BASIC CONCEPTS

Section 442.2 - Accounting entity

BASIC CONCEPTS

442.2 Accounting entity. (1110) A fundamental reporting concept is that of the accounting entity or unit. For reporting purposes, the hospital is presumed to be an entity capable of buying, selling and taking other economic actions which are to be accounted for separately from the personal affairs of those responsible for the hospital's administration. The hospital itself is the primary unit for which the accounting records are maintained. However, most departments of the hospital usually assume sufficient importance to require separate treatment as subordinate entities or units of accountability for planning and control purposes.
 

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Section 442.3 - Continuity of activity

442.3 Continuity of activity. (1120) A basic reporting concept is that of continuity of activity, or the going concern. The assumption is that the hospital will continue to function indefinitely. It then becomes necessary to divide the life of the hospital into reporting periods, to determine revenues earned and expenses incurred during each period and to measure the amounts of assets and obligations at the end of each period.
 

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Section 442.4 - Reporting period

442.4 Reporting period. (1130) (a) For cost reporting purposes, the program will require submission of annual reports covering a 12-month period of operations based upon the provider's accounting year.

(b) The provider may select any annual period for cost reporting purposes as long as the reporting period selected is the same as that used for Medicare reimbursement. Once a provider has made a selection and reported accordingly, it is required thereafter to report annually for periods ending as of the same date, unless the intermediary approves a change in the provider's reporting period.

(c) A cost reporting period under the program consisting of one of the following will be considered in compliance with the reporting periods cited above:

(1) 12 successive calendar months;

(2) 13 four-week periods with an additional day (two in a leap year) added to the last week or period to make it coincide with the end of the calendar year or month; or

(3) a reporting period which will vary from 52 to 53 weeks because it must always end on the same day of the week (Monday, Tuesday, etc.) and always end on:

(i) whatever date this same day of the week last occurs in a calendar month; or

(ii) whatever date this same day of the week falls on which is nearest to the last day of the calendar month, even though this same day falls in the first week of the following month.

(d) The method selected must be consistently followed.

(e) A provider may prepare a short-period cost report for part of a year under the circumstances described in sections 2414.1 through 2414.3 of the Medicare Provider Reimbursement Manual (HIM-15), Part I.

(f) Providers in a chain organization, or other group of providers, are required to file individual cost reports.

(g) Upon entering the health insurance program, a new provider may select an initial cost reporting period of at least 1 month but not to exceed 13 months. For example, a new provider which starts with the Medicare program on September 15, 1974, and wishes to adopt a reporting period ending September 30, 1974, must file a report for the period September 15, 1974 to September 30, 1975. Such a provider cannot file a report for the 15-day period ending September 30, 1974.

(h) A hospital beginning operations must select an initial reporting period beginning on the first day of operation, through the last month preceding the hospital's selected fiscal year. For example, a hospital beginning operations August 15, 1980, selecting a fiscal year beginning January 1st, would have an initial fiscal period running from August 15, 1980 through December 31, 1980. It would then move to the standard January 1st to December 31st fiscal year.

(i) Whatever fiscal year is used for reporting purposes must coincide with that used for Medicare (Medicaid for Medicaid-only hospitals) cost reporting purposes.
 

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Section 442.5 - Objective evidence

442.5 Objective evidence. (1140) (a) Information produced by the accounting process should be based, to the extent possible, upon objectively determined facts. Transactions should be supported by properly executed documents such as charge slips, purchase orders, suppliers' invoices, cancelled checks, etc. Such documents serve as objective evidence of transactions and should be retained as a source of verification of the data in the accounting records.

(b) Certain determinations that enter into the accounting records are based on estimates. The estimates should be based on past experience modified by expected future considerations. Examples would include recognition of estimated provisions for depreciation and bad debts.

(c) Books, papers, records or other data relevant to matters of hospital ownership, organization and operation must be maintained. The data must be maintained in an ongoing recordkeeping system which allows for the data to be readily verified by qualified auditors.
 

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Section 442.6 - Conservatism

442.6 Conservatism. (1150) Conservatism is a quality of judgment to be exercised in evaluating the uncertainties and risks present in the hospital entity to assure that reasonable provisions are made for potential losses in the realization of recorded assets and in the settlement of actual and contingent liabilities. However, conservatism is not a justification for deliberate understatement.
 

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Section 442.7 - Consistency

442.7 Consistency. (1160) Consistency refers to continued uniformity, during a period and from one period to another, in methods of accounting, mainly in valuation bases and methods of accrual, as reflected in the financial statements of an accounting entity, e.g., change from FIFO inventory method to the LIFO method. Consistency is very important to the development and analysis of trends on a year-to-year basis and as a means of forecasting. However, consistency does not require continued adherence to a method of procedure that is incorrect or no longer useful, nor does it preclude a justifiable and desirable change in accounting and reporting methods or procedures unless otherwise specified in this manual. Any such change must be highlighted in submitting reports to HCFA by appropriate footnotes on all schedules which are affected by the change.
 

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Section 442.8 - Full disclosure

442.8 Full disclosure. (1170) The concept of full disclosure requires that all significant data be clearly and completely reflected in accounting reports. If, for example, a hospital were to change its method of accounting for certain transactions, within the limitations of this manual, and if the change had a material effect on the reported financial position or operating results, the nature of the change in method and its effect must be disclosed when reporting costs to any agency. No fact that would influence the decisions of management, the governing board, or other users of financial statements should be omitted from or concealed in accounting reports.
 

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Section 442.9 - Materiality

442.9 Materiality. (1180) Materiality is an elusive concept with the dividing line between material and immaterial amounts subject to various interpretations. It is clear, however, that an amount is material if its exclusion from the financial statements would cause misleading or incorrect conclusions to be drawn by users of the statements.
 

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Section 442.10 - Basis of valuation

442.10 Basis of valuation. (1190) (a) Historical cost is the basis used in accounting for the valuation of all assets and in recording all expenses (except fair market value in the case of donations and imputed value in the case of nonpaid workers). Historical cost, simply defined, is the amount of cash or cash equivalents given in exchange for properties or services at the time of acquisition. It is the basis for the valuation of assets and for the recording of most expenses. Cost ordinarily has been the basis for accounting for assets and expenses because it is a permanent and objective measurement that reflects the accountability of management for the utilization of hospital funds.

(b) Hospitals, however, frequently acquire property, equipment, services and supplies by donation. The property, equipment, service and/or supply is considered donated when acquired without the hospital making any payment for it in the form of cash, property or services. The property, equipment, service and/or supply should be valued at the fair market value which is the price that the asset would cost by bona fide bargaining between well-informed buyers and sellers at the date of donation (regardless of date of receipt). Failure to give accounting recognition to donated properties and services results in an understatement of hospital assets, revenues and expenses.

(c) Many hospitals receive the services of members of an organization of nonpaid workers that has arrangements with the hospital for the performance of services. The services are in positions customarily held by full-time employees, and are performed on a regularly scheduled basis. The fair value of donated services must be reported when there is the equivalent of an employer-employee relationship and an objective basis for valuing such services. The value of services donated by organizations must be evidenced by a contractual relationship which provides the basis for valuation. The amounts reported are not to exceed those paid others for similar work.

(d) The value of services of a type of which hospitals generally do not remunerate individual's performances are not included as operating cost (e.g., donated services of individuals such as volunteers and trustees).
 

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