Financial Reporting

Financial ReportingScott FurnissSr. VP/CFOSt. Agnes HealthCare, Inc.

March 30, 2012

Todays DiscussionFinance Departments and ActivitiesAccounting Concepts Common Issues Basic Accounting TransactionsBasic Financial StatementsExample Financial StatementsFinancial Ratios and AnalysisCase Study

Finance Departments

Typical Finance DepartmentGeneral AccountingAccounts PayablePayrollTreasuryRates & ReimbursementTaxesFinancial Analysis and BudgetFinancial ReportingAll entities. Hospital and Subsidiaries*

Typical Finance DepartmentDaily Account postingBi-weekly PayrollMonthly Close (J/Es, Reconciliations, etc.)Monthly Compliance Reports (HSCRC)Monthly/Quarterly Management-Board ReportsQuarterly Disclosure ReportsPlus*

Typical Finance DepartmentAnnual BudgetAnnual Cost Reports (CMS, HSCRC, others)Annual Tax Returns (IRS, PBGC, State)Annual Financial Statements and AuditAll entities. Hospital and Subsidiaries*

Accounting Concepts

Reporting StandardsGenerally 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 AccountingAccrual basisrecognized when event happensearnedincurred

Cash basisrecognized when cash changes handsreceivedpaidTwo ways of recording transactions

Accrual Accounting Transactions1/10$1,000 of supplies ordered1/15$600 of supplies arrive, no payment1/31Books closed for January2/10$400 of supplies arrive, no payment2/28Books closed for February3/15Invoice for $1,000 received and paid3/31 Books closed for March

Accrual TransactionsProper matching of revenue and expense transactions and accounting periods

Sheet1

JanuaryFebruaryMarch

Amount Actually Received$600$4000.0

Accrual Accounting Entries:

Accounts Payable (Invoice Recorded)0.00.01,000

Accrual Accounting Entry6001,0000.0

Reversal of Accrual Accounting Entry0.0(600)(1,000)

Total Expense ( A + B - C )$600$4000.0

Without Accrual Accounting Approach0.00.0$1,000

Sheet2

Sheet3

Valuation MethodsCurrent Value: Cash, Vacation liabilities, inventories

Market Value: Investments, Debt

Historical Cost: Buildings and Equipment

Net Realizable Value: Receivables, Payables

Accounts Receivable Net Realizable ValueContractual 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 ValueOriginal charges vs. estimate of final collections$12,000,000$2,500,000

A/R Valuation Analysis

A

ACCOUNTS RECEIVABLE AGING ANALYSIS

Accounts Reveivable BalancesTotal0 - 3030 - 6060 - 9090 - 120120 - 150150 - 180> 180

Medicare and Medicaid$11,000,000$4,000,000$2,500,000$1,500,000$1,250,000$1,000,000$500,000$250,000

Commercial & HMO2,400,0001,000,000500,000325,000125,000100,000200,000150,000

Self Pay1,450,000300,000250,000200,000175,000125,000100,000300,000

Total$14,850,000$5,300,000$3,250,000$2,025,000$1,550,000$1,225,000$800,000$700,000

Probability of Collection95.00%90.00%85.00%80.00%75.00%60.00%50.00%

Accounts Receivable Value$12,670,000$5,035,000$2,925,000$1,721,250$1,240,000$918,750$480,000$350,000

Accounts Receivable - Gross$14,850,000

Allowance for Doubtful Accounts(2,000,000)

Accounts Receivable - Net$12,850,000

Accounts Receivable Value12,670,000

Recommended Adjustment$180,000

Common Issues

Depreciation & AmortizationSystematic and rational allocation of the cost of a long-term asset over its estimated useful lifeUsed for both tangible and intangible assetsAllocation of Tangible Assets = DepreciationAllocation of Intangible Assets = AmortizationExamples:MRI - 10 yearsBuilding - 40 yearsSoftware - 5 years

Depreciation MethodsStraight line method - primaryAccelerated methods:Units-of-productionSum-of-the-years-digitsDouble-declining balance Tax implications for taxable entities

