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Financial Reporting
Scott FurnissSr. VP/CFO
St. Agnes HealthCare, Inc.
March 30, 2012
Intro
Today’s Discussion
Finance Departments and Activities Accounting Concepts Common Issues Basic Accounting Transactions Basic Financial Statements Example Financial Statements Financial Ratios and Analysis Case Study
Finance Departments
Typical Finance Department
• General Accounting
• Accounts Payable
• Payroll
• Treasury
• Rates & Reimbursement
• Taxes
• Financial Analysis and Budget
• Financial Reporting
• All entities…. Hospital and Subsidiaries
5
Typical Finance Department
• Daily Account posting• Bi-weekly Payroll• Monthly Close (J/E’s, Reconciliations, etc.)• Monthly Compliance Reports (HSCRC)• Monthly/Quarterly Management-Board Reports• Quarterly Disclosure Reports• Plus…
6
Typical Finance Department
• Annual Budget• Annual Cost Reports (CMS, HSCRC, others)• Annual Tax Returns (IRS, PBGC, State)• Annual Financial Statements and Audit• All entities…. Hospital and Subsidiaries
7
Accounting Concepts
Reporting Standards
• Generally Accepted Accounting Standards (GAAP)• Financial Accounting Standards Board (FASB)• Securities Exchange Commission (SEC)• Internal Revenue System (IRS)• Centers for Medicare & Medicaid Services (CMS)• Health Services Cost Review Commission (HSCRC)• Employee Retirement Income Security Act (ERISA)• Others….
Cash vs. Accrual Accounting
• Accrual basis– recognized when
event happens– earned– incurred
• Cash basis– recognized when cash
changes hands– received– paid
Two ways of recording transactions
Accrual Accounting Transactions
– 1/10 $1,000 of supplies ordered– 1/15 $600 of supplies arrive, no payment– 1/31 Books closed for January– 2/10 $400 of supplies arrive, no payment– 2/28 Books closed for February– 3/15 Invoice for $1,000 received and paid– 3/31 Books closed for March
Accrual TransactionsProper matching of revenue and expense transactions and
accounting periods
Valuation Methods
• Current Value: Cash, Vacation liabilities, inventories
• Market Value: Investments, Debt
• Historical Cost: Buildings and Equipment
• Net Realizable Value: Receivables, Payables
Accounts Receivable “Net Realizable Value”
• Contractual Adjustments – per contracts/agreements
• Charity Care – inability to pay known when served
• Bad Debt Expense – failure to pay after service
• Allowance for Uncollectible Accounts – impact of Contractual Adjustments and Bad Debt
“Net Realizable Value”
• Original charges vs. estimate of final collections
Accounts ReceivableAllowance For
Uncollectible Accounts
$12,000,000 $2,500,000
Net Realizable Value$9,500,000
A/R Valuation Analysis
Common Issues
Depreciation & Amortization
Systematic and rational allocation of the cost of a long-term asset over its estimated useful life
Used for both tangible and intangible assetsAllocation of Tangible Assets = DepreciationAllocation of Intangible Assets = AmortizationExamples:
• MRI - 10 years• Building - 40 years• Software - 5 years
Depreciation Methods
• Straight line method - primary
• Accelerated methods:– Units-of-production
– Sum-of-the-years’-digits
– Double-declining balance
• Tax implications for taxable entities
Straight Line Depreciation
Valuation of Property Assets(Straight Line Method)
Lease Accounting• Operating vs. Capital
• Operating: Are we just leasing it for a short period of time?
• Capital: Will we own it or use it up by the end of the lease?
