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American Healthcare: A State of Flux

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The United States possibly has the most complex healthcare system in the world. The American healthcare system regulates the industry at both the federal and state level. It is paid for by private health insurance as well as from the government under its Medicare and Medicaid programs. Healthcare services are provided by the private sector; by both for-profit and non-profit entities, however; the government also provides services directly through the Veterans Administration. All of this, in a population with disparate levels of wealthy and poor citizens, leads to highly chaotic distribution of care and a complex payment system. Some facilities reap the benefits of bespoke medical furniture whereas some only have the basic requirements.

While half of all Americans receive healthcare coverage through their employers, the plans are subject to crushing regulations both federally and at the state level. Those Americans receiving healthcare coverage through Medicare and Medicaid, subject the provider to lower reimbursements.  As a result, providers are less willing to take on Medicare and Medicaid patients, leading to a shortage of providers for that patient base. Patients that are not covered by their employer or a federally provided healthcare program are required to seek private insurance. However, because of the Patient Practice and Affordable Care Act (PPACA), patients are provided limited options and those options greatly restrict their choices regarding providers.

Because of a more recent development, a totally different method of reimbursement to providers, from fee for service or volume payments, to outcome based reimbursements or Value Based Care (VBC) is being encouraged by both Centers for Medicare and Medicaid (CMS) and by private insurers. Essentially, fees for services under VBC are paid based on case outcome and the payment must be shared by all providers in the continuum.  VBC reimbursement was originally introduced by the CMS. However private insurers are moving in the direction of value based reimbursement and providing incentives to healthcare providers to participate. What is essential to succeed in the VBC method of reimbursement lie in integration of providers and the ability to aggregate data.

Even prior to the movement to VBC, the PPACA is requiring all practitioners to utilize Electronic Medical Records, (EMR) which is costly in both software acquisition as well as implementation. While a burden to small practitioners and other small providers, EMR will ultimately allow participants in the continuum to operate, integrate and bill more efficiently.

Adding to the complexity of the American Healthcare system is the attempts to repeal of the PPACA. The potential of repeal is having the greatest impact on the insurance industry, impacting the cost of insurance, as subsidies provided by the federal government are uncertain depending on the success of repeal and its subsequent replacement.

CFO Consulting Partners’ healthcare practice is here to help you. We can assist you to access your current situation and help you create and implement a plan forward that will help insulate your practice as the rapid changes within the industry unfold.

The CECL Approach, 2 of 3

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Tom Van Lenten, CPA, CFO Consulting Partners LLC

This is the second in the CFO Consulting Partners series of articles analyzing the new FASB Standard on accounting for credit losses (ASU 2016-13). Click here for the first article in the series.

It has been more than a year since the FASB issued ASU 2016-13 Click here for article . The new Standard is most commonly referred to as CECL, which is an acronym for “Current Expected Credit Losses”. The CECL standard requires an entity to recognize a forward-looking estimate of the expected credit losses in the Allowance for Loan and Lease Losses (ALLL), when an asset is booked. Current GAAP requires that the estimate of credit loss is based on incurred losses and banks typically historical losses as the basis for the calculation

CECL is one of the largest and most complex accounting standard implementations ever undertaken in the banking industry. Despite this, many banks have not begun urgent and focused execution of CECL implementation plans. Privately-held companies can see the long transition timeline (implementation is required at January 1. 2021 for non-SEC filers) as a reason for delay. However, public entities must react faster. They are required to include disclosures in their first SEC filings after issuance of ASC 2016-13 on June 16, 2016. The FASB has recently highlighted this disclosure requirement by issuing ACU 2017-3 in January 2017 which gives additional guidance for certain disclosures of standards that are issued but not yet implemented for SEC filers.

