New Year, New Plan, New Future for Your Life Plan Community J A N - - PDF document

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1/10/2018 1

New Year, New Plan, New Future for Your Life Plan Community

J A N U A RY 11 , 2 0 1 8

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• f live webinar
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1/10/2018 2

INTRODUCTIONS

Kimberly McKay, CPA Managing Partner kmckay@bkd.com Brian Todd, CPA Partner btodd@bkd.com John Harned, CPA Director jharned@bkd.com Bradley Paulis, ASA, FCA, MAAA Partner, Continuing Care Actuaries bpaulis@continuingcareactuaries.com

ASU 2014-09 REVENUE FROM CONTRACTS WITH CUSTOMERS

Effective for Public Business Entities (& certain NFPs) years beginning after December 15, 2017 All other entities years beginning after December 15, 2018 Principles based approach instead of a rules based approach

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REVENUE RECOGNITION PROCESS

Identify Contract with a Customer Identify Performance Obligations Determine the Transaction Price Allocate the Transaction Price Recognize Revenue When/As a Performance Obligation is Satisfied

TRANSITION APPROACHES

Transition Approach 2017 2018 Date of Cumulative Effect Adjustment

Full retrospective Restate for all contracts Apply to all contracts January 1, 2017 Retrospective using one or more practical expedients Restate for all contracts except contracts covered by practical expedients Apply to all contracts January 1, 2017 Cumulative effect at date of adoption No contracts restated; reported based on legacy guidance Apply to all contracts January 1, 2018

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1/10/2018 4 SCOPE

All entities that enter into contracts with customers

• Public, private,

not-for-profit

• Regardless of

industry EXCEPTIONS

• Lease contracts
• Insurance contracts
• Financial instruments
• Guarantees
• Non-monetary exchanges in the same line
• f business to facilitate sales to customers

EXCLUSIONS

• Contributions
• Collaborative agreements

AICPA REVENUE RECOGNITION TASK FORCES (RRTF)

• Develop a new Accounting Guide on Revenue Recognition
• Guide to provide helpful hints & illustrative examples on how to apply the

standard

• Guidance will not be prescriptive but instead intended to be a resource
• Full implementation issues will be posted for comment after review from the
• verall Revenue Recognition Working Group & FinREC
• List of issues by industry is posted on the AICPA website
• www.aicpa.org

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HEALTH CARE ISSUES IDENTIFIED BY THE AICPA RRTF

• Revenue recognition for self-pay patients – Finalized
• Application of Steps 1 & 3
• Application of the portfolio approach – Finalized
• Identifying the performance obligation & recognition of refundable &

nonrefundable entrance fees for CCRCs – To be exposed in January 2018

• Future service obligations for CCRCs – To be exposed in January 2018
• Significant financing components – To be exposed in January 2018
• Disclosure requirements – Finalized for hospitals & will be included in

the next AICPA Revenue Recognition Guide

• Contract acquisition costs – To be exposed in January 2018
• Determination of the transaction price as it relates to third-party

estimates – Exposure period ended September 1, 2017

• Bundled payments & risk sharing arrangements – Exposure

period ended December 1, 2017

• Performance obligations (other than CCRCs) – Exposure period

until February 1, 2018

HEALTH CARE ISSUES IDENTIFIED BY THE AICPA RRTF

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1

STEP 1 – IDENTIFYING CONTRACT(S) WITH A CUSTOMER A legally enforceable contract can be written, oral or implied by an entity’s customary business practices & needs to meet all of the following requirements

It has commercial substance The entity can identify each party’s rights regarding goods or services The parties have approved the contract & are committed to their

• bligations

The entity can identify the payment terms for the goods or services It is probable the entity will collect the amount of consideration to which it will be entitled

12

Q: SO WHEN WOULD THERE BE BAD DEBT EXPENSE? A:

When a health care entity performs a credit assessment prior to providing services to a patient & expects to collect substantially all of the discounted charges An organization will need to evaluate when it is performing credit assessments prior to providing services

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3

STEP 3 – IDENTIFYING THE TRANSACTION PRICE Transaction price is the amount of consideration an entity expects to be entitled to

Variable consideration Consideration payable to a customer Significant financing component Explicit & implicit price concessions Constraint of revenue

