Financial Reporting

Scott Furniss
Sr. VP/CFO
St. Agnes HealthCare, Inc.
March 30, 2012

Intro

Todays 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

Typical Finance Department

Daily Account posting

Bi-weekly Payroll
Monthly Close (J/Es, Reconciliations, etc.)
Monthly Compliance Reports (HSCRC)
Monthly/Quarterly Management-Board Reports
Quarterly Disclosure Reports
Plus

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

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

Two ways of recording transactions

Accrual basis
recognized when
event happens
earned
incurred

Cash basis
recognized when cash
changes hands
received
paid

Accrual Accounting Transactions

1/10
1/15
1/31
2/10
2/28
3/15
3/31

$1,000 of supplies ordered

$600 of supplies arrive, no payment
Books closed for January
$400 of supplies arrive, no payment
Books closed for February
Invoice for $1,000 received and paid
Books closed for March

Accrual Transactions
Proper 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 Receivable

Allowance 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 assets
Allocation of Tangible Assets = Depreciation
Allocation of Intangible Assets = Amortization
Examples:
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

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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

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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

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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

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Basic Accounting
Transactions

Transaction Data Pyramid

Financial
Statements
Departmental Reports
Trial Balance
General Ledger
Daily Transactions & Journal Entries

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 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 - ownerships net claim on the assets

Balance Sheet
Current Liabilities
Current Assets
Long-Term Debt
Long-Term Assets

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 NFPs

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

Average Age of Plant

Accumulated Depreciation/Depreciation Expense

Average Daily Census

Bad Debt Expense/Total Operating
Revenue

Patient Days/365
Bad Debt Expense/(Net Patient Revenue + Other
Operating Revenue)

Cash Flow

Net Income + Depreciation & Amortization

(Net Income + Depreciation & Amortization)/Total
Liabilities

Cashflow/Total Liabilities
Cushion Ratio
Days Cash on Hand
EBIDA (Earnings Before Interest,
Depreciation & Amortization)

Cash/Maximum Annual Debt Service

Cash/(Operating Expenses - Depreciation &
Amortization)/365)
Net Income + Interest, Depreciation & Amortization

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Financial Ratios and Analysis

EBIDA Margin
Interest Coverage
Long Term Debt/Capitalization
Maximum Annual Debt Service (MADS)
Coverage

EBIDA/Total Revenue
Net Income Available for Debt Service/ Interest
Expense
Long Term Debt/(Unrestricted Net Assets + Long Term
Debt)
Net Income Available for Debt Service/MADS

Operating Margin

Net Operating Income/Total Operating Revenue

Operating Cash Flow Margin

EBIDA/Total Operating Revenue

Current Liabilities/(Total Operating Expense Depreciation & Amortization)

Payment Period

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Financial Ratios and Analysis

SampleHospitalKeyFinancialMetricsReport
FiscalYearEnd

2007

2008

2009

2010

2011

Operatingmargin(%)

1.46

1.69

0.41

1.81

1.13

Excessmargin(%)

3.79

3.96

3.11

1.06

2.70

EBIDAmargin(%)

10.75

10.83

9.44

7.75

9.18

16.9

18.1

16.2

11.6

14.6

Maxdebtservicecoverage(x)

3.93

5.30

4.82

4.06

5.01

Maximumdebtservicetototalrevenue(%)

2.72

2.04

1.96

1.91

1.83

IncomeStatementandCashFlow

Cashflow/totalliabilities(%)
Debt

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Financial Ratios and Analysis

SampleHospitalKeyFinancialMetricsReport

FiscalYearEnd

2007

2008

2009

2010

2011

Dayscashonhand

163

179

154

128

140

Unrestrictedcash/debt(%)

130

166

160

126

145

Cushionratio(x)

14.9

21.8

19.8

17.2

19.3

Longtermdebt/capitalization(%)

32.9

27.6

27.6

32.4

30.5

Averageageofplant(years)

11.4

11.5

12.7

12.5

11.1

BalanceSheet

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Questions?