REPORTING PRINCIPLES

Section 442.11 - Accrual reporting

REPORTING PRINCIPALS

442.11 Accrual reporting. (1310) (a) In order to provide the necessary completeness, accuracy and meaningfulness in reporting data, accrual basis of accounting is required. Accrual accounting is the recognizing and recording of the effects of transactions and other events on the assets and liabilities of the hospital entity in the time periods to which they relate rather than only when cash is received or paid. For example, the writing off to expense each year of one third of the cost of a three-year insurance policy. We recognize that the immediate implementation of this policy may create a hardship for those hospitals currently on a cash basis. Because of this, a waiver of this rule will apply to cash basis hospitals for the first two reporting periods. At the end of this grace period, all reports must be on the accrual basis. Earlier compliance is encouraged.

(b) Requests for waivers of the accrual reporting requirement will be considered where a State law requires government hospitals to use other than full accrual accounting. The fiscal intermediary, after obtaining approval from the Health Care Financing Agency (HCFA), may grant such a waiver subject to review and revocation.
 

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Section 442.12 - Matching of revenue and expenses

442.12 Matching of revenue and expenses. (1320) (a) Determination of the net income of an accounting period requires measurements of revenue, revenue deductions and expenses associated with the period. Hospital revenue must be recorded in the period in which it is earned; that is, in the time period during which the services are rendered to patients and a legal claim arises for the value of the services.

(b) Once the revenue determination is made, a measurement must be made of the amount of expense incurred in rendering the services on which the revenue determination was based. Unless there is such a matching of revenue and expense, the reported net income of a period is meaningless.

(c) The requirement that revenue deductions must also be matched properly against the gross revenues of the reporting period is sometimes overlooked. During the reporting period, patients' accounts receivable will be debited and revenue accounts will be credited, at the hospital's full established rates, for all services rendered to patients. Some of these accounts receivable will remain unpaid at the end of the reporting period. A majority of these accounts will be collected in cash from the patients or from their third-party payors, but the remainder eventually will be written off as deductions from revenue.

(d) It is important that these revenue deductions be given accounting recognition in the same period that the related revenues were recorded, even though certain of these revenue deductions cannot be precisely determined.

(e) Revenue and expenses are to be matched not only for the hospital as a whole, but also for each cost center. The cost center is an accounting device for accumulating items of cost or revenue that have common characteristics. A cost center may or may not be a department within the hospital. A cost center such as depreciation is an example where the cost center would not be a department of the hospital. The costs of the functions and activities included in each cost center description are to be included in the cost center. Revenue relative to such functions and activities must be included in the matching revenue center. For example, expenses related to the clinical laboratory functions (activities) are included in the Laboratory Services-Clinical cost center (account 7210) and related revenue are to be included in Laboratory Services-Clinical revenue center (account 4210).

(f) Some hospitals record revenue on an all-inclusive rate basis (a rate based on type of accommodation regardless of the utilization of ancillary services). Utilization of an inclusive rate system results only in a modification of the patient billing and revenue accounting system. It does not eliminate the need to report expenses in the proper cost center. Those institutions which record charges on an all-inclusive rate basis are not required to report gross patient revenue for each patient care services revenue center. An all-inclusive rate charging system is where the hospital's total charges consist of a rate based on type of accommodation multiplied by length of stay regardless of the utilization of ancillary services.
 

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Section 442.13 - Deductions from operating revenue

442.13 Deductions from operating revenue. (1330) (a) In many instances, the hospital receives less than its full established charges for the services it renders. It is essential that reporting information reflect both the gross revenue and revenue "adjustments" resulting from inability to collect established charges for services provided.

(b) These revenue adjustments are called Deductions from Revenue and are of the following primary categories:

(1) Provision for bad debts. These deductions represent the estimated amount of current revenues that will not be realized as a result of credit losses.

(2) Contractual adjustments. These adjustments represent the difference between full established charges for individual services and the contractual rates received or to be received from third-party payors for services rendered.

(3) Charity service. These deductions represent the difference between full established charges and amounts received or to be received from indigent patients, voluntary agencies or governmental units on behalf of specific indigent patients.