DISCLOSURE REQUIREMENTS Both qualitative & quantitative information

Understand nature, amount, timing & uncertainty of revenue & cash flows Understand nature, amount, timing & uncertainty of revenue & cash flows Disaggregation

• f revenue

Contract balances Performance

• bligations

Significant judgments Costs to obtain

• r fulfill a

contract

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DISAGGREGATION OF REVENUE FOR HEALTH CARE

Example categories

Type of customer, e.g., Medicare, Medicaid, Self-Pay Timing of transfer of goods or service Type of service, e.g., independent living, assisted living, nursing home Geographical location Type of contract, e.g., type A, B,C

CCRC SPECIFIC CONSIDERATIONS

Accounting for monthly/periodic fees & nonrefundable entrance fees under the different contract types (focus has been primarily on Type A Contracts) Accounting for monthly/periodic fees & nonrefundable entrance fees under the different contract types (focus has been primarily on Type A Contracts) Significant financing component considerations for refundable & nonrefundable entrance fees Significant financing component considerations for refundable & nonrefundable entrance fees Obligation to provide future services & use of facilities Obligation to provide future services & use of facilities Contract acquisition costs Contract acquisition costs

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RRTF believes a resident agreement between the CCRC & the resident would generally meet the criteria to be considered a contract with a customer RRTF believes a resident agreement between the CCRC & the resident would generally meet the criteria to be considered a contract with a customer Collectibility – Still required to be assessed but given the screening process generally not an issue Collectibility – Still required to be assessed but given the screening process generally not an issue RRTF believes that because the CCRC resident has the ability to move out & discontinue paying monthly fees at any time the resident agreement may be viewed as a monthly contract with the option to renew RRTF believes that because the CCRC resident has the ability to move out & discontinue paying monthly fees at any time the resident agreement may be viewed as a monthly contract with the option to renew CCRCs should consider whether the contract contains a lease in the scope

• f FASB ASC 840 (or FASB ASC 842 after adoption of that topic)

CCRCs should consider whether the contract contains a lease in the scope

• f FASB ASC 840 (or FASB ASC 842 after adoption of that topic)

1

CCRC – STEP 1

Identifying a contract

Typical Type A contract provides that the resident can live in the CCRC & access health care as needed for little or no increase in fees (generally based on increases in operating costs or inflationary increases) Typical Type A contract provides that the resident can live in the CCRC & access health care as needed for little or no increase in fees (generally based on increases in operating costs or inflationary increases) RRTF believes that the promised good or service is that the CCRC is standing ready to provide a service such that the resident can live in the CCRC & access the appropriate level of care RRTF believes that the promised good or service is that the CCRC is standing ready to provide a service such that the resident can live in the CCRC & access the appropriate level of care

2

CCRC – STEP 2

Identifying the performance obligation

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2

CCRC – STEP 2

Identifying the performance obligation

RRTF believes that the nonrefundable entrance fee paid by a resident under a Type A life care contract contains a material right because the resident is paying the CCRC in advance for future goods or services RRTF believes that the nonrefundable entrance fee paid by a resident under a Type A life care contract contains a material right because the resident is paying the CCRC in advance for future goods or services Under FASB ASC 606-10-55-42, if in the contract an entity grants a customer the option to acquire additional goods or services, that

• ption is a performance obligation if the option provides a material

right that the customer would not receive without entering into that contract If the option provides a material right to the customer, the customer in effect pays the entity in advance for future goods or services & the entity recognizes revenue when those goods or services are transferred, or when the option expires

2

CCRC – STEP 2

Identifying the performance obligation

RRTF believes that the monthly renewal options included in a resident agreement would not provide a material right to the resident when comparing renewal options available to other life care customers RRTF believes that the monthly renewal options included in a resident agreement would not provide a material right to the resident when comparing renewal options available to other life care customers

• CCRCs will need to evaluate whether the monthly renewal options

provide a material right to the resident

• Judgment will be required & entity should consider comparing the

monthly renewal option with what is offered to other life care customers

• Generally, the monthly fees paid by a new life care customer would

be comparable to the fees paid by existing life care customers

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1/10/2018 11 CCRC RECOGNIZING REVENUE

