed, as the Hospital believed activity would be reported below
the excess of revenues over expenses whether hedge accounting was achieved or not


                                                                                          3
                                                         CUMULATIVE EFFECT EXAMPLE



In Month 2002, the AICPA issued Statement of Position No. 02-XX, Accounting for
Derivative Instruments and Hedging Activities by Not-for-Profit Health Care
Organizations. Among other matters, the SoP clarifies how not-for-profit health care
organizations should report the gains or losses on hedging and nonhedging derivative
instruments under FASB Statement No. 133. The Hospital adopted SoP 02-XX effective
1-1-03. The adjustment to apply retroactively apply the new method to 2002 would have
resulted in no change in the net asset balances previously reported for 2002, because the
impact of the change would have been limited to reclassifying $52 of unrealized losses on
derivatives from “other changes in net assets” to “excess of revenues over expenses.”
The SOP would have required this reclassification in 2002 because the swap, although it
is an economic hedge, was not designated as such during 2002, and the SOP requires fair
value changes in non-hedging derivatives to be included in, rather than excluded from,
the excess of revenues over expenses. In accordance with the requirements of FASB
Statement No. 117 and Health Care Organizations, the cumulative effect of a change in
accounting principle is reported below the excess of revenues over expenses in the
Statement of Operations.

The pro forma effects of retroactive application of SOP 02-XX for the year ended
December 31, 2002 are presented below:

                                                 As reported      Pro forma
Excess of revenues over expenses                 $23,494          $23,442
Increase in unrestricted net assets              $23,582          $23,582 (no change)




                                                                                        4
                                                      PROSPECTIVE APPLICATION EXAMPLE


                               Sample Not-for-Profit Hospital
                                 Statement of Operations
                                      (In thousands)
                                                                  2003        2002
      Net patient service revenue                               $ 348,398   $ 276,766
      Expenses:
         Salaries and benefits                                    223,516     185,686
         Other operating expenses                                 103,177      63,302
          Interest expense                                          4,279       2,154
          Depreciation                                              4,000       4,000
            Total expenses                                        334,972     255,142
      Operating income                                             13,426      21,624
      Other income                                                  1,415       1,870
      Excess of revenues over expenses                             14,841      23,494
      Change in net unrealized gains on other-than-trading
      securities                                                     155         140
      Change in net unrealized gains (losses) on derivatives
      (Note A)                                                         89        (52)
      Increase in unrestricted net assets                        $ 15,085   $ 23,582


Note A Derivatives and Hedging (addressing transition only)

As discussed in Note X, the Hospital utilizes an interest rate swap to hedge the variable
cash flows associated with its 1997 series debt. When the Hospital adopted FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, in its
fiscal year ended December 31, 2001, it did so in accordance with guidance in the 2000
edition of the AICPA audit and accounting guide Health Care Organizations. That
guidance indicated that the derivative gains and losses other than those associated with
fair value hedges should be reported below the excess of revenues over expenses.
Although the derivative in question was an economic hedge of variable interest
payments, proper designation and documentation necessary to report the swap as a cash
flow hedge were not employed, as the Hospital believed activity would be reported below
the excess of revenues over expenses whether hedge accounting was achieved or not

In Month 2002, the AICPA issued Statement of Position No. 02-XX, Accounting for
Derivative Instruments and Hedging Activities by Not-for-Profit Health Care
Organizations. Among other matters, the SoP clarifies how not-for-profit health care
organizations should report the gains or losses on hedging and nonhedging derivative
instruments under FASB Statement No. 133. The Hospital adopted SoP XX
prospectively as of January 1, 2003. If the Hospital had elected to apply the SoP
retroactively, the swap would not have been accorded cash flow hedging treatment,
because FAS 133 does not allow for retroactive designation of a hedge. Consequently,
the Hospital would have been required to report the swap as a non-hedging derivative and
include all gains and losses in the excess of revenues over expenses. The pro forma
effects of retroactive application of SOP 02-XX for the year ended December 31, 2002
are presented below:


                                                                                        5
                                          PROSPECTIVE APPLICATION EXAMPLE



                                      As reported     Pro forma
Excess of revenues over expenses      $23,494         $23,442
Increase in unrestricted net assets   $23,582         $23,582 (no change)




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