(4) Policy discounts. These deductions represent adjustments for items such as courtesy allowances and employee discounts from the hospital's full established charges for services.

(5) Administrative adjustments. These adjustments represent amounts of patient service revenue posted but not billed to patients because the cost of billing and collection would exceed the amounts received.

(c) The above items must be recorded and reported as deductions from gross operating revenue on an accrual basis rather than as expenses.
 

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Section 442.14 - Fund accounting

442.14 Fund accounting. (1340) (a) General.

(1) Many hospitals receive, from donors and other third parties, income, gifts, bequests and grants that are restricted as to use. When funds with donor-imposed restrictions are received, they must be reported separately. This would not preclude the pooling of assets for investment purposes.

(2) For balance sheet reporting, donor-restricted funds must be recorded separately in the appropriate restricted fund classifications. For income statement purposes, expenses relating to donor-restricted activities must be recorded in the Unrestricted Fund, and the earned share relative to such current year donor-restricted activities must be recorded as "Other Operating Revenue" unless otherwise restricted by covenant agreement. Hospitals receiving no restricted income, gifts, bequests or grants need not use separate fund accounting.

(3) Restricted funds generally fall into three categories: Plant Replacement and Expansion Fund, Specific Purpose Fund, and Endowment Fund. The accounts within each restricted fund are self-balancing, as each fund constitutes a separate subordinate accounting entity. The following sections outline the conditions and events which require separate accountability and the required accounting treatment for transactions within the established funds.

(b) Unrestricted Fund. (1341) (1) The Unrestricted Fund is used to account for funds derived from the day-to-day activities of the hospital and unrestricted contributions. Funds which originate from unrestricted gifts or previously accumulated income may be designated by the governing board for special uses. If the governing board designates assets in this manner, it should be recognized that the board also has the authority to rescind its action. For this reason, such funds must be accounted for in the Unrestricted Fund as "board-designated assets". All other funds within the Unrestricted Fund must be accounted for as operating funds. A separate structure of accounts in the Unrestricted Fund has been provided for operating funds and board-designated assets.

(2) The term restricted should not be used in connection with board or other internal hospital appropriations or designations of assets.

(c) Plant Replacement and Expansion Fund. (1342) (1) Resources restricted by donors and other third parties for the acquisition or construction of plant assets or the reduction of related debt must be accounted for in the Plant Replacement and Expansion Fund.

(2) When expenditures for plant assets are made by the Unrestricted Fund for the Plant Replacement and Expansion Fund, a transfer must be made from the Plant Replacement and Expansion Fund to match such expenditures if such funds are available. The entries to record such expenditures and the required transfer in both funds are as follows:

(i) Unrestricted Fund

June 30 Account Dr. Cr.

Construction in progress 1260 $1,000

Other accounts payable 2029 $1,000

Due from Plant Replacement and Expansion Fund 1073 $1,000

Transfer from restricted funds for capital outlay 2294 $1,000

(ii) Plant Replacement and Expansion Fund

Transfer to Unrestricted Fund for capital outlay 2695 $1,000

Due to Operating Fund 2581 $1,000

To record construction expenses incurred and related interfund transfer entries.

(3) Due to/due from accounts are to be used as an interim measure and should be reduced within a reasonable period of time by a transfer of assets (generally cash or investments) between the respective funds.

(i) Plant Replacement and Expansion Fund

July 3 Account Dr. Cr.

Due to Operating Fund 2851 $1,000

Cash 1510 $1,000

(ii) Unrestricted Fund

Cash 1010 $1,000

Due from Plant Replacement and Expansion Fund 1073 $1,000

To record transfer of cash from

Plant Replacement and Expansion

Fund to the Operating Fund.

(iii) Unrestricted Fund

July 5

Other accounts payable 2029 $1,000

Cash 1010 $1,000

To record payment of the liability.

(4) If cash is disbursed for plant assets directly from the Plant Replacement and Expansion Fund, the plant assets must nonetheless be recorded in the Unrestricted Fund, with the accompanying credit made to Fund Balance. In the Plant Replacement and Expansion Fund, fund balance would be debited, and a cash account credited. No entries would be made to the interfund payable or receivable accounts, nor would any cash be transferred between funds.

