Transcript Document
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 4 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… 5 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 6 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 21 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 22 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 23 Allocation of Costs • • • • • Benefits Depreciation Overhead Support Services Other • Purpose = reflect “total” cost of business at Department level 24 Capitalized Expenses Costs to make items operational • • • • Shipping Installation Calibration & Testing System “build” (but not data conversion) Training costs are not capitalized 25 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 32 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 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 64 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 65 Financial Ratios and Analysis Sample Hospital - Key Financial Metrics Report Fiscal Year End 2007 2008 2009 2010 2011 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 16.9 18.1 16.2 11.6 14.6 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 Income Statement and Cash Flow Cash flow/total liabilities (%) Debt 66 Financial Ratios and Analysis Sample Hospital - Key Financial Metrics Report Fiscal Year End 2007 2008 2009 2010 2011 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 Balance Sheet 67 Questions?