Title: Section 452.3 - Reporting principles
452.3 Reporting principles. (a) Accrual reporting. In order to provide complete, accurate and uniform financial data, all residential health care facilities, including governmental institutions, must report such data on the accrual basis. If differences between the results of accruing an item and reporting that item on a cash basis are immaterial, accrual reporting of that item would be waived. Within these guidelines, therefore, employee vacation, sick time, holidays and personal time must be accrued when there is reasonable assurance that a liability does exist and will be liquidated.
(b) Matching of revenue and expenses. (1) Subject to the limitations of subdivision (a) of this section, revenue must be reported in the period earned, i.e., when the services are rendered and a legal claim arises for the services. Deductions from revenue, including contractual adjustments, are to be given accounting recognition in the same period that the related revenues were recorded.
(2) Revenue derived from services must be matched with the cost of providing those services.
(3) Revenue and expenses should be matched for each cost center within the residential health care facility. Therefore, the cost of functions and activities within each cost center are to be included in accounts designated for that cost center. Revenue relative to such functions and activities must be included in the matching revenue accounts.
(4) For those institutions that record charges on an all-inclusive rate basis (a flat charge regardless of services performed), a center-by-center matching of cost and revenue at the cost center level would be impossible. Therefore, for these institutions, the matching of cost and revenue should be accomplished at the program level. This, however, does not preclude such institutions from recording their costs in the proper cost center. In addition, revenue from patients should be reported at gross (the full established rate charged to a private patient) with a contractual allowance to reflect the difference between the full rate and the amount received from third-party payors. If the institution is on an all-inclusive rate basis (a flat charge for all services), then the gross rate would be the all-inclusive flat charge. If, however, the institution utilized a fee-for-service basis (a separate charge for each service provided), the gross charge for each service and patient must be reflected.
(c) Fund accounting. Many residential health care facilities receive funds from donors which are restricted as to use. These funds must be accounted for separately as restricted funds. This does not preclude the pooling of assets for investment purposes. Restricted funds generally fall into three categories: endowment funds, plant replacement and expansion funds, and specific purpose funds. However, certain facilities may also have agency funds to account for funds held for patients. The accounts within each restricted fund are self-balancing, as each fund requires separate fiduciary accountability. The following paragraphs outline the conditions and events which require separate accountability and the required accounting treatment for transactions within the established funds.
(1) Unrestricted Fund. (i) The Unrestricted Fund is used to account for funds derived from the day-to-day activities of the residential health care facility 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 funds in this manner, it should be recognized that the board also has the authority to rescind its action. For this reason, such funds should be accounted for in the Unrestricted Fund as "board-designated funds". A separate structure of accounts in the Unrestricted Fund has been provided for these assets.
(ii) The term restricted should not be used in connection with board or other internal appropriations or designations of funds.
(2) Endowment funds. (i) Funds classified as endowment include:
(a) pure endowments (principal is to remain intact in perpetuity); and
(b) term endowments (principal is available for use upon the passage of time or the occurrence of an event).
(ii) When term endowments become available to the governing board for unrestricted purposes, they should be reported as nonoperating revenue; if these funds are restricted, they should be transferred to the appropriate restricted fund.
(iii) Income earned on endowment fund investments should be accounted for in accordance with donors' instructions if restricted, or as nonoperating revenue in the Unrestricted Fund if not restricted.
(iv) Under section 513 of the New York State Not-for-Profit Corporation Law, realized gains from the sale of endowment fund assets may be available for the general use of the residential health care facility, provided that the amount of fair value of the principal of such assets as of the end of the fiscal year in which the gains are recorded is not less than the amount of fair value of such assets at the time they were originally received by the home. Realized gains that were treated as additions to principal before the effective date of this section of law, September 1, 1970, may be available to the residential health care facility under the aforementioned conditions in an amount not to exceed 20 percent of such gains in one year. (3) Plant Replacement and Expansion Funds. (i) 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.
(ii) 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.
(iii) Due to/due from accounts are to be used only as an interim measure, and must be reduced within a reasonable period of time by a transfer of physical assets (generally cash or investments) between the respective funds.
(iv) If expenditures for plant assets are made in the Plant Replacement and Expansion Fund, the plant assets must be transferred to the Unrestricted Fund, with the accompanying credit made to the Operating Fund Balance--Transfers from restricted funds for capital outlays. In the Plant Replacement and Expansion Fund, fund balance would be debited, and a cash account credited. No entry would be made to the interfund payable or receivable accounts.
(v) Income earned and any net realized gains on investments should be reflected as an addition to the fund balance if so specified by the donor. If available for general operating purposes, they should be included in nonoperating revenue in the Unrestricted Fund.
(4) Specific Purpose Fund. (i) Funds received which are restricted for a specific purpose should be accounted for in a separate restricted fund (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.
(ii) Income earned and any net realized gains on investments should 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.
(d) Investments in marketable securities. Investments in marketable securities are to be valued at 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.
(e) Pooled investments. (1) 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 should be distributed to participating funds on a basis utilizing market value.