Straight Line Depreciation

Valuation of Property Assets(Straight Line Method)

Lease AccountingOperating 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

*

Capital Leases4 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

*

Donor Restricted FundsUnrestricted 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*

Allocation of CostsBenefitsDepreciationOverheadSupport ServicesOther

Purpose = reflect total cost of business at Department level*

Capitalized ExpensesCosts to make items operationalShippingInstallationCalibration & TestingSystem build (but not data conversion)

Training costs are not capitalized

*

Basic Accounting Transactions

Transaction Data PyramidDaily Transactions & Journal EntriesGeneral LedgerTrial BalanceDepartmental ReportsFinancialStatements

Basic Accounting TransactionsTransaction based activity:Accounts Payable invoices/paymentsPurchasing Activity supplies and servicesPatient ChargesPayrollCollections on receivablesInvestment and Debt activity

Basic Accounting TransactionsJournal Entry Activity:Depreciation expenseBad Debt ExpenseAccrual adjustmentsReconciliation adjustments

This can be a manual activity, data upload, or an interface

Example Activity Entries

Sheet1

Accounts Receivables BalanceTotal0-3030-6060-90>90

Self-Pay Receivable$3,520,000$900,000$900,000$600,000$1,120,000

Medicare Co-Pay Receivable4,640,0001,200,0001,200,000900,0001,340,000

Total8,160,0002,100,0002,100,0001,500,0002,460,000

Probability of Collection98.00%95.00%90.00%50.00%

Accounts Receivables Value$6,633,000$2,058,000$1,995,000$1,350,000$1,230,000

Accounts Receivable - Gross8,160,000

Allowance for Doubtful Accounts(800,000)

Accounts Receivable - Net7,360,000

Accounts Receivable Value$6,633,000

Recommended Adjustment727,000

Sheet2

19X119X219X319X4

Amounts committed to Lease #1$500$500$500$500

Amounts committed to Lease #2500500500



Total$500$1,000$1,500$2,000

Total Annual Capital Budget2000200020002000

Remaining Avail. Capital Budget150010005000

Outstanding Lease Balances2500450060007500

Maximum Avail. Debt Capacity5000500050005000

Remaining Avail. Debt Capacity2500500-1000-2500

Sheet5

JE

Sheet4

FUND BALANCE

DebitsRef.Credits

Bal. 4/30/XX$6,875,000.00

Sheet3

ACCOUNT/DESCRIPTIONDEBITCREDIT

Supplies and Services$25,000

Cash$25,000

To record purchase of office supplies

Accounts Receivable$5,000,000

Inpatient Revenue$5,000,000

To record inpatient charges

Accounts Receivable$3,500,000

Outpatient Revenue$3,500,000

To record outpatient charges

Trial BalanceList of all account BALANCES

Total debits = total credits

Preliminary to preparation of financial statements

Basic Accounting TransactionsDouble-entry bookkeepingDebits & CreditsCash TransactionsJournal EntriesSubsidiary recordsAccounts ReceivableAccounts PayablePayrollPurchase Orders*