  • The basic requirements of ASU 2017-3 are:
    if an SEC filer does not know or cannot estimate the financial impact from adoption of a new ASU it should make a statement to that effect and should consider additional qualitative disclosures to assist the reader in assessing the impact that the standard will have
  • the ASU also requires additional qualitative disclosures to include a description of the effect of the accounting policies that the SEC filers expect to apply together with a comparison to their current accounting policies,
  • additionally, SEC filers should describe the status of the process to implement CECL and the significant implementation matters yet to be addressed.

In a recent informal survey of financial institutions by MST Click here for article covering the implementation of CECL, 5% of the respondents said that they have not yet begun preparation for CECL implementation, and 87% have only held internal discussions about CECL implementation. One experienced CFO has been quoted as saying, “the commonly followed CECL implementation strategy of waiting for other banks to report first is in fact dangerous.”

Considering the size and complexity of CECL implementation we agree that delay is a high-risk approach and that thoughtful planning now will yield significant benefits.

  • The major elements of CECL implementation include:
  • Analysis of CECL impacts on the bank,
  • Project management,
  • Credit modeling,
  • Accounting Policies,
  • Operations,
  • Systems integration [click here for a case study of a CFO CP systems integration].

In our next newsletter, we will discuss further considerations in CECL implementations.

 

The CECL Approach, 1 of 3

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Tom Van Lenten, CPA, CFO Consulting Partners LLC

In mid-2016 the FASB issued its long-awaited standard on accounting for credit losses (ASU 2016-13). The new standard adds to US GAAP an impairment model known as the current expected credit loss model or CECL. In a shift from current practice the CECL model is based on expected losses rather than incurred losses. Under the new CECL model an entity recognizes its forward looking estimate of the expected credit losses in the Allowance for Loan and Lease Losses, or ALL when an asset is booked.

The FASB believes that the new standard will result in more timely recognition of credit losses. There is a long transition timeline and implementation is required at January 1, 2020 for calendar-year reporters that are SEC filers, and January 1. 2021 for other entities.

The CECL approach is to be applied to most debt instruments that are not measured at fair value. This includes loan commitments, financial guarantees, lease receivables, trade receivables and held-to-maturity securities. Available for sale debt securities are specifically excluded and will continue to be evaluated for impairment under the AFS securities impairment model.

The Standard does not require use of any one method to compute expected credit losses. Management is expected to maintain complete data sets, documentation, and analysis to support how the selected method fits with the standard and produces realistic estimates of future losses. Examples of some of the acceptable methodologies are:

  • Loss rate: Historical loss rates can still be used as a starting point for determining expected credit losses. When using historical loss rates, the Bank would have to consider how conditions that existed during the historical charge-off period differ from current projections and adjust the future loss rates accordingly.
  • Discounted cash flow: Projections of principal and interest flows over the life of the asset.
  • Probability of default method estimates the probability loans in certain risk-stratified segments will default. This approach computes the percentage of loans that have defaulted in a pool over a look-back period.
  • Roll-rate method. The roll-rate method is often referred to as “migration analysis”. It is based on determining a prediction of credit losses based on segmentation (by delinquency or risk rating, for example) of a portfolio of financial assets. No standard roll-rate model is used throughout the financial institutions industry, but most of the models used are based on similar underlying principles.
  • Aging analysis: Banks use aging analysis in determining the effectiveness of their credit and collections functions and for estimating potential loan losses. The information from this analysis is used by Banks as a component of their estimate the allowance for loan & lease losses.
  • Collateral-value: For loans that are collateral dependent, evaluation of collateral and costs of disposal can be used to estimate expected credit losses.

Institutions with multiple loan types will likely need several methodologies to properly analyze the loss content of each portfolio segment and then aggregate the results to understand the expected losses for entire loan portfolio.

Expected credit impairment will be recognized as an allowance, instead of as a direct write-down of the amortized cost of the financial asset. Changes to the ALLL are recorded immediately through credit loss expense. The carrying amount of a financial asset that is considered to be uncollectible will be written-off in a manner similar to current US GAAP.

