Running Head: CASE STUDY ASSIGNMENT

Case Study Assignment Case 3: Charitable Contributions and Debt Learning Team A Cheryl Dowle, Janet Nicole Garcia, Shelley Madison, Kristopher Miller, McKenzi Rank ACC/497 Advanced Topics in Accounting Research December 24, 2012 Ken Goranson

CASE STUDY ASSIGNMENT Case 3: Charitable Contributions and Debt: A Comparison of St. Jude Childrens Research Hospital/ALSAC and Universal Health Services Requirement A: Recording Revenue

1. What is meant by the reference in Table 5.3-1 to an FAS 116 adjustment (Stamp, 1981, p. 21)? First, FAS 116 is a statement on standards regarding Contributions Made and Received. FASB 116 was issued in June of 1993 and has an effective date for fiscal years beginning after December 15, 1994. For those not-for-profit organizations that have less than $5 Million in total assets and less than $1 Million in annual expenses, the effective date is delayed until financial years beginning after December 15, 1995 (1800net, 2003). FAS 116 was issued to cover accounting and reporting by both for-profit and not-for-profit organizations and for contributions made and received. FAS 116 includes the following: Contributions are defined as being an unconditional, nonreciprocal transfer of assets. This means that a contribution with a donor imposed condition such as a matching requirement, should not be recognized until the condition has been met and, secondly, the donor should not be receiving anything of value back for a contribution to exist; otherwise, the contribution is either just part contribution and part fee for service or possibly not a contribution at all (Fleming, 1996) Contributions will be recorded not just when cash is received, but also when pledges are made. This means doanees must record pledges receivable and contribution income prior to receiving the cash. This will be a change in practice for many nonprofits who previously only recorded pledged amounts when the cash was received (Fleming, 1996).

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Contributions will be recorded immediately as income even though the contribution may have had donor restrictions that have not been met. This requirement has been particularly controversial as most nonprofits record donor restricted contributions that is contributions that are restricted for a specific operating purpose or future period, as defined revenue on the balance sheet until the restriction of the gift has been met. The FASB concluded that restricted contributions only limit the use of the funds but do not result in liabilities. Therefore, the amounts should be recognized as income currently even though the related expenditure that satisfies the restriction may not be made until a future period (Fleming, 1996) . Noncash contributions, such as buildings and equipment, and contributed services, such as the time of volunteers, should be recorded, but the criteria for recognition, particularly contributed services, is much more restrictive. Noncash contributions that do not meet the criteria cannot be recorded. Basically, a volunteers time can only be recorded if the time is spent building an asset for the nonprofit or the volunteer possesses a professional skill such as an attorney or CPA, and the nonprofit would have paid for this services had the service not been donated (Fleming, 1996). I think that the reference in Table 5.3-1 to an FAS 116 adjustment means that the viewer needs to refer to FAS 116 regarding the corrections to the pledges made to the organization, or at least be aware of why the corrections were made. 2. How are contributions recorded? Is there a distinction between pledges receivable and accounts receivable (Stamp, 1981, p. 21)? From the financial tables found in the information provide for this assignment (Stamp, 1981, p. 21), contributions are recorded in the following way:

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Contributions, Gifts, and Similar Amounts Received: Hospital ALSAC Government Contributions (Grants): Hospital Accounts Receivable: Hospital $24,217,029 ALSAC $4,230,764 Pledges Receivable: ALSAC $23,604,748 $31,469,447 $91,978,426 $231,793,748

From the table, it is clear that contributions are recorded in two separate lines/columns with a distinction between non-government and government contributions. In regard to pledges received, one entry is used and found under the ALSAC line/column, which implies that the hospital does not accept/recognize pledges, but only direct contributions. The Accounts Receivable line/column has separate numbers for both lines/columns, 3. Are there circumstances when financial statements can qualify volunteers services (Stamp, 1981, p. 21)? From the information provided in the assignment, regarding when financial statements can qualify volunteers services, the following is stated: Unpaid volunteers have made significant contributions of their time, principally in fund-raising activities. The value of these services is not recognized in the financial statements since it is not susceptible to an objective measurement

