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GASB 97: What's new, what to do, and what you need to know

05.12.21

Read this if your organization operates under the Governmental Accounting Standards Board (GASB).

GASB Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans (GASB 97) addresses specific practice issues that have arisen related to retirement plans. The standard can be roughly divided into two parts, each of which focus on a different aspect of governmental retirement plan accounting. 

Part 1: Component units

Over the years, GASB has wrestled with clarifying exactly what entities should be included in a set of stand-alone financial statements. In general, it defined a financial reporting entity as a stand-alone government and all entities for which it is financially accountable, known as component units. One of the many situations where the government is financially accountable for another entity is where the majority of the entity’s board is appointed by the government. 

GASB 97 clarifies that when the entity has no governing board and the government performs the functions that a board would normally perform, the consideration of consolidation should be the same as if the government appointed a voting majority of a hypothetical governing board. This portion of the standard is consistent with previously issued implementation guides. 

What is new is that GASB 97 creates an exception, allowing defined contribution pension plans, defined contribution OPEB plans, and certain Section 457 plans who do not have a board to be excluded from consideration as a component unit. While GASB believes that it would be appropriate to include them like other entities, they listened to stakeholders who voiced their concerns about the costs of presenting defined contribution plans as component units. Their research showed that most stakeholders do not use information related to defined contribution plans presented as component units of governments, although if the government controls the assets, such information is more valued. GASB decided to balance the costs of preparation with the usefulness of the information.  

Additionally, for the purposes of determining component units, the government is not considered to have a financial burden for defined contribution pension plans and defined contribution OPEB plans that are administered through trusts. 

What should you do? 

First, the intended impact is that there will be fewer defined benefit plans presented as component units. If you currently present a defined benefit plan as a component unit, you may be able to save money by excluding them from the government-wide financial statements. 

Second, if you currently report a defined contribution plan that is administered through a trust as a component unit, you should reassess whether that is still considered a component unit. Remember, even if it is not a component unit, GASB Statement No. 84 Fiduciary Activities may still require it to be included in the financials if the primary government controls the assets. 

When does this apply? 

These changes are effective immediately. 

Part 2: Section 457 plans

Back in 1997 when GASB Statement No. 32 was issued, GASB did not believe it likely that plans established under Internal Revenue Code (IRC) section 457 would be pension plans because at that time, most Section 457 plans did not have employer contributions. In the more than twenty years that have passed since then, the IRC and characteristics of some of these plans have changed, forcing GASB to reconsider their classification. With the issuance of GASB 97, the board stated that it believes Section 457 plans could indeed be pensions. Therefore, Section 457 plans which fit the definition of a pension trigger the same reporting requirements of any other pension plan. 

What should you do? 

If your governmental organization has an employee benefit plan under Section 457, you should take the following steps: 

First, determine whether the plan is a “pension plan” or not. Pension plans provide retirement income or other postemployment benefits such as death benefits, life insurance, and disability benefits. Pensions do not include postemployment healthcare benefits and termination benefits. 

Despite the common usage of “pension” to mean only defined benefit plans, the statement is clear that the term “pension plan” includes defined contribution plans as well.

If the plan fits this definition, proceed to the next step. If not, this statement does not impact you. 

Second, if your Section 457 plan meets the definition of a pension plan and either issues its own standalone financial statements or is included in the financial statements of another government, those financial statements should include all financial reporting requirements that are relevant to pension plans. 

Generally, this means that GASB Statement No. 68 Accounting and Financial Reporting for Pensions (GASB 68) and all its related disclosure requirements are applicable, although there are some plans that don’t fall within GASB 68’s scope where GASB Statement No. 73 Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 applies instead. The additional requirements will not look the same for all entities; defined benefit and defined contribution plans have different reporting requirements and their footnote disclosures will differ. 

When does this apply? 

The requirements related to Section 457 plans apply to fiscal years beginning after June 15, 2021. Some stakeholders requested that GASB delay the adoption due to COVID-19, but the GASB believes that the adoption date they set provides sufficient time for adoption. 

What else do you need to know? 

If your retirement plan falls within the scope of this pronouncement, you may have new costs to deal with, including potentially having to consult with an actuary to develop a model to prepare the new disclosures if you have a defined benefit pension. Fortunately, the GASB believes that most of the additional disclosures will relate to defined contribution pensions which have simpler note disclosures. 

If you would like more information or have questions about your specific situation, please contact Nathan Dunlap or Grant Ballantyne. We’re here to help.
 