While there is significant time until required implementation, it is imperative that management begin the implementation process as soon as possible. The most problematic aspects of CECL implementation will likely be: a) developing the support systems and processes, b) gathering and organizing the historical data to support new methodologies, and c) developing going forward data capture and analysis processes.

  • With respect to a) above, existing modeling approaches currently used for Basel, and stress testing may be leveraged and adapted for CECL. However, new credit loss models will likely need to be implemented. It is anticipated that the development or purchase of credit models that estimate future credit losses may be the most time consuming phase of CECL implementation.
  • For b) the historical data requirements for the new models will often not be resident in current financial and credit systems. This data will have to be developed from the bank’s core operating system and organized into databases which the models can access.
  • For data capture and analysis c) the starting point for developing a future loss credit loss data base is current loan and credit loss data. Companies implementing CECL should undertake a robust review and analysis of its current loan and credit data so that the process of developing a future credit loss data base starts with historic data that has a high level of accuracy and integrity.

Many of the disclosures required under the new standard are similar to those required under current GAAP. For example disclosures on credit quality, ALLL roll-forward, policies tor determining credit losses, past due and non-accrual status, and collateral dependent assets are the same. There are, however, significant additional disclosures of credit quality indicators, disaggregated by year of origination for a five-year period.

Cyber Security: A fundamental component of Enterprise Risk Management (ERM)

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CFO Consulting Partners LLC Cyber Security White Paper March 2015 1 Cyber Security: A fundamental component of Enterprise Risk Management (ERM)

Cyberattacks have hit virtually every industry and the two industries most impacted by incursions, breaches and theft of data are financial services and health care. Financial services and the medical world are inexorably connected to the internet, and they are therefore connected to hackers, cyber criminals and even nation states intent upon getting access to financial and medical records.

Banks are a particular focus of cyber criminals. In a recent speech OCC Head Thomas Curry said,” The financial-services industry is one of the more attractive targets of cyberattacks, and unfortunately the threat is growing.” Further, one growing area of concern is the potential for criminals to target smaller banks. In late 2014 New York State banking regulator Benjamin Lawsky asked the institutions he supervises to understand the increasing complexity and interconnectedness of the financial system, as well as the importance of strong controls and of carefully monitoring the ways in which they connect to third parties.

Banks routinely use advanced statistical models and behavior analytics programs that can spot possible fraud and, to some extent, have a cultural data governance advantage over other industries. Analysts at the Gartner research group estimate that the health care industry is generally about ten years behind the financial services sector in terms of protecting consumer information.

In the healthcare world, major cyber breaches go back to 2010 when the WellPoint medical records breach set two records: the number of members’ records exposed in a security breach, and the size of the settlement amount paid to the Federal Government. The WellPoint breach is estimated to have cost $143 million dollars. These costs were for legal recovery actions, new security control investments, and extended credit and protection services for victims. During an investigation of WellPoint’s information systems, The US Department of Health and Human Services (HHS) found that the Indianapolis-based insurer had not enacted the appropriate administrative, technical and physical safeguards for data which are required Health Insurance Portability and Accountability Act of 1996 (HIPPA).

More recently the dangers of health care cyberattacks were highlighted early in 2015 when Anthem, the nation’s second-largest health insurer, said hackers broke into a database storing information on eighty million people. The hack led to a particularly valuable trove of data because it exposed Social Security numbers.

Basic components of cyber controls framework, and ERM (Risk Management):

• Governance: Cyber Security Companies in all industries need to establish a cybersecurity governance framework which is a central component of the ERM infrastructure. Regular reporting to the Board of Directors will help assure active participation among the Board, Senior Management and IT Management. The visibility of the cybersecurity infrastructure and processes are an important driver of adequate resourcing, which is essential for companies to stay ahead of the many bad actors in the cyberattack world. CFO Consulting Partners LLC Cyber Security White Paper March 2015 2

• Cyber Risk Assessment: Through risk assessments, companies understand the specific risks to their organizational infrastructure and operations. Risk assessment processes identify and document vulnerabilities, highlight internal and external threats, and ultimately prioritize the risk and related responses. The related controls should be organized and implemented as preventive, detective and corrective.

