May 2 — Some health care organizations that have investments classified as ‘other than trading securities' might face implementation challenges when applying the Financial Accounting Standards Board's new rules on classifying and measuring financial instruments, health care practitioners told FASB.
There are clearly some challenges for some health care companies in applying the rules, including volatility in the performance indicator, discussions during FASB's April 29 meeting with the Healthcare Financial Management Association's principles and practices board indicated.
The guidance, ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement for Financial Assets and Financial Liabilities, was issued by FASB in January. It is applicable to health care not-for-profit entities for periods after Dec. 15, 2018, but earlier application is allowed for certain provisions.
The rules will require health care not-for-profits to measure many equity investments at fair value, according to an Ernst & Young summary of the key provisions. They would recognize any changes in fair value in the performance indicator—the equivalent of income from continuing operations—unless the investments qualify for an accounting exceptions.
There are also some changes brewing for those companies. Health care nonprofits will no longer be able to recognize unrealized holding gains and losses on equity securities they classify today as ‘other than trading' separately from the performance indictor, the summary states. They also will no longer be able to use the cost method of accounting for equity investments that don't have readily determinable fair values.
The rules might prove troublesome to smaller health care entities, according to the HFMA discussion. Unsophisticated health care entities, who have a lot of control over what is happening with their investments, may have classified them as ‘other than trading securities' and excluded the income as unrealized gains or losses below the performance indictor, said Kimberly McKay, a partner at BKD, LLP.
“So as you look at [rules under] 2016-01 and that equity securities now would be above the performance indicator and the recognition of that income, the debt securities, would still be below the performance indicator, I think we see some challenges along implementation for those organizations, and how they're really going to distinguish that—and operationally,” she said.
The new rules were intended to be operationally easier, according to comments made from FASB members and staff accountants.
Related to the change in terms of equity securities, there's no longer trading characterization to them, a staff member said. “Just that all equity securities' changes in fair value would now go above the line—so there's no differentiation that you have to make that they are a trading security or not,” he said.
It's a point that was discussed by FASB when it deliberated the guidance, staff said. “Some board members felt that we should have kept current GAAP the way that it is, and other board members said that at the end of the day, in order to realize the value of the equity security, it has to be sold, and that convinced them that all changes in the fair value should go above the line for you and there shouldn't be a split any further going forward in GAAP,” he said.
Asked by FASB member Lawrence Smith about what the difficulty is, McKay said it comes from just looking at financial statements and the swings that can come with those unrealized gains and losses; “a lot of organizations do have that below the performance indicator.”“When you see the huge swings in the unrealized gains or losses in the performance indicator, that is a concern that health care organizations have,” she said.
Some FASB members observed that it's not that the rules aren't operations, it's the outcome practitioners don't like.
Still, said McKay, it posses an additional challenge when a company has a portfolio that includes multiple things that are not just equity securities. “It is going to be time consuming for them to have to step back and bifurcate out their portfolio between what's above the performance indicator and what's below,” she said.
To contact the reporter on this story: Denise Lugo in Norwalk, Conn., at firstname.lastname@example.org
To contact the editor responsible for this story: Laura Tieger Salisbury in Washington at email@example.com
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)