A new standard for determining credit loss is now in effect for years ending December 31, 2023, and later. Here’s how current expected credit loss (CECL) impacts you:
Previously, generally accepted accounting principles (GAAP) required an “incurred loss” methodology for recognizing credit losses that delayed recognition until it was probable a loss had been incurred. Effective for years ending December 31, 2023, and later, an allowance for credit losses will need to be estimated. Again, this standard only applies to not-for-profit and for-profit entities (aka it is not applicable to governmental entities).
This change in the accounting standards primarily affects patient accounts receivable, loans and leases receivable, rent receivable, and investments in debt securities (e.g., municipal bonds, US treasury bonds, corporate bonds).
For patient accounts receivable, the allowance for credit losses is the same as what has been referred to as the allowance for uncollectible accounts, or bad debts, in the past. The only difference under the new standard is the expectation that the allowance for credit losses is not based solely on historical information; now, you must also consider current conditions and reasonable and supportable forecasts. Therefore, if there are economic conditions in your community, such as layoffs and higher unemployment, or other factors, such as a global pandemic, that may change the collectibility of accounts, the effect of these factors needs to be estimated and incorporated into the allowance for credit losses calculation. The new standard does not have any requirements for how to do this estimate. If there have been similar situations in the past or if you can find other hospitals or other industries that have experienced similar situations, you may be able to use information from those examples in your estimate.
For loans, leases, rent, and other receivables, you will similarly need to consider, based on historical information, current conditions, and reasonable and supportable forecasts, whether an allowance for credit losses is necessary. Are the other parties in these situations likely to not pay the full amount owed? If so, you will need to estimate the expected loss.
For investments in debt securities, there are additional disclosure requirements, including disclosure of both the amortized cost of the investments and the fair value. If your investment statements do not already include this information, you will need to request this from your investment broker.
No other changes are expected that would affect your accounting. For the financial statements, there are some additional disclosures required, including describing the method of estimating the credit losses, a rollforward of the allowance for credit losses balance, and separately presenting the allowance for credit losses on the face of the statements of financial position.
Joe Lodge, CPA, Principal