(5) The preferred method of accounting for the expenditure of restricted Plant Replacement and Expansion Funds is specified above. However, because of restrictions placed on construction funds by certain funding authorities, such expenditures and related liabilities are required to be recorded in the Plant Replacement and Expansion Fund. If expenditures for plant assets are recorded in the Plant Replacement and Expansion Fund, the plant assets must be transferred to the appropriate asset account in the Unrestricted Fund, with the accompanying credit made to the Unrestricted Fund balance. In the Plant Replacement and Expansion Fund, fund balance would be debited, and the temporary accounts(s) credited. No entry would be made to the interfund payable or receivable accounts. (Accounts have not been provided in this manual for recording such expenditures and related liabilities. Hospitals may establish such accounts as necessary.) (6) Income earned and any net realized gains on investments must be reflected as an addition to the fund balance if so specified by the donor. If available for general operating purposes, they must be included in nonoperating revenue in the Unrestricted Fund.

(d) Specified Purpose Fund. (1343) (1) Funds received which are restricted for a specific operating purpose must be accounted for in the Specific Purpose Fund. These resources must be recorded as other operating revenue in the period in which expenditures are made for the purpose specified by the donor.

(2) Income earned and any net realized gains on investments must be recorded as an addition to fund balance if required to conform to the donor's instructions or as nonoperating revenue of the Unrestricted Fund if such revenue is available for general purposes.

(e) Endowment Fund. (1344) (1) Funds classified as endowment include:

(i) pure endowment (principal is to remain intact in perpetuity);

(ii) term endowments (principal is available for use upon the passage of time or the occurrence of an event).

(2) When term endowments become available to the governing board for unrestricted purposes, they must be recorded as nonoperating revenue; if these funds are restricted, they must be transferred to the appropriate restricted fund.

(3) Income earned on endowment fund investments must be accounted for in accordance with donors' instructions if restricted, or as nonoperating revenue in the Unrestricted Fund if not restricted.

(f) Interfund Transactions. (1345) (1) As is shown in the Chart of Accounts, the only liability accounts included in the restricted funds (i.e., all funds other than the Unrestricted Fund) are liabilities to other funds (with the exception of the Endowment Fund, which allows for the inclusion of certain liabilities on Endowment Fund assets, and the Plant Replacement and Expansion Fund for certain covenant agreements as explained under number 1342).

(2) Thus, virtually all liabilities incurred by the hospital are to be recorded in the Unrestricted Fund. When these liabilities apply to restricted fund activities, a receivable from the applicable restricted fund must be recorded within the Unrestricted Fund. A payable to the Unrestricted Fund (or transfer of funds if paid immediately), as well as a reduction of the restricted fund balance, is recorded within the applicable restricted fund.

(3) Except for expenses incurred in conformity with covenant agreements, all expenses relating to restricted fund activities must be recorded in the Unrestricted Fund in the cost center category to which they apply. This is true whether the actual expenditures of cash are made from the Unrestricted Fund or a restricted fund. Separate cost centers must be established within each of these categories to record restricted activities for which separate accounting is required by the terms of the grant or gift. Sufficient account numbers have been allowed so that specific restricted fund activities may be segregated. Transfers from the restricted funds to match these expenses must be made in one of the following accounts:

(i) transfers from restricted funds for Research Expenses (account 5020);

(ii) transfers from restricted funds for Education Expenses (account 5280); or

(iii) transfers from restricted funds for Other Operating Expenses (account 5880).

(4) Example. In the following example, assume that $200 of consulting costs were incurred (this consulting was performed by a nonrelated organization) for restricted research activities, recorded as an expense and a liability in the Unrestricted Fund, and subsequently paid.

(i) Unrestricted Fund

June 1 Account Dr. Cr.