• Default = Operating… unless it meets specific criteria
• Why care? …. Operating = Lease expense
• Capital = Depreciation and interest expense
22
Capital Leases
4 Ways to become a Capital Lease:Title passes to Lessee at end of lease term
Bargain purchase option ($1 buy-out)
Lease term is > 75% of estimated useful life (AHA guidebook)
NPV of lease payments >90% of property leased
23
Donor Restricted Funds
• Unrestricted – can be used for any purpose to support entity
• Temporarily Restricted – restricted by donor for specific purpose
• Permanently Restricted – only income on investments can be used for purpose determined by the donor
• Uniform Prudent Management of Institutional Funds Act (UPMIFA) rules can limit annual spending
24
Allocation of Costs
• Benefits• Depreciation• Overhead• Support Services• Other
• Purpose = reflect “total” cost of business at Department level
25
Capitalized Expenses
Costs to make items operational• Shipping
• Installation
• Calibration & Testing
• System “build” (but not data conversion)
Training costs are not capitalized
26
Basic Accounting Transactions
Transaction Data Pyramid
Daily Transactions & Journal Entries
General Ledger
Trial Balance
Departmental Reports
Financial
Statements
Basic Accounting Transactions
Transaction based activity:
• Accounts Payable – invoices/payments
• Purchasing Activity – supplies and services
• Patient Charges
• Payroll
• Collections on receivables
• Investment and Debt activity
Basic Accounting Transactions
Journal Entry Activity:• Depreciation expense
• Bad Debt Expense
• Accrual adjustments
• Reconciliation adjustments
This can be a manual activity, data “upload”, or an interface…
Example Activity Entries
Trial Balance
• List of all account BALANCES
• Total debits = total credits
• Preliminary to preparation of financial statements
Basic Accounting Transactions
• Double-entry bookkeeping• Debits & Credits• Cash Transactions• Journal Entries• Subsidiary records
– Accounts Receivable– Accounts Payable– Payroll– Purchase Orders
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Example Trial BalanceExample Trial Balance
Departmental Reports
Basic Financial Statements
Basic Financial Statements
• Balance Sheet
• Statement of Operations (Income Statement)
• Statement of Changes in Net Assets
• Statement of Cash Flows
• Notes to the Financial Statements
Basic Financial Statements
• Balance Sheet – Shows assets, liabilities and equity
(Assets = Liabilities + Equity)– Statement of position - a snapshot in time– Always as of a date, not for a period of time
Balance Sheet
Assets - items of value to which a company has a legal claim
Liabilities - amounts owed by company
Equities - ownership’s net claim on the assets
Balance Sheet
Current Assets
Long-Term Assets
Current Liabilities
Long-Term Debt
Equity
Current Assets
• Will be consumed within 12 months
• Listed in order of liquidity:– Cash
– Short-term investments
– Accounts receivable
– Inventories
– Prepaid expenses
Current Assets
• Cash – checks and money on deposit– credit card receipts
• Short-term investments – marketable securities– certificates of deposit– other investment instruments
Current Assets
• Accounts receivable– funds owed to the company– government and insurance payors– individual patients– other
• Inventories– Medical, surgical and office supplies– Fuel, food
Current Assets
• Prepaid expenses – prepaid insurance– prepaid rent and supplies– prepaid interest and property taxes
Fixed (Long-Term) Assets
• Useful life > 1 year • Long-term assets include:
– Property, plant and equipment
– Natural resources
– Intangible assets
Property, Plant & Equipment
• Land improvements– parking lots, sidewalks, landscaping
• Buildings• Fixed equipment
– Boilers, HVAC • Major equipment
– MRI, Linear Accelerators
Intangible Assets
• Items of value which lack physical characteristics– Goodwill– Patents/Trademarks– Franchises/Licenses– Customer lists– Computer software
Current Liabilities
• Payable within 12 months– trade accounts payable (invoiced)– salaries, wages, payroll taxes payable, accrued
vacation – accrued liabilities (known, but not yet invoiced)– advances from third-party payers– interest payable
Long-Term Liabilities
• Repaid over a period > 1 year– bonds and notes payable– bank loans– pension liability