• Technical Controls: The selection of specific controls by any company is dependent the company’s individual risk profile. Many companies use a “defense-in-depth” strategy in which they layer multiple independent security controls strategically throughout their technology systems. One way of looking at this approach is to view the components of a company’s technical infrastructure as residing in partially redundant layers.

• Vendor management: At every touch point vendors can introduce cyber threats (e.g. – viruses) into a company’s systems and data bases. While third party penetration testing is almost impossible with vendors, the company’s threat assessment must thoroughly evaluate each third party touch point for cyber risks.

• Incident Response Planning: An incident response plan is a framework to manage a cybersecurity event and limit the damage. A company’s incident response plan should establish a dedicated Cyber Security Incident Response Team, address all the possible attack vectors and take the legitimate concerns of third parties into account.

• Staff Training: Without adequate staff training and related awareness, the rest of a company’s cybersecurity program can be easily compromised. Companies must define cybersecurity training needs and requirements. Staff need to understand the possible vectors and techniques that the bad actors use to penetrate systems and data bases.

• Cyber Insurance: While almost unknown five years ago, many companies have chosen to obtain cyber risk insurance. Coverage is offered my most major insurance underwriters; premiums vary widely. Underwriting relies heavily on the quality of a company’s cyber control infrastructure. In other words, insurance premiums depend greatly on the quality and strength of the company’s cyber control infrastructure. Note: Cyber Control Framework items above extracted from FINRA 2014 “Report on Cybersecurity Practices”.

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New York Event Brings Together ACCA, IMA Members and Organization Leaders

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New York Event Brings Together ACCA, IMA Members and Organization Leaders

On Thursday evening, February 28, 2013, more than 100 IMA® and ACCA (the Association of Chartered Certified Accountants) members gathered in New York City for the first joint chapter event between members of the two partnering organizations. The event was planned in tandem with a special U.S. visit by ACCA CEO Helen Brand.

The evening included networking with local professionals and IMA and ACCA staff members; remarks from Ms. Brand and Jeff Thomson, CMA®, IMA president and CEO; and special guest speaker Teresa S. Polley, president and CEO of the Financial Accounting Foundation (FAF).

Following a warm introduction by IMA regional vice president Marc Palker, CMA, RTRP; and ACCA’s NYC Metro Area Chapter head Fuad A. Karimov, director of Transactions & Restructuring Services at KPMG LLP., members enjoyed a regulatory issues update by Ms. Polley, representing FAF.  As the independent oversight body for the Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB), FAF has an important responsibility to ensure the development of sound accounting standards that are relevant to stakeholders.

Pictured left: Helen Brand, ACCA CEO, welcomes an audience of IMA and ACCA members, the first joint chapter event between the two organizations.

“IMA has long echoed FAF’s belief that constituent input is a vital factor for creating the best possible accounting standards,” said Mr. Thomson. “IMA and ACCA are honored to have Ms. Polley join us for this landmark chapter event.”

“Successful partnerships are all about the relationship, shared values, and inspired visions. In the first year of our strategicpartnership, IMA and ACCA have delivered valuable research, thought leadership, and educational opportunities to our members around the world,” said Mr. Thomson  “The two organizations share a wonderful partnership centered around the common philosophy of delivering value—to professionals, organizations, and society.”

The New York event was so well received that IMA is exploring the possibilities of organizing other joint events, either in New York or with ACCA’s 10 other U.S. chapters.

“ACCA is immensely proud of the work it does alongside IMA. Both organizations have a long history of seeking innovations in finance and accounting, recognizing that a strong global profession needs to innovate to be relevant in a fast-changing world. I look forward to working closely with IMA in the future and I am confident that together we will make an excellent contribution to the development of the accountancy profession around the world,” said Ms. Brand.