Research 8010 $200

Accounts payable 2020 $200

Due from Specific Purpose Fund 1074 $200

Transfers from restricted funds

for Research Expenses 5020 $200

(ii) Specific Purpose Fund

June 1

Transfers to Operating Fund for Operating Purposes 2797 $200

Due to Operating Fund 2781 $200

To record the expense and related liability for

costs incurred in restricted research activities

in the Operating Fund and record an interfund

liability and reduction in fund

balance in the Specific Purpose Fund.

(iii) Unrestricted Fund

June 10

Cash 1010 $200

Due from Specific Purpose Fund 1074 $200

(iv) Specific Purpose Fund

June 10

Due to Operating Fund 2781 $200

Cash 1710 $200

To record the transfer of

cash to the Operating Fund.

(v) Unrestricted Fund

June 15

Accounts payable 2020 $200

Cash 1010 $200

To record the payment of the liability.

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Section 442.15 - Long-term security investments

442.15 Long-term security investments. (1350) Long-term security investments are to be valued at hospital cost if purchased or, if acquired by donation, at the fair market value at the date of the gift. If there is evidence of a permanent decline in value, an appropriate reduction in carrying value must be made by charging the necessary expense account(s). The market value of long-term security investments at year-end must be disclosed.
 

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Section 442.16 - Pooled investments

442.16 Pooled investments. (1360) (a) Investments of various funds may be pooled unless prohibited by law or the terms of a donation or grant. Gains/losses and investment income on pooled investments must be distributed to participating funds on a basis utilizing market value.
(b) To illustrate the market value method of distributing gains/losses and income on pooled investments, assume the following facts:
(1) A hospital decides to create a pool of investments from funds provided from the following sources:
Market value at inception of pool*
Amount % of total pool
Unrestricted Fund $1,000,000 20%
Endowment Fund (single endowment) $3,000,000 60%
Plant Replacement and
Expansion (PR&E) Fund $1,000,000 20%
___________ _______
$5,000,000 100%
___________________________________________________________________________
*FOOTNOTE: This serves as the initial distribution basis.
___________________________________________________________________________
(2) Gains/losses on the Endowment Fund must be added to or deducted from the principal; however, the investment income is available for unrestricted purposes under the terms of the gift.
(3) Gains/losses and investment income for the Plant Replacement and Expansion Fund must be added to or deducted from fund balance pursuant to the wishes of the donor.
(4) There were no gains/losses on the sale of investments for the first year the pool was in existence. The income generated by the pool for that year was $400,000.
(5) Any gains on investment sales and investment income are not reinvested in the investment pool. The cash is remitted to funds that are entitled to the gains and/or income.
(c) The distribution of the income for the first year would be based on each participating fund's percentage of the pool based on its contribution at market value at the initiation of the pool.
(1) Therefore, the distribution would be as follows:
Income
Distributed to distributed
Unrestricted Fund (total income of $400,000 x 20%) $ 80,000
Endowment Fund (total income of $400,000 x 60%) 240,000
PR&E Fund (total income of $400,000 x 20%) 80,000
__________________
$400,000
(2) The accounting entries necessary to account for the distribution of income from the pooled investments would be as follows:
(i) Unrestricted Fund
Account Dr. Cr.
Cash 1010 $320,000
Unrestricted income from Endowment
Fund (nonoperating revenue) 9050 $240,000
Income, gains and losses from
unrestricted investments 9040 $ 80,000
To record the income from pooled
investments for the year.
(ii) PR&E Fund
Cash 1510 $ 80,000
Fund balance 2690 $ 80,000
To record the income from pooled investments for the year.
(d) In the second year the following facts are assumed:
(1) On the first day of the year the hospital decided to add $1,000,000 of Unrestricted Funds to the pooled investments. On that date, but prior to making the aforementioned addition, the pooled investments had the same cost, $5,000,000, as at inception, but a market value of $6,000,000. There were no other additions to the pool during this year.
(2) There were net gains on the sale of investments of $100,000 for the year and the investment income was $500,000 for the same period.
(e) Based on the above facts, the distribution percentage (%) for the income and gains on pooled investments for each of the participating funds would be based on the market value of the investment pool as of the date of the last addition and would be calculated as follows:
Revised
distribution basis
Units % of total units
(1) Unrestricted Fund.
Market Value $6,000,000 x 20%
(distribution % prior to addition) $1,200,000
Addition to pool at fair value
as of that date 1,000,000
____________
$2,200,000 31.4%
(2) Endowment Fund.
Market Value $6,000,000 x 60%
(distribution % prior to addition
-- no new additions) $3,600,000 51.4%
(3) PR&E Fund.
Market Value $6,000,000 x 20%
(distribution % prior to addition
-- no new additions) 1,200,000 17.2%
____________
$7,000,000 100.0%
(f) The income and gains from pooled investments for the second year would be based on the newly computed distribution and would be as follows:
Current Gains to be Income to be
distribution % distributed distributed
Unrestricted Fund 31.4% $ 31,400 $157,000
Endowment Fund 51.4% 51,400 257,000
PR&E Fund 17.2% 17,200 86,000
_______ __________ __________ 100.0% $100,000 $500,000
(g) The accounting entries necessary to reflect the above distribution would be as follows:
(1) Unrestricted Fund.
Account Dr. Cr.
Cash 1010 $445,400
Unrestricted income from Endowment Fund (nonoperating revenue) 9050 $257,000
Income, gains and losses from unrestricted investments 9040 188,400
To record the income and gains on pooled investments attributable to these funds for the year.
(2) Endowment Fund.
Cash 1810 $ 51,400
Fund balance (gains on sales of investments) 2890 $ 51,400
To record the gains on pooled investments attributable to this fund for the year.
(3) PR&E Fund.
Cash 1510 $103,200
Fund balance 2690 $103,200
To record the gains and income on pooled investments attributable to this fund for the year.
(h) As the above example illustrates, each time an addition is made to the investment pool a new distribution basis must be calculated. This is also true for any reductions to the pool. All gains/losses and investment income from the beginning of the accounting period up to the date of the addition must be determined and distributed on the basis of account balances prior to the addition. Any gains/losses and investment income subsequent to an addition would be distributed on the new basis until another addition or reduction is made.
 