NONREFUNDABLE ENTRANCE FEES

RRTF believes that the nonrefundable entrance fee is a material right associated with the access to future services & should be recognized over time as the services are transferred to the residents. As the resident receives the benefit of the stand-ready obligation of the CCRC as the CCRC performs each month the period of time would be the resident’s life expectancy RRTF believes that the nonrefundable entrance fee is a material right associated with the access to future services & should be recognized over time as the services are transferred to the residents. As the resident receives the benefit of the stand-ready obligation of the CCRC as the CCRC performs each month the period of time would be the resident’s life expectancy In measuring progress toward satisfaction of a performance obligation, “the objective when measuring progress is to depict an entity’s performance in transferring control of goods or services promised to a customer”

MONTHLY FEES

RRTF believes that generally, the CCRC should recognize the monthly fees as revenue when the services for the month billed are performed (that is, the CCRC satisfies the performance obligation) RRTF believes that generally, the CCRC should recognize the monthly fees as revenue when the services for the month billed are performed (that is, the CCRC satisfies the performance obligation)

CCRC RECOGNIZING REVENUE

Allocation methods

• RRRTF is exploring a view that an appropriate method to allocate the

material right resulting from the nonrefundable upfront fees may be a time- based measure (i.e., straight line over the life of the resident)

• RTF is exploring a view that an appropriate method to allocate the material

right resulting from the nonrefundable upfront fees may be a time-based measure (i.e., straight line over the life of the resident)

RRTF believes that an appropriate method to allocate the material right resulting from the nonrefundable upfront fees may be a time-based measure, i.e., straight line over the life of the resident RRTF believes that an appropriate method to allocate the material right resulting from the nonrefundable upfront fees may be a time-based measure, i.e., straight line over the life of the resident RRTF believes that another acceptable approach is to allocate the nonrefundable upfront fees to the material rights is to estimate based on when the future costs or services are transferred to a CCRC resident (similar to a cost to cost method, i.e., cost of providing Independent Living (IL), Assisted Living (AL) & Skilled Nursing Facility (SNF) services) RRTF believes that another acceptable approach is to allocate the nonrefundable upfront fees to the material rights is to estimate based on when the future costs or services are transferred to a CCRC resident (similar to a cost to cost method, i.e., cost of providing Independent Living (IL), Assisted Living (AL) & Skilled Nursing Facility (SNF) services) In accordance with FASB ASC 606-10-32-10, consideration received from a customer should be recognized as a liability if the entity expects to refund some or all of that consideration to the customer

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1/10/2018 12 CCRC RECOGNIZING REVENUE

SUBSEQUENT TO INITIAL RECOGNITION

• A contract liability exists if an entity uses either a time based

allocation method or the cost-to-cost method

• Changes may occur subsequent to the initial recognition if a

resident’s life span changes or if using the cost to cost method a resident changes levels of care

• CCRCs may need to consider updating relevant assumptions at

the end of each reporting period RRTF believes that generally, variations in the amount of revenue recognized from the amount estimated at inception should be accounted for as a change in accounting estimate Furthermore, one acceptable approach is to apply the change in life expectancy or use of health care services prospectively RRTF believes that generally, variations in the amount of revenue recognized from the amount estimated at inception should be accounted for as a change in accounting estimate Furthermore, one acceptable approach is to apply the change in life expectancy or use of health care services prospectively

CCRC – FUTURE RECOGNITION OBLIGATION

ASU 2014-09 does not change the guidance related to the calculation of the obligation to provide future services & use of facilities; however, the determination of deferred revenue & deferred marketing costs components

• f calculation may change

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1/10/2018 13 CCRC – SIGNIFICANT FINANCING COMPONENT

CCRCs need to evaluate whether their contracts with residents provide a significant benefit of financing to either party of the contract. The financing component may be explicitly identified in the contract or, as frequently

• ccurs in this industry, may be implied by payment terms of the contract

First step is to assess the significance of a financing component based on individual facts & circumstances CCRCs utilize advance fees for various purposes

• Working capital
• Capital expenditures
• Refunds of advance fees to prior residents

FinREC believes that the refundable entrance fee is not part of the transaction price & therefore does not need to be considered in a CCRC’s significant financing component analysis FinREC believes that the refundable entrance fee is not part of the transaction price & therefore does not need to be considered in a CCRC’s significant financing component analysis