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Read this if you work for a charitable, not-for-profit organization that accepts gift-in-kind donations.

Not-for-profit organizations frequently receive contributions of nonfinancial assets, commonly referred to as gifts-in-kind. Examples of nonfinancial assets that could be considered gifts-in-kind include property, vehicles, equipment, the right to use property, vehicles or equipment, materials or supplies, or time and services. The Financial Accounting Standards Board (FASB) determined that existing Generally Accepted Accounting Principles (GAAP) do not provide sufficient transparency to readers of financial statements. Prior guidance gave little specific guidance on presentation of gifts-in-kind other than contributed services. Therefore, FASB issued Accounting Standards Update (ASU) 2020-07 Not-for-Profit Entities (Topic 958), effective for annual periods beginning after June 15, 2021, improving that transparency.

This article will provide a summary of the new gift-in-kind standard along with a refresher on existing tax implications of gifts-in-kind.

GAAP valuation of gifts-in-kind

The new ASU does not change the basis of measurement for gifts-in-kind, only the related disclosures. For instance, contributions of services are still only recognized if the services (1) either create or enhance nonfinancial assets or (2) require specialized skill, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation.

Tax valuation of gifts-in-kind

There is no separate valuation for in-kind contributions for Form 990 or 990-PF reporting purposes. In-kind contributions should be reported on the Form 990 or 990-PF on the same basis as the financial statements.

Donated services and use of facilities are not included in revenue or expenses on the Form 990. Instead, they are included as reconciling items on Schedule D, reconciliation from financial statements to the Form 990, at the same amounts as reported on the financial statements.

GAAP disclosures and groupings for gifts-in-kind

The ASU specifies that gifts-in-kind need to be presented as a separate line item in the statement of activities rather than being included with other contributions. Additionally, the financial statements will need to disaggregate the various types of contributed nonfinancial assets. For instance, if a donor provides free office space to a not-for-profit and another donor provides free accounting services, these types of contributions should be shown separately in a footnote disclosure or in the statement of activities.

Not-for-profits will also have to disclose information about whether the gifts were monetized or used (for instance, if a contributed vehicle was sold) and what program they were used for, along with their policy regarding monetizing or using contributed nonfinancial assets. The ASU also requires disclosure of any donor-imposed restrictions on the gift-in-kind and what methods were used to value it. Finally, the financial statements must disclose the principal or most advantageous market used to arrive at the fair value measure if the organization is prohibited by the donor from selling or using the contributed nonfinancial asset in that market.

Tax disclosures and groupings for gifts-in-kind

The nature of the gift-in-kind determines where and how it is disclosed on Form 990. Gifts of nonfinancial assets (i.e. fixed assets, materials, supplies) are disclosed on Form 990 as noncash contributions. The total noncash contributions an organization receives during the year and records as revenue may mean additional schedules for your filing.

A public charity that receives total noncash contributions of $25,000 or more must also complete Schedule M. Private foundations do not complete Schedule M.

If an individual noncash contributor rises to the level of Schedule B reporting (by contributing a minimum of either $5,000 or, for some public charities, 2% of total contributions for the year), a description of the noncash contribution, date of contribution and the amount recorded as revenue must be disclosed on Schedule B. Schedule B is not subject to public disclosure for section 501(c)(3) public charities. However, the Form 990-PF’s Schedule B is subject to public disclosure.

Schedule M has specific groupings of noncash contributions, such as gifts of clothing and household items, vehicles, and real estate. Unlike Schedule B, Schedule M does not require the breakout of individual contributors. There are no groupings of like-kind contributions on Schedule B as individual donors must be reported separately.

Donated services and use of facilities are not disclosed on Schedule M. In contrast to GAAP reporting, donated services and use of facilities are removed from both revenue and expenses for Form 990 and 990-PF purposes as previously mentioned.

In addition to the reporting mentioned above, if your organization receives noncash contributions, there may be additional considerations to evaluate as well. The BerryDunn team is here to help answer any questions.

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ASU 2020-07: The gift (in-kind) that keeps on giving

Read this if your organization operates under the Governmental Accounting Standards Board (GASB).

Along with COVID-19 related accounting changes that require our constant attention, we need to continue to keep our eyes on the changes that routinely emerge from the Governmental Accounting Standards Board (GASB). Here is a brief overview of what GASB Statement No. 93, Replacement of Interbank Offered Rates, Statement No. 96, Subscription-Based Information Technology Arrangements, and Statement No. 97 Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, may mean to you. If you want more detail, we’ve included links to more analyses and in-depth explanation of what you need to know now.