Equity
• Net assets of the company• Owners’ claims on the company assets
– stock– contributed (or paid in) capital– accumulated profits/losses
• Restricted and Unrestricted
Unique to Not-For-Profits
• Assets limited as to use• Contributions receivable• Advances from 3rd party payors• Third party settlements• Restricted net assets• No Tax expense/liability
Unique to Health Care
ASSETS:
• Assets Limited as to Use– Proceeds from tax-exempt bond issues
• Construction Fund
• Debt Service Reserve Fund
– Board Designated
– Donor Restricted
• Contributions
Unique to Health Care
LIABILITIES AND NET ASSETS:
• Advances from third-party payors
• Temporarily and permanently restricted Net Assets
Statement of Operations
Operating Revenues
Operating Expenses
Net Operating Income
Basic Financial Statements
STATEMENT OF OPERATIONS:
• Revenues and Gains
• Expenses
• Other Income and Expenses
Unique to Health Care NFP’s
OTHER REVENUES:
• Separate from Patient Revenue…
• Contributions
• Net Assets Released from Restrictions
• Rental Income
• Parking/Cafeteria Sales
• Grants
Basic Financial Statements
STATEMENT OF CHANGES IN NET ASSETS:
• Operating income
• Grants
• Contributions
• Net assets released from restrictions• For operations
• For property and equipment
Basic Financial Statements
STATEMENT OF CASH FLOWS:
• Operating activity
• Investing activity
• Financing activity
• Unrestricted and Restricted
Notes to Financial Statements
Significant Accounting Policies Major Assets and Liabilities Detail Commitments and Contingencies Other Information
Notes to Financial Statements
SIGNIFICANT ACCOUNTING POLICIES:
• Organizational structure
• Charity Care
• Revenue Methodology
• Asset Valuations
Notes to Financial Statements
ASSET AND LIABILITIES DETAIL:
• Investments – Cost vs.. Current Value
• Property and Equipment
• Debt and Assets Held by Trustee
Notes to Financial Statements
COMMITMENTS AND CONTINGENCIES:
• Pension and Post-Retirement Benefits
• Malpractice
• Outstanding Litigation
• Credit Risk/Payor Mix
Notes to Financial Statements
OTHER INFORMATION:
• Related Party Transactions
• Credit Risk/Payor Mix
• Functional Expenses– Healthcare services
– General and administrative
Financial Ratios and Analysis
Financial Ratios and Analysis
65
Average Age of Plant Accumulated Depreciation/Depreciation Expense
Average Daily Census Patient Days/365Bad Debt Expense/Total Operating Revenue
Bad Debt Expense/(Net Patient Revenue + Other Operating Revenue)
Cash Flow Net Income + Depreciation & Amortization
Cashflow/Total Liabilities(Net Income + Depreciation & Amortization)/Total Liabilities
“Cushion” Ratio Cash/Maximum Annual Debt Service
Days Cash on HandCash/(Operating Expenses - Depreciation & Amortization)/365)
EBIDA (Earnings Before Interest, Depreciation & Amortization) Net Income + Interest, Depreciation & Amortization
Financial Ratios and Analysis
66
EBIDA Margin EBIDA/Total Revenue
Interest CoverageNet Income Available for Debt Service/ Interest Expense
Long Term Debt/CapitalizationLong Term Debt/(Unrestricted Net Assets + Long Term Debt)
Maximum Annual Debt Service (MADS) Coverage Net Income Available for Debt Service/MADS
Operating Margin Net Operating Income/Total Operating Revenue
Operating Cash Flow Margin EBIDA/Total Operating Revenue
Payment PeriodCurrent Liabilities/(Total Operating Expense - Depreciation & Amortization)
Financial Ratios and Analysis
67
Sample Hospital - Key Financial Metrics Report
Fiscal Year End 2007 2008 2009 2010 2011
Income Statement and Cash Flow
Operating margin (%) 1.46 1.69 0.41 1.81 1.13
Excess margin (%) 3.79 3.96 3.11 1.06 2.70
EBIDA margin (%) 10.75 10.83 9.44 7.75 9.18
Cash flow/total liabilities (%) 16.9 18.1 16.2 11.6 14.6
Debt
Max debt service coverage (x) 3.93 5.30 4.82 4.06 5.01
Maximum debt service-to-total revenue (%) 2.72 2.04 1.96 1.91 1.83
Financial Ratios and Analysis
68
Sample Hospital - Key Financial Metrics Report
Fiscal Year End 2007 2008 2009 2010 2011
Balance Sheet
Days cash on hand 163 179 154 128 140
Unrestricted cash/debt (%) 130 166 160 126 145
Cushion ratio (x) 14.9 21.8 19.8 17.2 19.3
Long-term debt/capitalization (%) 32.9 27.6 27.6 32.4 30.5
Average age of plant (years) 11.4 11.5 12.7 12.5 11.1
Questions?