Example Trial Balance

April 30

Account NameNumberDebitsCredits

Cash100$1,750,000.00

Accounts Receivable105$3,325,000.00

Allowance for Uncollectables106$200,000.00

Inventory110$500,000.00

Plant and Equipment200$10,000,000.00

Accumulated Depreciation250$3,750,000.00

Accounts Payable300$1,750,000.00

Long Term Debt400$3,000,000.00

Fund Balance500$6,875,000.00

Inpatient Revenue600$7,500,000.00

Outpatient Revenue650$1,875,000.00

Discounts670$1,400,250.00

Salaries and Benefits700$5,000,000.00

Supplies and Services720$2,774,750.00

Interest750$100,000.00

Depreciation780$100,000.00

Totals$24,950,000.00$24,950,000.00


Cash100$1,750,000

Accounts Receivable105$3,325,000

Allowance for Uncollectables106$200,000

Inventory110$500,000

Plant and Equipment200$10,000,000

Accumulated Depreciation250$3,750,000

Accounts Payable300$1,750,000

Long Term Debt400$3,000,000

Fund Balance500$6,875,000

Inpatient Revenue600$7,500,000

Outpatient Revenue650$1,875,000

Contractual Allowances670$1,400,250

Salaries and Benefits700$5,000,000

Supplies and Services720$2,774,750

Interest750$100,000

Depreciation780$100,000

Totals$24,950,000$24,950,000

May 31


Cash100$1,845,000.00



Inventory110$500,000.00





Fund Balance500$6,875,000.00



Discounts670$1,400,250.00



Interest750$100,000.00


Totals$25,610,000.00$25,610,000.00


Cash100$1,845,000.00



Inventory110$500,000.00





Fund Balance500$6,875,000.00



Discounts670$1,400,250.00



Interest750$100,000.00


Totals$25,610,000.00$25,610,000.00

Sheet3

DebitsRef.Credits

$500,000.00Bal. 4/30/XX

$500,000.00Bal. 5/31/XX

Departmental Reports

Basic Financial Statements

Basic Financial StatementsBalance SheetStatement of Operations (Income Statement)Statement of Changes in Net AssetsStatement of Cash FlowsNotes to the Financial Statements

Basic Financial StatementsBalance Sheet Shows assets, liabilities and equity (Assets = Liabilities + Equity)Statement of position - a snapshot in timeAlways as of a date, not for a period of time

Balance SheetAssets - items of value to which a company has a legal claim

Liabilities - amounts owed by company

Equities - ownerships net claim on the assets

Balance Sheet

Current Assets

Long-Term Assets

Current Liabilities

Long-Term Debt

Equity

Current AssetsWill be consumed within 12 monthsListed in order of liquidity:CashShort-term investmentsAccounts receivableInventoriesPrepaid expenses

Current AssetsCash checks and money on depositcredit card receipts Short-term investments marketable securitiescertificates of depositother investment instruments

Current AssetsAccounts receivablefunds owed to the companygovernment and insurance payorsindividual patientsotherInventoriesMedical, surgical and office suppliesFuel, food

Current AssetsPrepaid expenses prepaid insuranceprepaid rent and suppliesprepaid interest and property taxes

Fixed (Long-Term) AssetsUseful life > 1 year Long-term assets include:Property, plant and equipmentNatural resources Intangible assets

Property, Plant & EquipmentLand improvementsparking lots, sidewalks, landscapingBuildingsFixed equipment Boilers, HVAC Major equipment MRI, Linear Accelerators

Intangible AssetsItems of value which lack physical characteristicsGoodwillPatents/TrademarksFranchises/LicensesCustomer listsComputer software

Current LiabilitiesPayable within 12 monthstrade accounts payable (invoiced)salaries, wages, payroll taxes payable, accrued vacation accrued liabilities (known, but not yet invoiced)advances from third-party payersinterest payable

Long-Term LiabilitiesRepaid over a period > 1 yearbonds and notes payablebank loanspension liability

EquityNet assets of the companyOwners claims on the company assetsstockcontributed (or paid in) capitalaccumulated profits/lossesRestricted and Unrestricted

Unique to Not-For-ProfitsAssets limited as to useContributions receivableAdvances from 3rd party payorsThird party settlementsRestricted net assetsNo Tax expense/liability

Unique to Health CareASSETS:Assets Limited as to UseProceeds from tax-exempt bond issuesConstruction FundDebt Service Reserve FundBoard Designated Donor RestrictedContributions

Unique to Health CareLIABILITIES AND NET ASSETS:Advances from third-party payorsTemporarily and permanently restricted Net Assets

Statement of Operations

Operating Revenues

Operating Expenses

Net Operating Income

Basic Financial StatementsSTATEMENT OF OPERATIONS:Revenues and Gains ExpensesOther Income and Expenses

Unique to Health Care NFPsOTHER REVENUES:Separate from Patient RevenueContributionsNet Assets Released from RestrictionsRental IncomeParking/Cafeteria SalesGrants