GASB 93

We have all heard that by the end of 2021, LIBOR will cease to exist in its current form. In March 2020, the GASB provided guidance to address the accounting treatment and financial reporting impacts of the replacement of interbank offered rates (IBORs) with other referenced rates, while maintaining reliable and comparable information. Statement No. 93 specifically addresses previously issued Statement Nos. 53 and 87 to provide updated guidance on how a change to the reference rate impacts the accounting for hedging transactions and lease arrangements.  Read more in our article The Clock is Ticking on LIBOR. Now What?

GASB 96

GASB Statement No. 96 defines the term Subscription-Based Information Technology Agreements (SBITA) as “A contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.”

GASB Statement No. 96 determines when a subscription should be recognized as a right-to-use subscription, and also determines the corresponding liability, capitalization criteria, and required disclosures. Learn why this matters and what you need to do next: Our Take on SBITA: Making Accounting for Cloud-Based Software Less Nebulous.

GASB 97

GASB Statement 97 addresses specific practice issues that have arisen related to retirement plans. The standard is roughly divided into two parts—component units and Section 457 plans—each of which focus on a different aspect of governmental retirement plan accounting. Help your organization gain an understanding of the standard with our article GASB 97: What's new, what to do, and what you need to know.

If you have questions about these pronouncements and what they mean to your organization, please contact Grant Ballantyne.

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Update for GASB-governed organizations: Lease accounting, LIBOR transition, SBITA, and Section 457 plans

Read this if you are a financial institution.

Whether you think of New Year’s resolutions or goal setting, it’s that time of year where we traditionally take time for reflection (current state, desired state) in order to take action on the change we want to see. Understandably, as many institutions have been so focused on developing and understanding their CECL model and results, evolving the internal control environment may have, well, lagged a little. Which is why, in the spirit of starting the new year on the right foot, now is the perfect time to think about internal CECL controls.

CECL internal controls: Where to start?

Let’s acknowledge this right away: there is no “best” place to start. Some folks like to review what controls they already have in place and then think about how best to evolve or tweak them. Others may prefer to take a clean slate approach—map out the CECL workflows, identify risks, and then determine what controls are needed. One way to bridge these approaches is after you’ve mapped out the process, risks, and controls, then compare that to what you already have and make the necessary adjustments. We’ve seen all of these approaches work, but there are some pros and cons and pitfalls to consider for each. 

Existing controls

If you choose to begin by reviewing and tweaking the controls you already have, one pitfall is that you may not challenge your thinking enough to recognize where new risks have been introduced with your CECL methodology. For example, how does the CECL calculation—and all the new data you are now relying on—impact controls? Is your area responsible for making choices about all those numbers, values, and codes, or are those calculations, choices, and decisions taking place in other areas where controls may need to be developed, or reviewed and enhanced for CECL?

Another good example: if you’ve invested in software, have you recognized the need for new controls over data flow in and out of that system, including the manual calculations you’re doing outside of the system and then keying those results into the system as model inputs? We have found that some people go into this approach thinking it will save them time—like a short-cut—only to realize later they’ve missed the opportunity to identify one or more key risks/controls.

Clean slate mapping

Speaking from experience, this approach can take some time but may be a great way to ensure your thinking is not limited by “what you’ve always” done or had in place. That said, we can appreciate that while staring at a blank page is energizing to some, it can feel overwhelming to others. Moreover, that overwhelmed feeling may be the underlying reason why it is tough to engage in this approach.

Here’s the big tip: put some sort of starting point on paper (maybe even the middle of the paper) understanding that as you think about it, you could be adding to the workflow before, above, under, or past that starting point. It’s okay that you don’t know all the related workflows because you’re identifying that there are related workflows whose risks/controls may be in other areas that need to be further explored. Maybe take this activity, initially, to a conference room with a big dry-erase board (there are online versions of this, too)! 

Now, just like those new year’s resolutions for increased exercise that sometimes are easier to stick to when you have an accountability partner—is there someone in your organization that is particularly adept at creating workflows whose strengths and talents you can tap into to help you create this one? 

Tips for helping ensure CECL internal control success

No matter which approach you end up taking, here are some of our top tips for helping ensure CECL internal control success:

Communicate: Outreach and awareness are foundational to engaging others in this process. It is so understandably easy for people not directly involved in the day-to-day CECL calculation to even realize they have a key role to play when it comes to CECL controls. 