(2) 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. For subsequent periods, 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. 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 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.
(f) Inventories. (1) Inventories reflect the cost of unused residential health care facility supplies and should be carried at cost or market, whichever is lower. 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 reporting period. Cost of inventories based on the last invoice price is not an acceptable method for determining such cost.
(2) Perpetual inventory record systems are recommended. Physical valuation must be made at least once a year and the accounting records and perpetual records, if applicable, adjusted to such valuations. Physical valuations on a cycle basis are acceptable if perpetual inventory record systems are used by the residential health care facility.
(3) Inventory usage records of some sort should be maintained for all inventories that are distributed and used by more than one department or cost center in the residential health care facility. It is recommended that a formal requisition system be used for this purpose.
(4) Where inventory had not been recorded in the past, the cumulative effect of establishing such amounts will be reflected in accordance with generally accepted accounting principles.
(5) While the taking of a physical inventory is mandated, the independent public accountant shall determine whether or not they should observe the physical evaluation of inventory for the purpose of expressing an opinion on the financial statements. (g) Accounting for property, plant and equipment. (1) Classification of fixed asset expenditures. 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. Costs of construction in progress and related liabilities should be recorded in or transferred to the Unrestricted Fund as incurred except for assets and liabilities related to the proceeds of debt. For those areas, refer to paragraph (n)(3) of this section.
(2) Basis of valuation. Property, plant and equipment must be recorded on the basis of cost. Cost shall be defined as historical cost or fair market value at the date of gift for donated property, less any applicable salvage value.
(3) Accounting control. To maintain accounting control over capital assets of the residential health care facility, 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. The plant ledger should be segregated by cost center so that the cost of equipment and the related depreciation for each center is available. Those providers who are not able to identify historical costs and depreciation by department for major movable acquisitions prior to January 1, 1978, may use square feet net to allocate depreciation by department. All additions to major movable equipment as of January 1, 1978 and thereafter must be identified by cost center.
(4) Capitalization policy. Each residential health care facility must set a standard policy with respect to the capitalization of its depreciable assets. This policy, excluding minor equipment, must meet the following specifications:
(i) The minimum capitalization policy must follow the guidelines and amounts required in the Medicare regulations.
(ii) Normal repair and maintenance and modernization to maintain depreciable assets should not be capitalized if the life of the asset is not materially extended.
(iii) Significant alterations and renovations should be capitalized and depreciated over the expected useful lives, which should not exceed the lives of the assets to which they are fixed.
(5) Minor equipment. Minor equipment includes such items as wastebaskets, bed pans, syringes, catheters, silverware, mops, buckets, etc. The general characteristics of this equipment are: (i) in general, no fixed location, and subject to use by various departments within a residential health care facility; (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 approximately three years or less. The cost of minor equipment is to be reported in accordance with Medicare regulations.
(6) Interest expense during period of construction. Frequently, residential health care facilities borrow funds to construct new facilities or to 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 put into 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.
(7) Depreciation policies. (i) Depreciation on plant assets used in the residential health care facility's operations should be recorded as an operating expense in the Unrestricted Fund. The straight-line method of depreciation must be used for uniform reporting.
(ii) The estimated lives used in computing depreciation should be taken from the recommendations made in the Estimated Useful Lives of Depreciable Hospital Assets, published by the American Hospital Association ( copyright 1973), or other acceptable sources. However, with the rapidly changing technology in residential health care facilities, these recommendations may not be all-inclusive; in which case, the exper tise of the manufacturer or other reliable source may be considered subject to approval by the New York State Department of Health.
(iii) Each residential health care facility must establish, and consistently follow, a policy relative to the amount of depreciation to be taken in the year of acquisition on normal annual additions. Examples of acceptable policies are: (a) recording first-year depreciation based upon the number of actual months the asset was in use during the first year;
(b) recording one half of the annual depreciation expense in the years of acquisition and disposal, regardless of the date of acquisition;
(c) recording no depreciation in the year of acquisition and a full year's depreciation in the year of disposal; or
(d) recording a full year's depreciation expense if the asset was acquired in the first half of the year. If the asset was acquired in the last half of the year, no depreciation expense would be recognized in the year of acquisition.
The above alternatives are acceptable for normal annual additions to plant assets. However, when major construction projects are completed and capitalized, first-year depreciation must be computed based upon the actual number of months the asset was in use, if the application of any other method results in a material mismatching of revenue and expense in the initial year.
(8) Disposal of plant assets. Plant assets may be retired voluntarily, or disposed of by sale, trade or abandonment, or involuntarily lost as a result of casualty such as fire or storm. At the date of the retirement or disposal, the cost of the asset and its related accumulated depreciation must be removed from the accounts. Any resulting gain or loss on the retirement or disposal is to be reported as nonoperating revenue/expense.
(h) Investment tax credit. (1) As contained in APB Opinion No. 2, issued by the American Institute of Certified Public Accountants, the investment tax credit may be accounted for in one of the following manners:
(i) the allowable investment credit may be taken as a reduction of Federal income taxes in the year in which the credit arises (flow-through method); or
(ii) the allowable investment credit may be reflected in net income over the productive life of the asset and not in the year in which it is placed in service (deferral method).