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Section 442.17 - Inventories

442.17 Inventories. (1370) (a) Inventories reflect the cost of unused hospital supplies. Any generally accepted cost method (e.g., FIFO, LIFO, Average, etc.) may be used as long as it is consistent with that of the preceding accounting period. Cost of inventories based on the last invoice price is not an acceptable method for determining such cost.

(b) Inventory accounting record systems are required, consistent with the method of the inventory valuation employed. Perpetual inventory records are recommended but not required. Physical valuations must be made at least once a year and the accounting records, if applicable, adjusted to such valuations.

(c) Inventory usage records are required to be maintained for all inventories that are distributed and used by more than one cost center in the hospital. It is recommended that a formal requisition system be used for this purpose. In all cases, the cost of non-billable supplies used during the period must be distributed to the user cost centers, preferably on a monthly basis.
 

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Section 442.18 - Accounting for property, plant and equipment

442.18 Accounting for property, plant and equipment. (1380)

(a) Classification of fixed asset expenditures. (1381) Property, Plant and Equipment and related liabilities must be recorded in the Unrestricted Fund, since segregation in a separate fund would imply the existence of restrictions on the use of the asset. Cost of construction in progress and related liabilities must be recorded in the Unrestricted Fund as incurred except for assets and liabilities related to certain debt agreements.

(b) Basis of valuation. (1382) (1) Property, Plant and Equipment must be reported on the basis of cost. Cost shall be defined as historical cost or fair market value at the date of gift of donated property.

(2) Property, Plant and Equipment must be reported on the basis of the historical cost incurred by the present owner in acquiring the asset under a bona fide sale. The historical cost shall not exceed the lower of current reproduction cost adjusted for straight-line depreciation or fair market value at the time of purchase. See section 104.10 of HIM-15. Cost is defined as historical cost or fair market value of donated property on the date of acquisition.

(c) Accounting control. (1383) (1) To maintain accounting control over capital assets of the hospital, a plant asset ledger should be maintained as part of the general accounting records. Some items of equipment should be treated as individual units within the plant ledger when their individuality and unit cost justify such treatment. Other items of equipment, if they are similar and are used in a single cost center, may be grouped together and treated as a single unit within the ledger.