Cooperate: Invite others into the process, especially when it comes to helping you evaluate how changes under CECL relate to work they do day-to-day. Work together to simply understand or clarify how the pieces fit together. 

Collaborate: There are lots of ways to design, test, and monitor internal controls. Lean into the strengths and talents of others to help create efficient and effective controls that can save you and others a lot of time and headache. I recommend this no matter how mature the control practice is—there may be ways to make it better and easier.

Coach, train, and support: I advise against the “control dump and run”—letting someone know they have one or two new controls, and then leaving them to it. Certainly, there is value in having to solve something from the ground up. However, helping others connect the dots between why controls are important, ways to evaluate and structure them, and who in the organization can collaborate with them to make them as easy and effective as possible, goes a long way toward getting the most value out of your control environment.

Seek advice: CECL is new for almost everyone, and controls are not a one-size fits all. Engaging someone experienced in both CECL and controls can help challenge your thinking, open your eyes to pitfalls, prevent over-engineering, provide perspective, and help you transition as you grow. 

No matter your CECL challenge or pain point, our team of experts is here to help you navigate the requirements as efficiently and effectively as possible. For more information, visit the CECL page on our website. If you would like specific answers to questions, please visit our Ask the Advisor page to submit your questions.

For more on CECL, stay tuned for our next article in the series, or enjoy our CECL Radio podcasts. You can also follow Susan Weber on LinkedIn.

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Resolve to consider internal CECL controls

Read this if your organization receives charitable donations.

As the holiday season has passed and tax season is now upon us, we have our own list of considerations that we would like to share—so that you don’t end up on the IRS’ naughty list!

Donor acknowledgment letters

It is important for organizations receiving gifts to consider the following guidelines, as doing some work now may save you time (and maybe a fine or two) later.

Charitable (i.e., 501(c)(3)) organizations are required to provide a contemporaneous (i.e., timely) donor acknowledgment letter to all donors who contribute $250 or more to the organization, whether it be cash or non-cash items (e.g., publicly traded securities, real estate, artwork, vehicles, etc.) received. The letter should include the following:

  • Name of the organization
  • Amount of cash contribution
  • Description of non-cash items (but not the value)
  • Statement that no goods and services were provided (assuming this is the case)
  • Description and good faith estimate of the value of goods and services provided by the organization in return for the contribution

Additionally, when a donor makes a payment greater than $75 to a charitable organization partly as a contribution and partly as a payment for goods and services, a disclosure statement is required to notify the donor of the value of the goods and services received in order for the donor to determine the charitable contribution component of their payment.

If a charitable organization receives noncash donations, it may be asked to sign Form 8283. This form is required to be filed by the donor and included with their personal income tax return. If a donor contributes noncash property (excluding publicly traded securities) valued at over $5,000, the organization will need to sign Form 8283, Section B, Part IV acknowledging receipt of the noncash item(s) received.

For noncash items such as cars, boats, and even airplanes that are donated there is a separate Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, which the donee organization must file. A copy of the Form 1098-C is provided to the donor and acts as acknowledgment of the gift. For more information, you can read our article on donor acknowledgments.

Gifts to employees

At the same time, many employers find themselves in a giving spirit, wishing to reward the employees for another year of hard work. While this generosity is well-intended, gifts to employees can be fraught with potential tax consequences organizations should be aware of. Here’s what you need to know about the rules on employee gifts.

First and foremost, the IRS is very clear that cash and cash equivalents (specifically gift cards) are always included as taxable income when provided by the employer, regardless of amount, with no exceptions. This means that if you plan to give your employees cash or a gift card this year, the value must be included in the employees’ wages and is subject to all payroll taxes.

There are, however, a few ways to make nontaxable gifts to employees. IRS Publication 15 offers a variety of examples of de minimis (minimal) benefits, defined as any property or service you provide to an employee that has a minimal value, making the accounting for it unreasonable and administratively impracticable. Examples include holiday or birthday gifts, like flowers, or a fruit basket, or occasional tickets for theater or sporting events.

Additionally, holiday gifts can also be nontaxable if they are in the form of a gift coupon and if given for a specific item (with no redeemable cash value). A common example would be issuing a coupon to your employee for a free ham or turkey redeemable at the local grocery store. For more information, please see our article on employee gifts.