CASE STUDY ASSIGNMENT or valuation and because the activities of these volunteers are not subject to the operating supervision and control present in an employer/employee relationship (Stamp, 1981, p. 21). Also, FAS 116 states that a volunteers time should be recorded if the services were of a

professional nature that would have otherwise been paid or if the volunteer built a physical asset (FASB, 1993). St. Jude Childrens Research Hospital also noted that the volunteers were not employees or subject to the requirements of that relationship. 4. Can financial statement users of not-for-profit hospitals financial statements expect to be fully informed regarding affiliated parties, such as the linkage between St. Jude Childrens Research Hospital, ALSAC, and the foundation cited? Explain (Stamp, 1981, p. 21). I believe that financial statement users of not-for-profit hospitals financial statements can expect to be informed regarding affiliated parties. Regarding this case study, the link between ALSAC and St. Jude is clearly visible. Although it is always possible that someone can alter filings, trades, or affiliations, when the information is filed correctly, viewers of the financial statements can expect that the information is accurate. If St. Jude did fail to report the linkage to the ALSAC or the foundation cited, for instance, the amounts presented in the financial statements would not be accurate because the amounts reflect the totals for St. Jude s whole, along with the separate amounts for the ALSAC and the foundation. Requirement B: Revenue Mix (Strategy Related Considerations) 1. How does this revenue mix compare with the revenue blend of the not-for-profit entity, St. Jude Childrens Research Hospital (ALSAC)? Access the latest SEC filing and compare the reported revenue mix; has it changed (Stamp, 1981, p. 21)?

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The revenue mix analysis for St. Jude Childrens Research Hospital and the American Lebanese Syrian Associated Charities, Inc., based on the 2008 annual report (St. Jude.org, 2010), which was the latest financial report with of the information (2009s annual report did not contain much information regarding financial amounts) and based on the Universal Health Services, Inc. 2008 report, includes the following information: Universal Health Services, Inc. 2008 Medicare Medicaid Managed Care Other Sources Totals 18.48% 18.73% 21.70% 100.00% 22.40% 27.20% 30.80% 49.10% 100.00% 22.07% 14.43% 45.02% 21.88% 16.07% 43.32% 32.30% 11.50% 34.50% 33.50% 12.60% 31.50% 34.30% 11.30% 27.20% 35.60% 14.50% 19.10% 35.60% 15.30% N/A 2007 2000 1999 1998 1997 1996

100.00% 100.00%

100,00% 100.00% 100.00%

Based on this revenue mix information, Universal Health Services, Inc.s revenues from Medicare as a percentage of its total revenues have declined steadily from 35.60% in 1996 to 22.07% in 2008. The companys Medicaid revenues, on the other hand, were around the same percentage level. Drastic changes happened for the revenues coming from managed care and other sources. The percentages for Managed Care increased from 19.10% (1997) to 45.02% (2008). The opposite trend occurred for revenues from Other Sources, which decreased from 49.10% (1996) to 18.48% (2008).

CASE STUDY ASSIGNMENT Unfortunately, there is no available information for St. Jude Childrens Hospital (ALSAC) for the period covering 1996 to 2000. However, based on the companys 2007 and 2000 financial data, interesting changes also happened. Some of the other revenue mix is as follows (this includes some of the information from the same sources as the previous table as well as the little information I found for 2009): St. Jude/ALSAC 2008 Total Support Net Patient Services Revenue Research Grants Net Investment Income Other Totals 78.91% 8.23% 8.09% 3.85% 0.92 100.00% 2007 59.32% 7.07% 7.15% 25.72% 0.72 100.00%

Information For 2008 and 2009 2008 UHS Acute Care Facilities Behavioral Totals $3,669,504 101,797 1,251,116 $4,917.379 $3,410,368 126,704 1,146,078 $4,677,050 2007