(2) All equipment purchased on or after the first day of a hospital's first accounting period beginning after the effective date of this manual, and all equipment purchased prior to such date where the necessary records have been maintained, must be segregated in the plant ledger record by cost center so that the cost of equipment and the related depreciation for each cost center is available.

(d) Capitalization policy. (1384) (1) If a depreciable asset has at the time of its acquisition an estimated useful life of three or more years and an historical cost of at least $300, its cost must be capitalized, and written off ratably over the estimated useful life of the asset.

(2) If a depreciable asset has an historical cost of less than $300, or if the asset has a useful life of less than three years, its costs are recorded in the year it is acquired, subject to the provisions of writing off the cost of minor movable equipment. The hospital may, if it desires, establish a capitalization policy with lower minimum criteria but under no circumstances may the above criteria be exceeded. Alterations and improvements in excess of $300 which extend the life a minimum of three years or increase the productivity or efficiency of an asset, as opposed to repairs and maintenance which either restore the asset to or maintain it at its normal or expected service life, must be capitalized and depreciated over their expected useful lives, not to exceed the lives of the asset to which they are fixed. Normal repair and maintenance costs are to be reported as expense in the current accounting period.

(3) For cost reporting periods beginning January 1, 1981 and thereafter, the historical cost limits will be adjusted to "an historical cost of at least $500 or, if it is acquired in quantity, the cost of the quantity is at least $1,000". The new $500 limit will also apply to alterations and improvements. All other principles cited above will continue in force.

(e) Minor equipment. (1385) (1) Minor equipment includes such items as wastebaskets, bedpans, silverware, mops, buckets, etc. The general characteristics of this equipment are:

(i) in general, no fixed location, and subject to use by various cost centers within a hospital;

(ii) comparatively small in size and unit cost;

(iii) subject to inventory control;

(iv) fairly large quantity in use; and

(v) generally, a useful life of less than three years.

(2) There are two ways in which the cost of minor equipment may be reported:

(i) The original cost of this equipment may be capitalized and not depreciated. Any replacements to this base stock would be reported as operating expenses. The amount of the base stock would be adjusted only if there were a significant change in the size of the base stock.

(ii) All purchases of minor equipment may be capitalized and depreciated over their estimated useful lives.

(3) Once a hospital has applied one of the methods, that method must be used consistently thereafter.

(f) Interest expense during period of construction. (1386) Frequently hospitals borrow funds to construct new facilities or modernize and expand existing facilities. Interest costs incurred during the period of construction must be capitalized as a part of the cost of the construction. The period of construction is considered to extend to the date the constructed asset is ready for use. When proceeds from a construction loan are invested and income is derived from such investments during the construction period, the amount of interest expense to be capitalized must be reduced by the amount of such income. (g) Depreciation policies. (1387) (1) Depreciation on plant assets used in the hospital's operations must be reported as an operating expense in the Unrestricted Fund. The straight line method of depreciation must be used for all assets acquired after July 1970. The estimated useful life of a depreciable asset is its normal operating or service life in terms of utility to the hospital. Some factors to be considered in determining useful life include normal wear and tear, obsolescence due to normal economic and technological advances, climatic or local conditions and the hospital's policy for repair and replacement.

(2) In selecting a proper useful life for computing depreciation, hospitals must utilize the most recent useful life guidelines published by the Secretary of the Department of Health and Human Services or, if none exist, the most recent guidelines published by the Internal Revenue Service or the 1973 guidelines published by the American Hospital Association. However, with the rapidly changing technology in hospitals, these recommendations may not be all-inclusive; in which case, the expertise of the manufacturer, or other reliable sources, may be considered. Any changes in estimated useful lives must be properly documented by the hospital and approved by the hospital's Medicare intermediary.

(3) For reporting purposes each hospital must establish, and follow consistently from year to year, a policy relative to the amount of depreciation to be taken in the year of acquisition and disposal of depreciable assets. Examples of acceptable policies are:

(i) Computing first year depreciation based upon the portion of time the asset was in use during the year. That is, if a depreciable asset was received and in use in the hospital for eight months in the year of acquisition, two thirds of a full year's depreciation expense would be recognized in that first year.