CCRC – SIGNIFICANT FINANCING COMPONENT

BC232 explains that an entity should consider 1) the expected length of time between the payment of goods or services & the transfer of those goods or services 2) the prevailing interest rates in a relevant market A customer would not have a significant financing component if the customer pays in advance & the timing of the transfer of those goods or services is at the discretion of the customer Depending on individual facts & circumstances a CCRC may determine that they have a significant financing component

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1/10/2018 14 COSTS OF ACQUIRING CCRC CONTRACTS

• Incremental costs of obtaining a contract
• Cost the entity incurs that would have not been incurred if the

contract would not be obtained – Recognize as an asset if the entity expects to recover those costs

• Costs that would have been incurred regardless of whether the

contract was obtained – Expense as incurred

• Practical Expedient – Recognize as an expense when incurred if

the amortization period of the asset is one year or less FinREC believes sales commissions that are directly related to sales achieved during a time period typically represent incremental costs that would require capitalization FinREC believes sales commissions that are directly related to sales achieved during a time period typically represent incremental costs that would require capitalization FinREC believes some bonuses & other compensation that is based on

• ther quantitative or qualitative metrics, i.e., profitability or performance,

typically do not meet the criteria for capitalization because they are not directly related to obtaining the contract FinREC believes some bonuses & other compensation that is based on

• ther quantitative or qualitative metrics, i.e., profitability or performance,

typically do not meet the criteria for capitalization because they are not directly related to obtaining the contract

COSTS OF ACQUIRING CCRC CONTRACTS

Amortization & Impairment

• Asset should be amortized consistent with the pattern of

transfer of the customer services

• Entity shall update the amortization for significant changes in

the pattern of transfer

• Assets should be evaluated for impairment

RRTF is exploring a view that the amortization of related contract acquisition costs capitalized should mirror the pattern of transfer of the goods & services, i.e., over time or cost to cost method RRTF is exploring a view that the amortization of related contract acquisition costs capitalized should mirror the pattern of transfer of the goods & services, i.e., over time or cost to cost method

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• Two options
• Current methodology
• Expense matching methodology
• Why change?

ASC 606 – AMORTIZATION OF ENTRANCE FEES

Monthly Service Fee @ Entry $3,000 Stand Alone Market Rates IL per month $3,988 AL per day 142 SNF per day 285 Entrance Fee $300,000 Refundability 0% Fiscal Year End December 31 Date of Birth 1/1/1940 Date of Entry 1/1/2015 IL Life Expectancy 10.5 yrs AL Life Expectancy 1.0 yrs SNF Life Expectancy 1.2 yrs Total 12.7 yrs

Sample Calculation – Single Female – Age 75 Type A Lifecare Contract Based on Life Expectancy Upon Entry – 12/31/15 Development

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Entrance Fee Monthly Fees Deferred Revenue IL AL SNF Total 2015 $300,000 $35,877 $335,877 ---> reflects actual experience 2016 37,080 37,080 2017 38,192 38,192 2018 39,338 39,338 2019 40,518 40,518 2020 41,734 41,734 2021 42,986 42,986 2022 44,275 44,275 reflects life expectancy at age 76 2023 45,604 45,604 2024 46,972 46,972 2025 44,299 4,082 48,381 2026 46,184 3,648 49,832 2027 51,327 51,327 2028 7,988 7,988 $300,000 $456,875 $50,267 $62,964 $870,106 Total Expected Transaction Price $870,106 Life Expectancy IL AL SNF Total 75 10.5 yrs 1.0 yrs 1.2 yrs 12.7 yrs 76 9.9 yrs 1.0 yrs 1.2 yrs 12.1 yrs Sample Calculation – Single Female – Age 75 Type A Lifecare Contract Based on Life Expectancy Upon Entry – 12/31/15 Development IL AL SNF Total 2015 $51,661 $51,661

• --> reflects actual experience

2016 53,394 53,394 2017 54,995 54,995 2018 56,645 56,645 2019 58,345 58,345 2020 60,095 60,095 2021 61,898 61,898 2022 63,755 63,755 reflects life expectancy at age 76 2023 65,667 65,667 2024 67,637 67,637 2025 63,788 6,085 69,873 2026 68,835 10,874 79,709 2027 153,000 153,000 2028 23,812 23,812 $657,880 $74,919 $187,687 $920,486 Distribution 71.5% 8.1% 20.4% Sample Calculation – Single Female – Age 75 Type A Lifecare Contract Based on Life Expectancy Upon Entry – 12/31/15 Development

