Financial Reporting

Scott Furniss
Sr. 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

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 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…

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 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

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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 • Cash basis

– recognized when – recognized when cash
event happens changes hands
– earned – received
– incurred – paid
 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 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

Allowance For
Accounts Receivable 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

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 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 - ownership’s 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 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

Average Age of Plant Accumulated Depreciation/Depreciation Expense

Average Daily Census Patient Days/365

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

Cash Flow Net Income + Depreciation & Amortization

(Net Income + Depreciation & Amortization)/Total
Cashflow/Total Liabilities Liabilities

“Cushion” Ratio Cash/Maximum Annual Debt Service

Cash/(Operating Expenses - Depreciation &
Days Cash on Hand Amortization)/365)
EBIDA (Earnings Before Interest,
Depreciation & Amortization) Net Income + Interest, Depreciation & Amortization

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 Financial Ratios and Analysis

EBIDA Margin EBIDA/Total Revenue

Interest Coverage
Long Term Debt/Capitalization
Maximum Annual Debt Service (MADS)
Coverage
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 -
Payment Period Depreciation & Amortization)

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 Financial Ratios and Analysis
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

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 Financial Ratios and Analysis
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

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Questions?