CASE STUDY ASSIGNMENT Medicare Medicaid Managed Care Other Sources Totals Acute Care Medicare Medicaid Managed Care Other Sources Facilities Medicare Medicaid Managed Care Other Sources Behavioral Medicare Medicaid Managed Care Other Sources 16% 22% 42% 20% 15% 26% 41% 18% 27% 9% 47% 17% 27% 9% 46% 18% 24% 12% 46% 18% 24% 13% 44% 19% $1,108,345 724,748 2,261,285 928,039 $5,022,417 $1,024,610 752,731 2,028,738 877,071 $4,683,150

Based on the information from 2007 and 2008, some very interesting changes occurred. For instance, the companys net investment income as a percentage of total revenues decreased from

CASE STUDY ASSIGNMENT 25.72% (2007) to 3.85% (2008). However, revenues from total support increased to 78.91% (2008 from 59.32% (2007).

2. What does that imply as to the strategies of investor-owned hospitals in managing risk and ensuring adequate capital relative to not-for-profit entities? An opportunities exists to explore the greater social and political questions that are frequently debated about the compatibility of profit-oriented entities and quality of health care, relative to not-forprofit entities. As background, identify what the latest SEC filings report concerning charity care (Stamp, 1981, p. 21). The trends from the above revenue mix analysis reflect that in regard to investor-owned hospitals, managers have the tendency to shift to elevated margin activities. For example, managed care shifted away from low margin activities, including Medicaid, and Medicare reimbursable medical services. Although hospitals, even investor-owned hospitals, have a professional responsibility to provide medical services to anyone in need, but management also possesses the responsibility in proving adequate return to the investors of the hospital. Thus, management is required to act professionally in providing services to the needy and at the same time, protecting investors returns. Government Owned and Operated the Hospitals Many of the government owned and operated hospitals are military-based hospitals that are governed by the governmental accounting standards board (GASB). The GASB is the independent organization that establishes and improves standards of accounting and financial reporting for U.S. state and local governments. The GASB is not a government entity; instead, it is an operating component of the FAF, which is a private sector not-for-profit entity. The GASB

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also allows government owned and operated hospitals to apply all of the FASB pronouncements that do not come into conflict with the GASB statements ("Health Care", 2012). According to the GASB, statement No. 34 discusses how the government owned hospitals need to handle their financial statements. Statement No. 34 requires an expanded statement of revenues, expenses, and any changes in net assets/equity. It also requires these hospitals to adopt the accrual basis in reporting revenues. These hospitals are also required to report revenues under the GASB statement No. 34 net of discounts and allowances by major source of revenue with separate subtotals for operating revenues, expenses, and income or loss ("Health Care", 2012).

CASE STUDY ASSIGNMENT References FASB (1993). Statement of Accounting Standards No. 116. Retrieved December 13, 2012, from http://www.fasb.org/cs/BlobServer?blobcol=urldata&

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blobtable=MungoBlobs&blobkey=id&blobwhere=1175820922799&blobheader=applicat ion%2Fpdf Fleming, R., (Modified on April 1, 1996). New Accounting and Reporting Standards for Nonprofits-What You Need to Know. Bellevue, WA. Retrieved December 13, 2012, from http://www.eskimo.com/~pbarber/fasb116.html Health Care. (2012). Retrieved from http://www.revenuerecognition.com/industry/healthcareproviders/ Mastery of Financial Accounting Research System (FARS) Through Cases, Wanda A. Wallace, Second Edition Stamp, E. (1981). Why Can Accounting Not Become a Science Like Physics? ABACUS (Vol. 17, NO. 1, 1981), p. 21. Retrieved December 13, 2012, from https://ecampus.phoenix.edu/content/eBookLibrary2/content/eReader.aspx#wallace1612c 05-sec1-0003 St. Jude Childrens Research Hospital. (2008 - 2009). Annual Report. Retrieved December 13, 2012, from http://www.stjude.org Universal Health Services, Inc. (2008). 2008 10-K. Retrieved December 13, 2012 from http://www.sec.gov/Archives/edgar/data/352915/000119312508041955/d10k.htm#toc