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Actual Revenue Recognized IL AL SNF MSF's Paid Unamortized Revenue 2015 $48,833 $35,877 $12,957 $287,043 2016 50,471 37,080 2017 51,985 38,192 2018 53,545 39,338 2019 55,151 40,518 2020 56,806 41,734 2021 58,510 42,986 2022 60,265 44,275 2023 62,073 45,604 2024 63,935 46,972 2025 60,297 5,752 48,381 2026 65,067 10,279 49,832 2027 144,626 51,327 2028 22,509 7,988 $621,873 $70,819 $177,414 $570,106 71.5% 8.1% 20.4%

Sample Calculation – Single Female – Age 75 Type A Lifecare Contract Based on Life Expectancy Upon Entry – 12/31/15 Development

Entry Age Life Expectancy Projected Terminal Age 75 12.7 87.7 80 10.0 90.0 85 7.8 92.8

LIFE EXPECTANCIES

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REVENUE RECOGNITION – CURRENT METHODOLOGY

EF MSF Total Revenue 2015 $25,581 $35,877 $61,458 2016 24,743 37,080 61,823 2017 23,613 38,192 61,805 2018 22,527 39,338 61,865 2019 21,361 40,518 61,879 2020 20,213 41,734 61,947 2021 18,903 42,986 61,889 2022 17,607 44,275 61,882 2023 16,270 45,604 61,874 2024 14,945 46,972 61,917 2025 22,638 48,381 71,019 2026 35,407 49,832 85,239 2027 36,193 36,713 72,906 $300,000 $547,502 $847,503

Sample Calculation – Single Female – Age 75 Type A Lifecare Contract Based on Life Expectancy Upon Entry

REVENUE RECOGNITION – EXPENSE MATCHING METHODOLOGY

EF MSF Total Revenue Expense Matching Methodology Total Revenue Current Methodology % Change 2015 $12,957 $35,877 $48,833 $61,458

• 20.5%

2016 12,912 37,080 49,992 61,823

• 19.1%

2017 12,782 38,192 50,975 61,805

• 17.5%

2018 12,550 39,338 51,888 61,865

• 16.1%

2019 12,286 40,518 52,804 61,879

• 14.7%

2020 11,903 41,734 53,637 61,947

• 13.4%

2021 11,510 42,986 54,496 61,889

• 11.9%

2022 11,020 44,275 55,295 61,882

• 10.6%

2023 10,525 45,604 56,129 61,874

• 9.3%

2024 9,932 46,972 56,904 61,917

• 8.1%

2025 12,340 48,381 60,721 71,019

• 14.5%

2026 24,002 49,832 73,834 85,239

• 13.4%

2027 145,281 36,713 181,993 72,906 149.6% $300,000 $547,502 $847,502 $847,503

Sample Calculation – Single Female – Age 75 Type A Lifecare Contract Based on Life Expectancy Upon Entry

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ENTRANCE FEE AMORTIZATION COMPARISON

Current Expense Matching Difference % Change 1991 $65,537 $35,482 ($30,055)

• 45.9%

1992 $858,913 $651,759 ($207,154)

• 24.1%

1993 $1,556,050 $789,179 ($766,871)

• 49.3%

1994 $1,918,815 $1,122,435 ($796,380)

• 41.5%

1995 $2,881,334 $2,452,919 ($428,415)

• 14.9%

1996 $2,290,818 $1,775,819 ($514,999)

• 22.5%

1997 $3,012,197 $2,916,498 ($95,699)

• 3.2%

1998 $3,304,910 $2,570,353 ($734,557)

• 22.2%

1999 $3,004,888 $2,414,701 ($590,187)

• 19.6%

2000 $3,706,990 $3,568,201 ($138,789)

• 3.7%

2001 $4,397,795 $3,858,720 ($539,075)

• 12.3%

2002 $4,688,785 $3,912,137 ($776,648)

• 16.6%

2003 $5,393,948 $5,045,484 ($348,464)

• 6.5%

2004 $4,980,938 $4,144,362 ($836,576)

• 16.8%

Min Difference (years 11-25):