To learn about the latest initiatives of the IMA/ACCA strategic partnership and recent joint research reports, visit the partnership web page at www.imanet.org/acca.

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Signs a Small Business Needs a CFO

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When should a small business owner hire a CFO? While there is no right answer, there are certain indicators. I spoke with Marc P. Palker,CMA, about this topic. Marc is Director of CFO Consulting Partners, LLC – a firm that provides interim and part-time CFO services to small and midsized public and private companies – and a member of theIMA (Institute of Management Accountants) Board of Directors.

This interview has been edited and condensed.

Jeff Thomson: What are some internal indicators that a small business owner should hire a CFO?

Marc Palker: An important internal tipping point is when information that helps the business make timely and important decisions is not being prepared. Business owners make decisions at the pace of the business and must be able to rely on the accurate and timely information provided by CFOs. It‘s never too late to make a change.

In many small- to medium-sized companies, the CFO is responsible for the interpretation of the results, cost control measures, capital acquisition, and forward-thinking due to economic, industry, tax, government regulation, social issues and sometimes even looking into methods that will mean the small business can compete with the giants. In some cases, the CFO can also be the OFO, or Only Financial Officer, and must rely on bookkeepers for accurate processing of financial information. The CFO must also be critical of the banking relationship – there can be no slip-ups.

 JT: Should a business owner hire a CFO when the company hits a certain revenue figure?

MP: It will largely depend on the business and/or industry. A company generating $10 million in revenue might be ready for a CFO while a company generating $20 million may not be. One client could sell its product for $1.5 million each but only sells five units in one year, while another client might need 28,571 transactions to reach $10 million with an average transaction of $350. The complexity of the transactions can also determine the need for a higher level of experience or knowledge. The type of business you are running is also a vital tell because if you grow so big that you need to relocate then that could be a sign you need help with finding london office rental and the finances of it.

Rapid growth is another important indicator. Growth requires an expansion of automated systems to handle the growth, and additional capital and/or financing to finance the growth. A CFO is best suited to handle rapidly increasing growth due to the complexity involved. He or she must be able to interpret the investment and technology, and the terms of acquiring capital.

One final indicator is when a business is preparing for a merger or acquisition. In this situation, the CFO must be able to choose the correct team to evaluate a target acquisition. In many cases, that will result in outsourcing to a firm to perform the financial and regulatory due diligence. The CFO is the best person to interpret the report issued by the due diligence team so the terms can be tailored to the findings. A very important skill required of CFOs is the ability to feed a potential investor or lender. Preparing the information and anticipating their questions will shorten the process and eliminate further digging.

JT: What specific responsibilities should the CFO of a small business have?

MP: A CFO in a growth-oriented small business must be hands-on. Being in the weeds is critical to controlling growth and communicating results to those with money at stake. That could be the owners or shareholders, banks, insurance companies and – let’s not forget – the employees. As growth occurs, the company and its key customers, suppliers and employees will face new risks. Managing risk involves not only having insurance, but the CFO must also protect the company from regulatory, environmental and human capital risks.

This column offers CFOs and their teams insights and ideas related to challenges of the position, in light of market demands and global economic conditions. Jeff Thomson, CMA, is president and CEO ofIMA (Institute of Management Accountants), one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Follow IMA on Twitter and visit IMA’s YouTube channel.

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Key Highlights of 2010 Exposure Draft on Leases by FASB and IASB

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By Valentine Ejiogu, Director, CFO Consulting Partners

Late last year, the FASB and IASB released an exposure draft on the proposed new accounting standard, Topic 840. This will be the first significant change in lease accounting since FAS 13 was released in 1976.

If finalized, the exposure draft would converge FASB’s and IASB’s accounting for lease contracts in most significant areas. The few remaining differences pertain mostly to discrepancies with other existing standards.