(ii) Recording one half of the yearly depreciation expense in the years of acquisition and disposal, regardless of the date of acquisition or disposal.

(4) Depreciation expense reported on buildings, purchased or constructed, in the year of acquisition or disposal must be based on the actual time during which the building was in use for hospital operations.
 

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Section 442.19 - Timing differences

442.19 Timing differences. (1390) (a) Timing differences result when accounting policies and practices used in an organization's accounting differ from those used for reporting operations to governmental units collecting taxes or to outside agencies making payments based upon the reported operations. These differences must be recorded on the hospital's records when they arise. The references relative to their acceptable accounting treatment are as follows:

--Income tax allocation--Accounting Principles Board Opinions Nos. 11, 23 and 24.

(b) The following condensed income statement illustrates a timing difference attributable to different methods of calculating depreciation expense for financial accounting versus tax or third-party reimbursement purposes.

(1) Assumptions:

(i) Depreciation for accounting purposes is calculated on the straight-line method and amounts to $10 for the current year.

(ii) Depreciation for tax and third-party reimbursement purposes is calculated on a declining balance method and amounts to $20 for the current year.

(iii) The tax rate is 40 percent.

(iv) The third-party utilization is 50 percent.

(v) The only deduction from revenue is the contractual allowance.

(2) Income statement.

Tax/third-party

Accounting records cost report

Revenue $180 $180

Deductions from Revenue 30 25

_____ _____

Net Revenue $150 $155

----- ----

Expenses (excluding depreciation) 110 110

Depreciation 10 20

_____ _____

Total Expenses before Taxes $120 $130

----- ----

Income before Taxes 30 25

Taxes 12 10

_____ _____

Net Income $ 18 $ 15

----- ----

(3) The income tax expense is comprised of three components:

$10 currently payable and $4 payable in future periods representing the tax effect of the difference between depreciation expense for accounting and tax purposes (40% x $10 = $4), and $2 to be applied against tax liabilities in future periods, representing the tax effect relative to reimbursement caused by the difference between depreciation for accounting purposes and cost report purposes, computed as follows: 40% (tax effect) x 50% (third-party utilization) x $10 (difference between depreciation for accounting and cost report purposes) = $2 or, stated another way, it is the difference between the deductions from revenue per the accounting records ($30) and the Tax/Cost Report Records ($25) times the tax rate of 40%.

(4) The journal entry to record these items is:

Account Dr. Cr.

Provision for income taxes

Federal - current 9411 $10

Provision for income taxes--

Federal - deferred 9412 2

Income taxes payable 2090 $10

Deferred income taxes payable 2120 2

(5) The deduction from revenue (contractual adjustments) is calculated as follows:

(i) Calculation.

Accounting Tax/cost

records report

Medicare revenue ($180 x 50%) $90 $90

Reimbursable costs:

$120 x 50% 60

$130 x 50% 65

____ ____

Contractual Adjustment $30 $25

(ii) Of the $30 contractual adjustment for accounting purposes, $25 is the current portion and $5 is the deferred portion.

(6) The journal entry to record this expense is:

Account Dr. Cr.

Contractual adjustment - Medicare 5910 $30

Allowance for contractual

adjustments - Medicare 1042 $25

Deferred revenue - Medicare 2131 5
 

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Section 442.20 - Accounting for pledges

442.2O Accounting for pledges. (1410) All pledges, less a provision for amounts estimated to be uncollectible, must be included in the hospital's accounting records. If unrestricted, they must be recorded as nonoperating revenue in the period the pledge is made. If part of the pledge is to be applied during some future period, that part must be recorded in the period the pledge is received as deferred revenue. If restricted, they must be recorded as an addition to the appropriate restricted fund balance. See Hospital Audit Guide.
 