• 19.7%

2005 $6,883,746 $6,630,696 ($253,050)

• 3.7%

Max Difference (years 11-25): 9.6% 2006 $6,200,509 $4,977,569 ($1,222,940)

• 19.7%

2007 $6,601,189 $6,959,111 $357,922 5.4% 2008 $6,544,094 $6,708,732 $164,638 2.5% 2009 $6,218,177 $6,103,189 ($114,988)

• 1.8%

2010 $6,220,706 $5,365,034 ($855,672)

• 13.8%

2011 $7,030,489 $7,178,645 $148,156 2.1% 2012 $6,206,432 $6,285,770 $79,338 1.3% 2013 $6,063,460 $5,608,116 ($455,344)

• 7.5%

2014 $6,212,257 $6,810,409 $598,152 9.6% 2015 $6,730,743 $6,353,689 ($377,054)

• 5.6%

ENTRANCE FEE AMORTIZATION COMPARISON

Current Expense Matching Difference % Change 1991 $65,537 $35,482 ($30,055)

• 45.9%

1992 $858,913 $651,759 ($207,154)

• 24.1%

1993 $1,556,050 $789,179 ($766,871)

• 49.3%

1994 $1,918,815 $1,122,435 ($796,380)

• 41.5%

1995 $2,881,334 $2,452,919 ($428,415)

• 14.9%

1996 $2,290,818 $1,775,819 ($514,999)

• 22.5%

1997 $3,012,197 $2,916,498 ($95,699)

• 3.2%

1998 $3,304,910 $2,570,353 ($734,557)

• 22.2%

1999 $3,004,888 $2,414,701 ($590,187)

• 19.6%

2000 $3,706,990 $3,568,201 ($138,789)

• 3.7%

2001 $4,397,795 $3,858,720 ($539,075)

• 12.3%

2002 $4,688,785 $3,912,137 ($776,648)

• 16.6%

2003 $5,393,948 $5,045,484 ($348,464)

• 6.5%

2004 $4,980,938 $4,144,362 ($836,576)

• 16.8%

Min Difference (years 11-25):

• 19.7%

2005 $6,883,746 $6,630,696 ($253,050)

• 3.7%

Max Difference (years 11-25): 9.6% 2006 $6,200,509 $4,977,569 ($1,222,940)

• 19.7%

2007 $6,601,189 $6,959,111 $357,922 5.4% 2008 $6,544,094 $6,708,732 $164,638 2.5% 2009 $6,218,177 $6,103,189 ($114,988)

• 1.8%

2010 $6,220,706 $5,365,034 ($855,672)

• 13.8%

2011 $7,030,489 $7,178,645 $148,156 2.1% 2012 $6,206,432 $6,285,770 $79,338 1.3% 2013 $6,063,460 $5,608,116 ($455,344)

• 7.5%

2014 $6,212,257 $6,810,409 $598,152 9.6% 2015 $6,730,743 $6,353,689 ($377,054)

• 5.6%

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ENTRANCE FEE AMORTIZATION COMPARISON

1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Current Methodology Expense Matching Methodology

TOTAL REVENUE COMPARISON

2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Current Methodology Expense Matching Methodology

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UNAMORTIZED REVENUE COMPARISON

5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Current Methodology Expense Matching Methodology

WHY CHANGE METHODOLOGIES?

Future Service Obligation Summary of 2017 Results Methodology Current Expense Matching >$5,000,000 Surplus 32% 53% $2 - 5,000,000 Surplus 14% 16% $0 - 2,000,000 Surplus 30% 14% $0 - 2,000,000 Liability 4% 3% $2 - 5,000,000 Liability 3% 3% >$5,000,000 Liability 17% 11%

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• Year-to-year fluctuation of revenue will increase
• Type A – Unamortized revenue will increase
• Net profit/loss will decrease
• Future service obligation liability will decrease
• Discuss with & prepare your Board of Directors

TAKEAWAYS

Tax Cuts and Jobs Act (TCJA)

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GOOD NEWS! KEY PROVISIONS THAT DID NOT MAKE IT

Repeal of tax-exempt status for private activity bonds Termination of New Markets Tax Credits Modifications for excess benefit transactions Elimination of medical expense deduction for individuals

CHARITABLE CONTRIBUTIONS

Increase limitation to 60% of AGI Standard mileage rate, not adjusted for inflation No deduction for payments made in exchange for college athletic seating rights

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ITEMIZED DEDUCTIONS

Increased standard deductions

• $12,000 single
• $24,000 MFJ

$10,000 limit on state & local tax deduction Medical expense deduction

• 7.5% of AGI for 2017 & 2018
• 10% of AGI beginning in 2019

Repeal of the overall limitation on itemized deductions Impact on charitable giving?

