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changes in settlement estimates be disclosed in accordance with SOP 94-6 Additional guidance on these matters can be found in SOP 00-1, Auditing Health Care Third-Party Revenues and Related Receivables For health care companies that are SEC registrants, reserves related to third-party settlements represent an area of increased SEC scrutiny, due to SEC s concerns over the potential use of reserves to manipulate earnings by accruing larger-than-necessary reserves under the guise of conservatism and then reversing those excess accruals to boost earnings when needed in subsequent periods Registrants are expected to review the propriety of the reserve amounts each quarter and increase or decrease the accrual based on new events or changes in facts and circumstances When signi cant adjustments are reported, the SEC staff may inquire about the registrant s policy on establishing and relieving third-party reserves and ask what new facts and circumstances occurred that triggered the adjustment in the particular period in which it was reported In some cases, the SEC staff is requiring HCOs to provide detailed disclosures in the notes to the nancial statements and the Management Discussions and Analysis (MD&A) on reserve changes and to explain the reasons for reserve adjustments (g) BAD DEBTS The Guide de nes bad debt expense as the provision for actual or expected uncollectibles resulting from the extension of credit The provision for bad debts should be determined on an accrual basis and reported as an expense (h) CHARITY CARE Providers often render services free of charge (or at discounted rates) to individuals who have no means to pay for them The accounting for the write-off of charges pertaining to charity services is similar to that for bad debts; an allowance for charity services should be established, which is a valuation account related to patient accounts receivable The provision for charity services should be determined on an accrual basis and accounted for as a deduction from gross revenue Special rules apply to the reporting of charity care in the provider s nancial statements According to the Guide, charity care results from an entity s policy to provide health care services free of charge to individuals who meet certain nancial criteria Because no cash ows are expected from these services, charges pertaining to charity services do not qualify for recognition as revenue in the provider s nancial statements The provider is considered to have given away the services, rather than having sold them Receivables reported in the balance sheet for health care services and the related valuation allowance similarly should not include amounts related to charity care These prohibitions hold true on the face of the nancial statements and in any note disclosures or supplemental schedules that accompany the nancial statements However, the Guide does not intend for all mention of charity care to disappear from the nancial statements Charity care represents an important element of the services provided by many facilities Accordingly, the Guide requires speci c disclosures regarding charity care to be made in the notes to the nancial statements A statement of management s policy with regard to providing charity care, and the fact that charity services do not result in the production of revenue, should be included in the entity s summary of signi cant accounting policies The level of charity care provided for each of the years covered by the nancial statements also must be disclosed in the notes to the nancial statements The level of care provided may be measured in a variety of ways, such as at established rates, costs, patient days, occasions of service, or other statistics The method used to measure the charity care should also be disclosed These disclosures are applicable to for-pro t providers as well as not-for-pro t providers The Guide recognizes that distinguishing charity care write-offs from bad debt write-offs is not easy in the health care environment Because charity care results from an entity s policy to provide health care services free of charge to individuals who meet certain nancial criteria, the establishment of a formal management policy clearly de ning charity care should result in a reasonable determination, according to the Guide Some facilities ay choose to provide information concerning gross service revenue and deductions from revenue in either the notes to the nancial statements or in a supplemental schedule.

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the reversion As noted in Subsection 323(c), the termination/reestablishment of a de ned bene t plan does not constitute a curtailment, but it may nevertheless require a settlement recognition Withdrawal from a multiemployer plan may result in additional cost to the employer The effect of the withdrawal should be recognized when it becomes probable or reasonably possible (f) TERMINATION BENEFITS In 1983, SFAS No 74, Accounting for Special Termination Bene ts Paid to Employees, was issued ostensibly to address window retirement programs and shutdown bene ts Although it required recognition of the effects of any changes on the previously accrued expenses for those bene ts, no recognition method was de ned and compliance with the Statement was not widespread SFAS No 88 superseded SFAS No 74, and as with that Statement, it deals with both pension and nonpension bene ts such as severance payments, supplemental unemployment bene ts, and life and health insurance bene ts, regardless of whether they are paid by a plan or directly by the employer The amount to be recognized is the amount of any immediate payments plus the present value of any expected future payments The cost of special termination bene ts that are offered only for a short period of time should be recognized when the employees accept the offer and the amount can be reasonably estimated In contrast, contractual termination bene ts, which are required by the terms of a plan only if a speci ed event (such as a plant closing) occurs, should be recognized when it is probable that employees will be entitled to bene ts and the amount can be reasonably estimated Keep in mind that a situation involving termination bene ts often also involves a curtailment The curtailment recognition is rst determined using the bene t obligation without the termination bene ts The effect of the termination bene ts is then the difference between the bene t obligations determined with and without the termination bene ts It is not unusual, in the measurement of the PBO and the pension cost of a plan, to assume some probability for events that may give rise to termination bene ts In such a situation, the amount of termination bene ts to be recognized under SFAS No 88 is the difference between the PBO including the termination bene ts and that measured without any termination bene t For example, a plan may permit early retirement after age 55 with a reduced pension but provide an unreduced pension regardless of age in the event of a change in control of the employer When a change in control occurs, the amount of termination bene t to be recognized for an employee who is age 40 is the difference in the value of his unreduced pension commencing immediately and his reduced pension commencing when he will reach age 55 Furthermore, if the situation constitutes a curtailment, the PBO adjustment is the difference between the value of his reduced pension commencing at age 55 and his PBO determined using the regular actuarial assumptions including, if applicable, an allowance for some probability that change-in-control bene ts may be invoked It would not be reasonable to treat the entire change in PBO as a gain or loss or to handle the situation solely as a curtailment, merely because the assumptions used to determine the PBO prior to the change of control included some allowance for change-in-control bene ts (g) BUSINESS COMBINATIONS SFAS No 141, issued in June 2001, supersedes APB Opinion No 16 and precludes the use of the pooling-of-interest method for business combinations Under the Statement, all business combinations must be accounted for under the purchase method Using the purchase method, the purchaser should record a liability (accrued pension cost) equal to the excess of the acquired PBO over the acquired plan assets, or an asset (prepaid pension cost) equal to the excess of the acquired plan assets over the acquired PBO Simultaneous with the recording of such purchase accounting liability (asset), goodwill is increased (decreased) by an equal amount Once these adjustments have been made, any previously existing unrecognized prior service cost, net obligation, or asset at transition and net gain or loss are eliminated and no further amortization of them will be needed If the acquired company continues to issue its own separate nancial statement, after the purchase date, its pension cost may be determined without the purchase accounting adjustment nd may therefore be different from the pension cost reported by the parent company on its behalf.

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