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Title: 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.


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


VOLUME C (Title 10)