ESTATE TAX

Increase exclusion to $10M

• Inflation adjustment $11.2M 2018

Effective for estates of decedents dying after December 31, 2017 Effect on charitable giving?

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TAX-EXEMPT BONDS

Repeals the exclusion from gross income for interest on advance refunding bonds

EXCISE TAX ON EXECUTIVE COMPENSATION

Excise tax on compensation in excess of $1M

• Follows corporate rate (21%)
• Five highest-paid employees
• Parachute payments three times greater than

the five-year salary average (excluding retirement benefits)

• Taxable compensation

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COMPENSATION & EMPLOYEE BENEFITS

Excise tax

• Includes nonqualified deferred compensation

from ineligible deferred compensation includible when there is not substantial risk of forfeiture (457(f))

• Exempts not highly compensated employees

from the definition of parachute payments

• Exempts professional medical services

UNRELATED BUSINESS INCOME

Corporate alternative minimum tax repealed 21% flat corporate tax rate Bonus depreciation – 100% through 2022, then scaled back through 2026 Net interest expense limitation

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UNRELATED BUSINESS INCOME

NOL deduction 80% taxable income No entertainment deductions Section 179 expensing – $1M UBI increased for certain fringe benefits

UNRELATED BUSINESS INCOME FOR TRUSTS

Trust tax rates

Taxable Income Income Tax Not over $2,550 10% $2,551–$9,150 $255 + 24% of the excess over $2,550 $9,151–$12,500 $1,839 + 35% of the excess over $9,150 > $12,500 $3,011.50 + 37% of the excess over $12,500

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1/10/2018 28

UNRELATED BUSINESS INCOME

Pass-through deduction Trust vs. corporation considerations

• Charitable deduction limitations
• Tax rates
• Joint venture considerations

UNRELATED BUSINESS INCOME

Silo income/loss by activity

• Loss from one activity cannot offset income

from another

Effective years beginning after December 31, 2017 Net operating loss carryforwards from before January 1, 2018, are not subject to the rule of the provision

SLIDE 29

1/10/2018 29 ASU 2016-14 – PRESENTATION OF FINANCIAL STATEMENTS OF NOT-FOR- PROFIT ENTITIES

• Net asset classification scheme
• Improved disclosures about availability of resources & liquidity
• Methods of presenting statement of cash flows
• Presentation of expenses by nature & function
• Presentation of net investment return
• Donor-imposed restrictions for the acquisition or construction
• f long-lived assets
• Disclosures about self-defined operating measures

ASU 2016-14 – PRESENTATION OF FINANCIAL STATEMENTS OF NOT-FOR- PROFIT ENTITIES

• Effective for financial statements for fiscal years beginning

after December 15, 2017, & for interim financial statements for periods after that date (early adoption is allowed)

• If comparative financial statements are issued, NFP may
• mit the following information in comparative financial

statements for any years presented before the adoption year

• Analysis of expense by functional & natural

classification

• Disclosures around liquidity & availability of resources

BKD WEBINAR ON THE NFP REPORTING MODEL ARCHIVED https://www.bkd.com/webinars/2017/ready-to-roll-with-the-new-nfp-reporting- standard.htm BKD WEBINAR ON THE NFP REPORTING MODEL ARCHIVED https://www.bkd.com/webinars/2017/ready-to-roll-with-the-new-nfp-reporting- standard.htm

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Questions?

CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education

• n the National Registry of CPE Sponsors. State boards of accountancy

have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered

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CPE CREDIT

• CPE credit may be awarded upon verification of participant

attendance

• For questions, concerns or comments regarding CPE credit,

please email the BKD Learning & Development Department at training@bkd.com

Thank You!

Kimberly McKay | kmckay@bkd.com Brian Todd | btodd@bkd.com John Harned | jharned@bkd.com Bradley Paulis | bpaulis@continuingcareactuaries.com