(2) Once a residential health care facility has applied one of these methods, that method must be used consistently thereafter.
(i) Leases. Often a facility will obtain the use of land, buildings, or equipment by entering into an agreement to lease them from an outside party. In some cases, a lease is merely obtaining the use of an asset for a specified period; however, under certain conditions a lease is considered to be, in substance, a purchase of property. For determination of the acceptable accounting treatment for leases, reference should be made to Accounting for Leases--Statement of Financial Accounting Standards No. 13.
(j) Timing differences. 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 residential health care facility's records when they arise. The references relative to their acceptable accounting treatment are as follows:
(1) income tax allocation--accounting principles--Board Opinions Nos. 11, 23 and 24;
(2) third-party cost reimbursement--timing differences--Hospital Audit Guide.
(k) Accounting for pledges. All pledges, less a provision for amounts estimated to be uncollectible, should be included in the residential health care facility's records. If unrestricted, they should be recorded as nonoperating revenue. If restricted, they should be recorded as an addition to the appropriate restricted fund balance.
(l) Self-insurance. Self-insurance by a residential health care facility for potential losses due to malpractice claims, asserted or otherwise, places all or part of the risk of such losses on the residential health care facility rather than insuring against all or part of such losses with an independent insurer. Accruing for self-insured losses is governed by the Financial Accounting Standards Board's Statement No. 5, Accounting for Contingencies.
(1) Paragraph 8 of that statement indicates that "an estimated loss from a loss contingency can only be accrued as a charge to income if both of the following conditions are met:
(i) "Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.
(ii) "The amount of loss can be reasonably estimated."
(2) Paragraphs 29 and 30 of that statement state:
(i) "An enterprise may choose not to purchase insurance against risk of loss that may result from injury to others, damage to the property of others, or interruption of its business operations. Exposure to risks of those types constitutes an existing condition involving uncertainty about the amount and timing of any losses that may occur, in which case a contingency exists... (ii) "Mere exposure to risks of those types, however, does not mean that an asset has been impaired or a liability has been incurred. The condition for accrual in paragraph 8(a) is not met with respect to loss that may result from injury to others, damage to the property of others, or business interruption that may occur after the date of an enterprise's financial statements. Losses of those types do not relate to the current or a prior period but rather to the future period in which they occur. Thus, for example, an enterprise with a fleet of vehicles should not accrue for injury to others or damage to the property of others that may be caused by those vehicles in the future, even if the amount of those losses may be reasonably estimable. On the other hand, the conditions in paragraph 8 would be met with respect to uninsured losses resulting from injury to others or damage to the property of others that took place prior to the date of the financial statements, even though the enterprise may not become aware of those matters until after that date, if the experience of the enterprise or other information enables it to make a reasonable estimate of the loss that was incurred prior to the date of its financial statements."
(3) For the purposes of this Article, a reasonable estimate of current and prior unasserted self-insurance claims can only be made by an independent professional qualified to make such valuations. If an estimate is obtained, such amount should be recorded on the books of the residential health care facility.
(m) Other related organizations. Auxiliaries, guilds, fund-raising groups and other related organizations frequently assist residential health care facilities. If such organizations are independent and are characterized by their own charter, bylaws, tax-exempt status and governing board, or a sufficient combination of these characteristics, to demonstrate their independent existence from the residential health care facility, the financial reporting of these organizations should be separate from reports of the residential health care facility. If such organizations are under the control of (or common control with) residential health care facilities and handle residential health care facility resources, their financial reports should be combined with those of the residential health care facility.
(n) Debt financing for plant replacement and expansion purposes. 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, such financing gives rise to special accounting treatment because of discounts and premiums on bond issues, financing charges, formal restrictions on debt proceeds, sinking and other required funds.
(1) Discounts and premiums on bond issues. Discounts and premiums arising from the issue of bonds must be amortized over the life of the related issue(s). For reporting purposes, bond discounts must be reported as a reduction of the related debt (Bonds Payable--New of Unamortized Discount). Bond premium must be reported as Other Deferred Credits.
(2) Financing charges. All costs of obtaining debt financing other than discounts (e.g., legal fees, underwriting fees, special accounting costs) should be recorded as deferred costs and amortized over the life of the related debt.
(3) Accounting for debt proceeds. (i) Debt agreements which finance 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 uses should be reported as other noncurrent assets in the unrestricted funds. However, proceeds which require formal segregation have been recorded in several ways, specifically:
(a) as a separate restricted fund which includes all of the attendant liabilities and any required equity contribution, as in the case of financing through New York State Housing Finance Agency; or
(b) as part of the restricted plant replacement and expansion funds, which include all of the attendant liabilities; or
(c) the liabilities are reflected in the unrestricted fund and only the proceeds are reflected in a restricted fund. The proceeds, however, are not considered as an addition to the restricted fund balance but rather as a liability to the unrestricted fund. This liability is reduced as the proceeds are used for their intended purposes.
VOLUME D (Title 10)