By Denise Lugo
The biggest accounting concern for the healthcare sector and companies in general these days is that the coronavirus (COVID-19) pandemic coincided with the most significant reporting and tax season of the year, accounting practitioners said.
Accountants and tax advisers are at their busiest period – working on first quarter and December 31, 2019 closings for private companies and nonaccelerated SEC filers.
“It comes at a pivotal time in financial reporting, with most years end completed, yet a significant subsequent event occurred that would have to be evaluated relative to the 12/31 years ends under audit,” Steven Shill, Partner and National Leader, BDO Center for Healthcare Excellence & Innovation, at BDO USA, LLP, said. “Although the conclusion is that the subsequent event is not a “non-recognized event” for year ends through to January 30, 2020—the date that the national emergency was declared—it is still relevant to going concern and debt modification considerations,” he said.
“And for 12/31 year end that all the accountants are busy running around trying to finalize—we have to consider ASC 855-10. And the conclusion is that it is a non recognized subsequent event,” Shill said. “In other words, it just becomes disclosure in the financial statement. You don’t adjust your financial statement for the impact of it, with two exceptions” he said.
The two exceptions, said Shill, are: evaluation of a going concern, i.e., whether the company survives within the next 12 months, and any subsequent debt modifications that have to take place as a result of the COVID-19 issues. “Because GAAP says you have to put that back into your financial statements,” he said.
The scramble comes even with the conditional relief the SEC provided for registrants that are impacted by COVID-19 and are unable to file on a timely basis. On March 25, the regulator issued a new order extending the due date by 45 days to file certain SEC disclosure reports, such as Forms 10-K or 10-Q. The exemptions granted related to reporting and proxy delivery requirements for registrants and the new order had modified exemptions to now cover filings due between March 1, 2020 and July 1, 2020.
“For issuers with the SEC, the impact or consideration of impacts would still need to be considered in the Business Section, the Risk factors and Management’s Discussion and Analysis if Financial Conditions and Results of Operations [MD&A] of SEC 10-K filings,” said Shill. “Of course for quarterly filings ended March 30, 2020, consideration becomes an event that took place during that quarter and factors such as potential impairments for indefinite lived intangible assets, including goodwill, property, plant, and equipment the impact of potential impairment in value of investment portfolios, loss contingencies, revenue recognition, lease modifications, stock compensation issues, loss contingencies, business interruption insurance considerations the enactment of CARE ACT treatment under new tax law to address COVID-19 etc. Lots to consider,” he said.
Impact on Sector Profound
The impact of the novel virus on the healthcare sector has been profound on a number of levels. Many of hospitals had negative margins already, and over the past few years over 2,000 hospitals had closed their doors or merged.
“If you overlay this COVID-19 situation, for many of these hospitals the loss of the elective procedures plus the fact that many of them already had negative margins, work heavy Medicaid or Medicare populations as part of their patient mix – would result in those negative margins just being exacerbated,” Shill said.
Physician practices, nursing homes, and senior living facilities have also had to suspend access because of federal and state mandates enacted to stem the spread of the novel virus. Moreover, hospitals own a lot of other non-critical businesses that were profit centers, which had to suspend services.
“So a lot of hospital systems have physician practices, they have surgery centers, they have ancillaries. So from their standpoint while they may be preparing for this onslaught of people coming in with COVID-19, a lot of their profits are in these other businesses that support the hospital and are owned by the hospital as well,” Jim White, Managing Partner, Tax Services, BDO USA, LLP, said.
“The smaller companies – almost all the physician practices…unless you’re a critical care pulmonologist or infectious disease specialist, you’re slammed,” said White. “Almost everything else – even cardiology which you would think that’s mission critical, except for taking care of patients that need to be seen, they’re doing a lot of virtual work. So they’ll loose some revenues because they get their big dollars once the patient’s seen by the doctor and they then do a procedure,” he said.
Accountants said that smaller healthcare operations are focused right now on remaining afloat. The Internal Revenue Service extended the due date for tax work and therefore companies have slowed down in sending in related documents. “Instead we are now inundated trying to help our clients stay in business,” said White. “The first question they’re asking is ‘what do I do from a cash flow standpoint,’ and my normal answer to them is ‘call their bank,’” White said. “They should number one try to acquire a larger line of credit, most of the banks are quick to do that.”
The second thing companies should do if they have any large debt payments is ask for 90 to 120 days deferral of the principal and interest, said White. “What I’m hearing is most banks are just modifying loans, because you have to do a loan modification for that, putting it on the back end with no penalty for the client.”
CARES Act Will Help Ease Liquidity Concerns
Moody’s Investors Service in its April 1, 2020, report said the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by President Donald Trump on March 27, will ease liquidity concerns for some organizations, but not all.
The stimulus package will send over $100 billion of aid to hospitals and healthcare workers. Some of the funding will go towards reimbursing healthcare providers, not only for expenses related to treating coronavirus patients but also for lost revenue due to canceled procedures.
“Part of this aid package will allow Medicare providers to receive accelerated or advanced payments in order to bridge liquidity. That said, there is still uncertainty around the timing and amount of payments to many providers,” a text of the report states. Further, many rated healthcare companies will not be direct recipients of the aid as they are not paid by government payors, the report states. “Instead, they are paid directly by consumers, hospitals, pharmacies, laboratories, or other customers. For these companies, liquidity may still be a concern.”
This article originally appeared in the April 8, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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