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Section 442.21 - Self-insurance

442.21 Self-insurance. (1420) Self-insurance by a hospital for potential losses due to unemployment, workers' compensation and malpractice claims, asserted or otherwise, places all or part of the risk of such losses on the hospital rather than insuring against all or part of such losses with an independent insurer. For uniform reporting purposes for self-insurance, hospitals must follow the guidelines of Statement 5 of the Financial Accounting Standards Board.
 

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Section 442.22 - Related organizations

442.22 Related organizations. (1430) A hospital itself may be subsidiary to or under the control of a larger organization such as a university, governmental entity or parent corporation. It is typical in such situations for hospitals to receive services from these related organizations. Examples of services received are administration, purchasing, general accounting and menu planning. In addition, related organizations lease property, plant and equipment to hospitals as well as paying for various other items such as insurance. The related organization then usually charges for the service either directly or through a management fee. For uniform reporting purposes the direct charges must be reported as purchased services in the appropriate functional cost centers as billed, and the management fee must be reported in the functional cost centers in amounts relative to the services received for which the fee is paid.
 

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Section 442.23 - Debt financing for plant replacement and expansion purposes

442.23 Debt financing for plant replacement and expansion purposes. (1440) (a) Debt financing for plant replacement and expansion programs may take many forms. Under the terms of most debt financing agreements the debtor is required to perform or is prohibited from performing certain acts. In many instances, debt financing gives rise to special accounting treatment because of discounts and premiums on bond issues, financing charges, formal restrictions on debt proceeds, and sinking and other required funds.

(b) Discounts and premiums on bond issues. (1441) Discounts and premiums arising from the issue of bonds must be amortized over the life of the related issue(s). Bond discounts must be recorded as a reduction of the related debt (Bonds Payable - Net of Unamortized Discount). Bond premium must be recorded as Other Deferred Credits (account 2140).

(c) Financing charges. (1442) Costs of obtaining debt financing other than discounts (e.g., legal fees, underwriting fees, special accounting costs) must be recorded as deferred costs and amortized over the life of the related debt.

(d) Accounting for debt proceeds. (1443) (1) Debt agreements for financing plant replacement and expansion programs may or may not require formal segregation of debt proceeds prior to their use. Proceeds which are not required to be formally segregated prior to their use must be recorded as other noncurrent assets in the Unrestricted Fund.

(2) For the purposes of this Part, all funds received under covenant agreement arrangements which require formal segregation and/or separate accountability shall be recorded in the Plant Replacement and Expansion Fund until such time as the project is completed. Upon completion, the asset and related debt must be transferred to the Unrestricted Fund.

(e) Sinking and other required funds. (1444)

(1) These funds are usually established to comply with loan provisions whereby specific deposits are to be used to insure that adequate funds are available to meet future payments of:

(i) interest and principal (retirement of indebtedness funds); or

(ii) property insurance, related taxes, repairs and maintenance costs, equipment replacement (escrow funds).

(2) Funds of this nature may also be required to be held by trustees outside the hospital. Income generated from the investment of such funds may be immediately available to the hospital or such income may be held by the trustee for some future designated purpose.

(3) For the purposes of this Part, all sinking and other required funds will be accounted for in the following manner:

(i) All fund assets, whether trusteed or otherwise, must be recorded in the Unrestricted Fund as a long-term investment. The only exception is when the funds are restricted by covenant agreement.

(ii) All income generated from the investment of such funds must be recorded as nonoperating revenue in the Unrestricted Fund, except as required under number 1386. Income generated from funds under covenant agreement may be accounted for as an addition to the appropriate restricted fund balance account.

(f) Early debt retirement. (1445) (1) Many bond contracts provide for the calling of any portion or all of the issue at the option of the company at a stated price, usually above par, for the purpose of enabling the corporation to reduce its indebtedness before maturity as occasion arises, or to take advantage of opportunities to borrow on more favorable terms. Bonds are often retired piecemeal through sinking fund operations.

(2) Costs incidental to the recall of bonds before their date of maturity are considered debt cancellation costs. Such costs include bond recall penalties, unamortized bond discounts and expenses, legal and accounting fees, etc. These costs must be reduced by any unamortized bond premiums and recorded in the Unrestricted Fund in accordance with generally accepted accounting practices.
 

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