Basic Financial StatementsSTATEMENT OF CHANGES IN NET ASSETS:Operating incomeGrantsContributionsNet assets released from restrictionsFor operationsFor property and equipment

Basic Financial StatementsSTATEMENT OF CASH FLOWS:Operating activityInvesting activityFinancing activityUnrestricted and Restricted

Notes to Financial StatementsSignificant Accounting PoliciesMajor Assets and Liabilities DetailCommitments and ContingenciesOther Information

Notes to Financial StatementsSIGNIFICANT ACCOUNTING POLICIES:Organizational structureCharity CareRevenue Methodology Asset Valuations

Notes to Financial StatementsASSET AND LIABILITIES DETAIL:Investments Cost vs.. Current ValueProperty and EquipmentDebt and Assets Held by Trustee

Notes to Financial StatementsCOMMITMENTS AND CONTINGENCIES:Pension and Post-Retirement BenefitsMalpracticeOutstanding LitigationCredit Risk/Payor Mix

Notes to Financial StatementsOTHER INFORMATION:Related Party TransactionsCredit Risk/Payor MixFunctional ExpensesHealthcare servicesGeneral and administrative

Financial Ratios and Analysis

Financial Ratios and Analysis*

Average Age of PlantAccumulated Depreciation/Depreciation ExpenseAverage Daily CensusPatient Days/365Bad Debt Expense/Total Operating RevenueBad Debt Expense/(Net Patient Revenue + Other Operating Revenue)Cash FlowNet Income + Depreciation & Amortization Cashflow/Total Liabilities(Net Income + Depreciation & Amortization)/Total Liabilities Cushion RatioCash/Maximum Annual Debt ServiceDays Cash on HandCash/(Operating Expenses - Depreciation & Amortization)/365)EBIDA (Earnings Before Interest, Depreciation & Amortization)Net Income + Interest, Depreciation & Amortization


EBIDA MarginEBIDA/Total RevenueInterest CoverageNet Income Available for Debt Service/ Interest ExpenseLong Term Debt/CapitalizationLong Term Debt/(Unrestricted Net Assets + Long Term Debt)Maximum Annual Debt Service (MADS) CoverageNet Income Available for Debt Service/MADS Operating MarginNet Operating Income/Total Operating RevenueOperating Cash Flow MarginEBIDA/Total Operating RevenuePayment PeriodCurrent Liabilities/(Total Operating Expense - Depreciation & Amortization)


Sample Hospital - Key Financial Metrics ReportFiscal Year End20072008200920102011Income Statement and Cash FlowOperating margin (%)1.461.690.411.811.13Excess margin (%)3.793.963.111.062.70EBIDA margin (%)10.7510.839.447.759.18Cash flow/total liabilities (%)16.918.116.211.614.6DebtMax debt service coverage (x)3.935.304.824.065.01Maximum debt service-to-total revenue (%)2.722.041.961.911.83


Sample Hospital - Key Financial Metrics ReportFiscal Year End20072008200920102011Balance SheetDays cash on hand163179154128140Unrestricted cash/debt (%)130166160126145Cushion ratio (x)14.921.819.817.219.3Long-term debt/capitalization (%)32.927.627.632.430.5Average age of plant (years)11.411.512.712.511.1

Questions?

*********WELL TALK BALANCE SHEET TODAY. INCOME STATEMENT NEXT WEEK.

MHHEFA RESTICTIONS ON USE OF PROCEEDS.

BOARD RESTRICTIONS FOR SPECIAL USES DEPRECIATION/FUTURE CAPITAL PROJECT/OTHER

CONTRIBUTIONS RECEIVABLE = ONLY GIVEN TO NFPSADVANCES= PAYORS DUTY TO GET DISCOUNT (for Quick Pay)

3RD PARTY SETTLEMENT= MEDICARE/MEDICAID RECEIVABLE/PAYABLE FOR :ANNUAL COST REPORTS.

TEMPORARILY RESTRICTED = Available when request is achieved.

PERMANENTLY RESTRICTED= Only income is available.**

Financial Reporting

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