Companies would face significant changes in how they account for leasing transactions if the exposure draft is adopted. For example, today if a company enters into a multi-year year lease for premises, the lease payments would normally be expensed evenly over the life of the lease. If the exposure draft is adopted, that lease would be capitalized, which would result in amortization and interest expense, with more interest expense recognized in the early years and less in the remaining years. Therefore, the Company’s income statement will suffer in the early years. Further, lease expense, which is now normally considered operating expense and which is included in EBITDA, would be shown after the EBITDA line.

Lessees would be required to perform significantly more monitoring and recordkeeping, particularly for leases currently classified as operating leases. Lessees will also need to apply lease requirements to all outstanding leases as of initial application (comparative periods would need to be restated). Lessees will need to apply the proposed transition requirements to leases currently accounted for as operating leases.

  • All leases are to be capitalized. That is, all leases would result in asset and liability recognition. There is no exclusion from capitalization for short-term leases; though the Boards will permit leases with a total maximum lease term of 12 months or less to be capitalized at the undiscounted value of the rents. The exposure draft proposes the lessee recognize an asset for right to use the leased asset and a liability of its obligations to make future payments and in addition, amortization of the right-to-use asset and finance expense arising from the liability.
  • The interest rate used for present valuing the rents and recognizing interest expense is the incremental borrowing rate, except that the “the rate the lessor charges the lessee” may be used if known. This is referred to as the implicit rate, which must now include contingent rents.

Definition of a Lease

A lease is a contract in which the right to use a specified asset (the underlying asset) is conveyed, for a period of time, in exchange for a consideration.

At the date of inception of a contract, an entity shall determine whether the contract is, or contains, a lease on the basis of the substance of the contract by assessing whether:

  • The fulfillment of the contract depends on providing a specified asset or assets (the underlying asset); and
  • The contract conveys the right to control the use of a specified asset for an agreed period of time
  • The proposed requirements would affect any entity that enters into a lease, except that they would not apply to:
  • Leases of intangible assets
  • Leases to explore for or use minerals , oil, natural gas, and similar non regenerative resources
  • Leases of biological assets
  • Certain service components of leases
  • Contracts that represent a purchase or sale of an underlying asset.

Impact on Accounting by Lessees

The following are the major differences for lessees in the new exposure draft:

  • Cash payments for leases are considered financing activities in the statement of cash flows
  • Existing operating leases will be capitalized by present valuing the remaining rents as of the date of application. Lessees will adjust the right-of -use asset for any existing deferred/prepaid rent liability or asset.
  • Similar to FAS 13, the liability is amortized using the interest method; the asset is amortized like other property, plant and equipment. Interest and depreciation expense are reported separately from other interest and depreciation, but in the same place on the income statement. Lease expenses would no longer be recognized on a straight line basis, but rather replaced by amortization and interest expense.
  • Initial direct costs are to be added to the asset to be depreciated over the life of the lease.
  • The exposure draft provides that lessee disclosure in the financial statements should include:
  • Description of leasing activities, including assumptions and judgments for valuing contingent rentals, sale and leaseback transactions and information about significant future leases.
  • A reconciliation of opening and closing balances for right-of-use assets and lease liabilities.
  • A maturity analysis of future rents, by year for 5 years and all remaining years combined. Minimum lease payments are to be separated from contingent rentals, termination penalties and residual guarantees.
  • Initial indirect costs incurred during the reporting period.

Impact on Accounting for Lessors

The lessor would recognize an asset representing its right to receive lease payments and, depending on its exposure to risks or benefits associated with the underlying asset, would either

  • Recognize a lease liability while continuing to recognize the underlying asset (performance obligation approach) or
  • Derecognize the rights in the underlying asset that it transfers to the lessee and continue to recognize a residual asset representing its right to the underlying asset at the end of the lease term. (Derecognition approach).
  • The derecognition approach is similar to the current accounting for sales-type leases under GAAP. However, the amount of the upfront profit recognized, as well as the measurement of the lease receivable and the residual asset, may be different from that recognized under the sales-type lease.Effective Date

    The Boards are yet to determine the effective date.

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