Despite the strict revenue recognition guidelines of the Sarbanes-Oxley Act (SOX), and the latest revenue recognition rules in the Financial Accounting Standards Board (FASB) Accounting Standards Codification® (ASC) 606, many labs still struggle with precise accounting of net revenue. Having trouble understanding true top line revenue results in labs failing to precisely measure and report their ultimate profitability. This is often due in large part to inaccurate accounting of contractual allowances.
FASB ASC 606 makes fundamental changes in the way all contracts must be analyzed and reported each quarter. Every lab company and organization that follows GAAP in its financial rules, or is audited by an outside CPA firm, must comply. Labs need to accurately determine contractual allowances, price concession percentages, and bad debt percentages for FASB compliance. For example, they need analytics based upon adjudicated claims and analytics based upon remaining aging balance.
FASB 606 requires companies to determine revenue recognition based on a five-step methodology:
For healthcare diagnostics providers, it is especially Step Three–determining the transaction price–that requires consideration, particularly given the transition to value-based care and the diverse nature of constituents such as hospitals, accountable care networks and post-acute care providers.
Labs need to evaluate key contracts to identify the revenue recognition changes required and thus the related impact. Teams need to review every contract with healthcare insurers and Medicare Advantage plans to develop a reporting formula for each type of class of contract.
Labs also need the right tools and flexibility to examine their business and understand how it will change under the new standards. It helps to have a partner that specializes in health information technology like XIFIN, whose RCM solution was specifically built to provide the level of detail and control that FASB 606 demands. Our business intelligence and reporting empowers teams to get at the data they need to make better business decisions without relying on time-consuming, error-prone spreadsheet analysis.
There are two transition methods for adopting the new FASB standard. While there are advantages and disadvantages to both, both methods do require an amount of dual reporting (reporting both under the old GAAP rules and the new GAAP that incorporates FASB 606).
Learn more about these transition methods as well as how to thrive while complying with the newest revenue recognition standards.