AICPA's Health Care Organizations Audit Guide
Are Realized Gains Applicable to Not-For-Profit Entities?
Open Letter Addressed to the Chairman of the Audit Guide Committee
Re: Health Care Organizations Audit Guide, of May 1, 2001
Performance Indicator and Realized
Gains for Not-For-Profit Entities
The purpose of this memo is to provide you our reasons for disagreeing with
the concept and definition of the "performance indicator" as described in
paragraphs 10.17-19, 4.07-11 and samples on pages 162 and 163 of the above
audit guide. We noticed that FASB recently added this topic to their agenda
for for-profit entities.
We disagree with the entire concept of the "performance indicator" for the
1. First and foremost, CPAs are frustrated with the burdens of standards
which remove professional judgment from our craft and with those in our own
trade association that regulate such indirectly on our behalf. Your
audit guide has created this defacto standard.
2. Paragraph 4.07 introduces FAS #115 definition of trading securities.
FAS # 115 does not apply to not-for-profits. Refer to the scope paragraphs
of FAS # 115 as well as FAS # 124 regarding such. It appears that the
audit guide committee has taken the "allows" language of FAS # 124, Appendix
B, paragraph 49, and created a defacto standard by omitting in the AAG the
minor detail that FAS # 115 treatment is not part of the FAS # 124 opinion.
We believe the committee is in violation of FAS # 115 and has not justified
why the FASB was wrong in this regard, refer to page iii, last sentence of
3. The inclusion of investment income within revenues (and also as a part
of the committee’s performance indicator) is the first item analysts take
out when comparing hospitals, for-profit and not-for-profit. For casual
readers, like boards of trustees, its inclusion really should be discouraged,
but not regulated. Displaying such prominently in published examples
is clearly inappropriate, refer to page 162. In my opinion, relying
upon a significant amount of interest income to prop up results from operation
of a hospital is an economic dependency requiring disclosure; what if interest
rates fall from 8% to 2%, i.e. calendar year 2001? There are a number
of hospitals that have failed in New England of late, we wonder how many
comforted their boards by reporting investment return as part of operating
4. Sample on pages 162 and 163 show duplicate information regarding non operating
income items. Its simply ugly, redundant and unnecessary.
5. The audit guide has changed FAS # 124 paragraph 49 word "allows" to "shall"
by mandating a distinction between realized and unrealized gains; This is
contrary to FAS #124 which attempted to remove the ability of entities from
marking up (or not marking down as the case may be) their income statements
by selling an investment. The committee, on the other hand, thinks
that a sold investment has more value to income recognition in spite of FAS
6. The performance indicator, if one is needed at all, should be "income
from operations" without any investment results except maybe certain items
of interest income which by their nature may offset interest expense, for
example unexpended bond construction funds and may be xx days of working
capital. Non operating income is just that, items making up the remaining
changes in unrestricted net assets. Under FAS 124 there is no need
to introduce the concept of double net income, i.e. "comprehensive income"
that exist in the for-profit world (FAS #130, Comprehensive Income does not
apply to not-for-profit organization, paragraph 6, in any form). To
do so adds significant accounting burdens to not-for-profits due to the fact
they have to then account for realized gains, a concept which is foreign
under "mark to market" accounting. Treating realized investment gains
differently from unrealized investment gains is of no analytical value; why
attempt to distinguish such? The economic reality, which we thought
was our objective, is "fair market value". What additional meaning
is added by creating an adjustment located after some performance indicator
for realized gains and loss? It amounts to nothing but an adjustment
necessary to reach the goal of FMV. Unless, that is, if one considers
that it also overstates operating cash flow by the amount of your FAS #115
sales of trading securities.
7. Until FAS rules on this issue, it is our opinion that your performance
indicator is nothing but a "hack." That is, representation on a committee
of the purpose of stealing a standard needed to boost a client's bottom line.
The concept does not exist anywhere else, like a FAS.
Thank you for listening to our frustrations with the committee's published
deliberations. In general, we have historically respected and admired
the publication. However, our firm will not follow your guidance on
this issue for the reasons explained above.
Very Truly Yours,
Scott Beane, CPA
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