Feb. 19, 2018
With the new revenue recognition Accounting Standards Update (No. 2014-09), “Revenue From Contracts With Customers (Topic 606),” upon us, the Crowe Revenue Cycle Analytics (Crowe RCA) User Community should be aware of the reporting capabilities available within the application to perform the appropriate level of analysis.
The core principle of the new standard is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. More succinctly, the net revenue recognized and the related accounts receivable (A/R) must be as accurate as possible to calculate the expected payment on a given account or portfolio of like accounts.
The Crowe RCA application includes this level of precision. Since its inception, the tool has been able to categorize revenue streams and to estimate implicit concessions, variable consideration, and, ultimately, the transaction price. Its reporting capabilities help monitor, prevent, and, in certain situations, even predict revenue reversals.
However, because the tool is highly configurable, users must conduct specific tests on a regular basis to analyze portfolios and ensure the module is optimized for precision.
Hindsight Trending Template/Analysis (AR71)
The primary test of the balance sheet allowance approach is hindsight analysis. Payment activity run outs or look backs are compared to historical reserve and net A/R calculations. The payment activity at the end of a period (for example a 12-month hindsight period) should support the historical net A/R calculation. The Crowe RCA solution offers the “Hindsight Trending Template (AR71)” for this test. We recommend generating this template monthly with refreshed look-back periods (for example, 12 to 18-month periods) as part of the month-end close process. A consistently low variance (Crowe likes to see 0.5 percent or less depending on the materiality of any given reporting entity) is preferred. Further analysis is recommended on any variance.
MRA Estimates and Hindsight Activity (AR72)
In order to pinpoint the source of any payment activity to historical net A/R variance in the “Hindsight Trending Template,” the Crowe RCA solution can generate the underlying payer detail report. Using the “MRA Estimates and Hindsight Activity (AR72)” report, the user can determine the variance by inpatient or outpatient, payer, aging bucket, and adjustment type. This type of analysis assists in validating the appropriateness – including likeness, size, and composition – of the portfolios used when the portfolio approach is used when applying Topic 606. Whether the estimated portfolio revenue was overly aggressive or too conservative, the user should assess the need for a change to previous and future estimates. If management justifies an adjustment to the model, the adjustment is quantified and footnoted. The footnote should explain to internal and external reviewers any discrepancies in the historical hindsight trending variance.
Recasting, or scenario analysis, refers to the recommended process of testing the financial impact of any changes to parameters or assumptions in the reserve model. Users can find the recasting functionality in the automated close module. This set of reports allows the user to compare the historical reserve on any given month-end aged trial balance against the same aged trial balance with different settings. It helps normalize payer and aging mix while highlighting the impact of changes to the model. Changes to be recast may include quantifying the impact of newly created portfolios, removing “cliffs” from certain payers, or not fully reserving the 360-plus aging bucket.
Variance Analysis Reporting: Changes in Prior-Period Estimates
Once a strong estimate of the consideration we are expected to collect has been analyzed for each portfolio, users can then monitor the month-over-month and fiscal year-to-date net revenue – including any changes in prior-period estimates. The guidance allows revenue recognition to the extent that a significant reversal of the amount of cumulative revenue recognized to date is not probable. Changes in prior estimates, or prior-period adjustments, represent revenue adjustments. Revenue adjustments could increase or decrease net revenue based on either transaction activity or changes in collection estimates. Ideally, changes in prior-period estimates are immaterial. Minimal prior-period adjustments reflect a precise model and a consistent adjudication of accounts in the revenue cycle.
If significant revenue reversals occur, this series of reports will highlight the activity, allowing the user to drill into the account detail and further understand root cause. This analysis may result in in the need for either a change in a process or an adjustment to the reserve and net revenue model.
Numerous opportunities exist through RCA reporting to better understand net revenue and changes in prior-period estimates. The “VA001 Net Revenue Analysis” report, the “VA010 – VA012 Analytical Comparison” reports, and the “VA0019 Change in Prior Themes” report are some of the most insightful.
The new revenue recognition standard requires greater scrutiny of the consideration an entity expects to be entitled to receive and the inputs into the net revenue model. The Crowe RCA model promotes this level of precision. In order to test the configuration of the model and the composition of the portfolios, users can find a number of helpful reports available in the application. These reports should be generated and analyzed on a monthly basis to ensure cash collections support the revenue estimate at the inpatient/outpatient portfolio level. Furthermore, users should analyze net revenue with close attention to changes in prior-period estimates. This analysis also should occur at the end of each reporting period. Changes in prior-period adjustments are revenue reversals, which we hope to minimize at all times.