Financial Reporting

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

2. Intro

3. 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

4. Finance Departments

5. Typical Finance Department • General Accounting • Accounts Payable • Payroll • Treasury • Rates & Reimbursement • Taxes • Financial Analysis and Budget • Financial Reporting • All entities…. Hospital and Subsidiaries

6. 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…

7. 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

8. Accounting Concepts

9. 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….

10. Accrual basis recognized when event happens earned incurred Cash basis recognized when cash changes hands received paid Cash vs. Accrual Accounting Two ways of recording transactions

11. 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

12. Accrual Transactions Proper matching of revenue and expense transactions and accounting periods

13. Valuation Methods • Current Value: Cash, Vacation liabilities, inventories • Market Value: Investments, Debt • Historical Cost: Buildings and Equipment • Net Realizable Value: Receivables, Payables

14. 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

15. Allowance For Uncollectible Accounts Accounts Receivable Net Realizable Value $9,500,000 “Net Realizable Value” • Original charges vs. estimate of final collections $12,000,000 $2,500,000

16. A/R Valuation Analysis

17. Common Issues

18. 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

19. Depreciation Methods • Straight line method - primary • Accelerated methods: • Units-of-production • Sum-of-the-years’-digits • Double-declining balance • Tax implications for taxable entities

20. Straight Line Depreciation

21. Valuation of Property Assets(Straight Line Method)

22. 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

23. 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

24. 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

25. Allocation of Costs • Benefits • Depreciation • Overhead • Support Services • Other • Purpose = reflect “total” cost of business at Department level

26. Capitalized Expenses Costs to make items operational • Shipping • Installation • Calibration & Testing • System “build” (but not data conversion) Training costs are not capitalized

27. Basic Accounting Transactions

28. Transaction Data Pyramid Financial Statements Departmental Reports Trial Balance General Ledger Daily Transactions & Journal Entries

29. 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

30. 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…

31. Example Activity Entries

32. Trial Balance • List of all account BALANCES • Total debits = total credits • Preliminary to preparation of financial statements

33. Basic Accounting Transactions • Double-entry bookkeeping • Debits & Credits • Cash Transactions • Journal Entries • Subsidiary records • Accounts Receivable • Accounts Payable • Payroll • Purchase Orders

34. Example Trial Balance

35. Departmental Reports

36. Basic Financial Statements

37. 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

38. 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

39. 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

40. Balance Sheet Current Assets Current Liabilities Long-Term Debt Long-Term Assets Equity

41. Current Assets • Will be consumed within 12 months • Listed in order of liquidity: • Cash • Short-term investments • Accounts receivable • Inventories • Prepaid expenses

42. Current Assets • Cash • checks and money on deposit • credit card receipts • Short-term investments • marketable securities • certificates of deposit • other investment instruments

43. Current Assets • Accounts receivable • funds owed to the company • government and insurance payors • individual patients • other • Inventories • Medical, surgical and office supplies • Fuel, food

44. Current Assets • Prepaid expenses • prepaid insurance • prepaid rent and supplies • prepaid interest and property taxes

45. Fixed (Long-Term) Assets • Useful life > 1 year • Long-term assets include: • Property, plant and equipment • Natural resources • Intangible assets

46. Property, Plant & Equipment • Land improvements • parking lots, sidewalks, landscaping • Buildings • Fixed equipment • Boilers, HVAC • Major equipment • MRI, Linear Accelerators

47. Intangible Assets • Items of value which lack physical characteristics • Goodwill • Patents/Trademarks • Franchises/Licenses • Customer lists • Computer software

48. 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

49. Long-Term Liabilities • Repaid over a period > 1 year • bonds and notes payable • bank loans • pension liability

50. Equity • Net assets of the company • Owners’ claims on the company assets • stock • contributed (or paid in) capital • accumulated profits/losses • Restricted and Unrestricted