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5.4 Contract assets and liabilities
Publication date: 31 Mar 2023
us Health care guide
In health care services arrangements accounted for under ASC 606, the entity agrees to provide the services requested by the customer (the patient or resident) and the customer agrees to pay for those services. Contract assets and contract liabilities can arise when the timing of receipt of consideration from the customer (or the payer(s)) differs from the timing of when services are rendered and/or when invoices are issued.
When performance by a customer (i.e., payment) lags behind performance by the health care entity, the difference represents a contract asset that is reflected in the balance sheet. Alternatively, if the customer pays before the health care entity performs, the balance sheet would reflect a contract liability. The basic rule is set forth in ASC 606-10-45-1.
When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable.
5.4.1 Contract assets
Contract assets arise from revenue earned for goods or services provided that is not yet billable to a customer (for example, because the seller or service provider’s performance is not yet complete). A contract asset becomes a receivable when only the passage of time is required before payment of consideration is due (ASC 606-10-45-4); said differently, there’s nothing else the provider must do to be entitled to the consideration.
Excerpt from ASC 606-10-45-4
A receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.
In healthcare services transactions, contract assets are rarely encountered outside of hospital inpatients that remain “in-house” on the last day of a reporting period (quarterly or annual). The hospital will have earned the revenue associated with the services provided up to that point, but because the patients’ stays are still in progress, the unbilled amounts represent contract assets. Upon the patients’ discharge (at which point the hospital’s performance obligations will have been fully satisfied), the contract assets become receivables (i.e., financial assets). From a practical perspective, when the time frame from beginning to end of a patient service revenue transaction is very short, no contract asset will arise; the provider will simply recognize revenue and a receivable.
5.4.2 Contract liabilities
Contract liabilities arise for payments collected in advance from patients or third-party payers. They represent obligations that will be satisfied by providing goods or services. Many organizations may describe their contract liabilities as “deferred revenue” or “customer deposits.” It is important to note that refund obligations and third-party settlement liabilities are not contract liabilities, as they generally are settled by paying cash or other financial assets, rather than by providing services.
Healthcare-specific examples of contract liabilities include nonrefundable entrance fees received from residents entering into continuing care retirement communities (CCRCs) and advances received by providers or suppliers under Medicare’s accelerated and advance payment program (see Question HC 5-2).
Question HC 5-2
Under fee-for-service Medicare program rules, CMS can make accelerated or advance payments to eligible health care entities during periods of claims payment disruption or unusual operating circumstances (e.g., national emergencies or natural disasters). How should health care entities account for payments received under the Medicare Accelerated and Advance Payment Program?
Under fee-for-service Medicare program rules, CMS can make accelerated or advance payments to eligible health care entities during periods of claims payment disruption or unusual operating circumstances (e.g., national emergencies or natural disasters). How should health care entities account for payments received under the Medicare Accelerated and Advance Payment Program?
PwC response
These payments represent advances on payments for future claims that the health care entities expect to submit to CMS for services provided to Medicare patients. Thus, they would generally be reflected as contract liabilities. Once the recoupment period stipulated by CMS commences, the contract liability will be reduced over time as revenue is recognized for services provided to Medicare patients for which claims will be submitted.
If the advance has not been entirely offset by services provided through the end of the recoupment period, the health care entity must repay the remaining amount to CMS. Thus, if an entity does not expect to have sufficient Medicare volume to settle the liability by providing services, it may be appropriate to reclassify any amounts expected to be repaid to CMS from contract liability to a refund liability.
AICPA TQA 6400.68 provides further information about this program.
5.4.3 Presentation and disclosure of contract assets and liabilities
“Contract assets” and “contract liabilities” are conceptual terms, not prescribed financial statement captions. When these assets or liabilities are reported separately in the balance sheet, more descriptive titles (such as “deposits” or “deferred revenue” for a contract liability) are likely to be more useful to financial statement users.
ASC 606-10-50-8 through ASC 606-10-50-10 requires disclosures about the opening and closing balances of contract assets, contract liabilities, and receivables, if material. If such assets or liabilities are reported separately on the balance sheet, this information may be readily apparent from the face of the balance sheet if comparative statements are provided (in which case the disclosure requirement would be satisfied). Entities with significant contract liability balances that extend across multiple periods (for example, CCRCs and similar entities that report nonrefundable advance fees) may be required to disclose additional information, such as reductions in those balances resulting from performance obligations satisfied during the reporting period.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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