Health care providers sometimes provide loans to physicians who agree to relocate and establish a practice in the hospital's service area. Typically, the physician signs a loan agreement stating that they will be liable for the loan and will repay both principal and interest at terms defined in the agreement. The hospital may, at its discretion, forgive the loan if the physician stays in the community for a stipulated number of years. Assuming that the hospital has executed a formal, legally enforceable loan agreement with the physician, the hospital holds a financial instrument that meets the ASC Master Glossary definition of a loan (i.e., a contractual right to receive money on demand or on fixed or determinable dates). Thus, an asset should be recognized when the funds are advanced to the physician, even if the hospital's policy and practice is to forgive such loans.

ASC 310-10-35-16 indicates that a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts according to the contractual terms of the loan agreement. In our view, "unable to collect" does not mean the same thing as "chooses not to collect." An inability to collect would exist if the physician is deemed unable to repay the loan (based either on the original terms of the note or on modified terms, such as if the payments are extended over a longer period). Therefore, physician loans should be assessed for impairment based on an evaluation of the physician’s ability or inability to repay the outstanding balance of the loan. If the loan agreement provides for "milestones" which, upon attainment, would result in a forgiveness of a portion of the debt, the hospital would write off that portion of the loan to expense ("physician recruitment" or similar expense category, not impairment or bad debt expense) as the milestones are reached. If no milestones are specified, the receivable would be written off when the hospital forgives the loan (i.e., when the physician is formally notified that the loan, or a portion thereof, has been forgiven).

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance was effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019 (including interim periods). For all other entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods.

ASU 2016-13, codified in ASC 326, requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

Upon adoption, physician loans will be subject to the current expected credit losses (CECL) model prescribed by ASC 326. Health care entities should record lifetime expected credit losses for these loans in their allowance for credit losses. In estimating credit losses, a healthcare entity would include amounts it does not expect to collect due solely to credit risk (for example, amounts not collected from a physician who defaults on the loan). Amounts that a health care entity expects to forgive would likely be considered compensation or physician recruitment expense.