Other year-end filing requirements

As the end of the calendar year approaches, it is also important to start thinking about Form 1099 filing requirements. There are various 1099 forms; 1099-INT to report interest income, 1099-DIV to report dividend income, 1099-NEC to report nonemployee compensation, and 1099-MISC to report other miscellaneous income, to name a few.

Form 1099-NEC reports non-employment income which is not included on a W-2. Organizations must issue 1099-NECs to payees (there are some exclusions) who receive at least $600 in non-employment income during the calendar year. A non-employee may be an independent contractor, or a person hired on a contract basis to complete work, such as a graphic designer. Payments to attorneys or CPAs for services rendered that exceed $600 for the tax year must be reported on a Form 1099-NEC. However, a 1099-MISC would be sent to an Attorney for payments of settlements. For additional questions on which 1099 form to use please contact your tax advisor.

While federal income tax is not always required to be withheld, there are some instances when it is. If a payee does not furnish their Tax Identification Number (TIN) to the organization, then the organization is required to withhold taxes on payments reported in box 1 of Form 1099-NEC. There are other instances, and the rates can differ so if you have questions, please reach out to your tax advisor. 1099 forms are due to the recipient and the IRS by January 31st.

Whether organizations are receiving gifts, giving employee gifts, or thinking about acknowledgments and other reporting we hope that by making our list and checking it twice we can save you some time to spend with your loved ones this holiday season. We wish you all a very happy and healthy holiday season!

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Making a year-end list and checking it twice

Read this if you are in the senior living industry.

Happy New Year! While it may be a new calendar year, the uncertainties facing senior living facilities are still the same, and the question remains: When will the Public Health Emergency end, and how will it impact operations? Federal and state relief programs ended in 2022, and facilities are trying to find ways to fund operations as they face low occupancy levels. Inflation was at 7.1% in November and staffing remains a significant challenge. So, what can the industry expect for 2023?

Occupancy

Through the pandemic, occupancy losses were greater in nursing facilities than in assisted living (AL) and independent living (IL) facilities. This trend of care shifting away from nursing facilities had started before the onset of the pandemic. From 2018-2020, nursing facility volume decreased by over 5% while AL facilities occupancy increased by 1.1%.

Nursing facility occupancy nationwide was 80.2% in January of 2020 and declined to as low as 67.5% in January 2021. In 2022, nursing facility occupancy began to recover. As of December 18, 2022, nationwide occupancy had rebounded to 75.8%.

The assisted living and independent living markets were certainly impacted by the pandemic but not to the extent of the nursing facilities. AL and IL occupancy was reported at 80.9% in March 2021, a record low occupancy for the industry. Through the third quarter of 2022, NIC reported IL occupancy at 84.7%, which was up from 83.8% in the second quarter of 2022. AL occupancy was at 79.7%. in the third quarter of 2022. 

Providers are starting to see some positive signs with occupancy, but are reporting the recovery has been slowed by staffing shortages.

Cost of capital

The lending market is tightening for senior living providers and occupancy issues are negatively impacting facilities bottom lines. In addition, there has been significant consolidation in the banking industry. As a result, interest and related financing costs have risen. For those facilities that aren’t able to sustain their bottom lines and are failing financial covenants, lenders are being less lenient on waivers and in some cases, lenders are imposing default lending rates. 

Ziegler reports in their Winter 2022 report the lending market for senior housing is beginning to pick up. The majority of the lenders surveyed were regional banks, and reported they are offering both fixed and floating rate loans. Lenders are also reporting an increased scrutiny on labor costs coupled with looking at a facility’s ability to increase occupancy. 

Despite these challenges, analysts are still optimistic for 2023 as inflation seems to be tapering, which will hopefully lead to a stabilization of interest rates.

Staffing

Changes to five-star rating
In July 2022, the Centers for Medicare and Medicaid Services (CMS) modified the five-star rating to include Registered Nurse (RN) and administrator turnover. The new staffing rating adds new measures, including total nurse staffing hours per resident day on the weekends, the percentage of turnover for total nursing staff and RNs, and the number of administrators who have left the nursing home over a 12-month period.

Short-term this could have a negative impact on facilities ratings as they are still struggling to recruit and retain nursing staff. The American Healthcare Association has performed an analysis, and on a nationwide basis these changes resulted in the number of one-star staffed facilities rising from 17.71% to 30.89%, and the percentage of one-star overall facilities increasing from 17.70% to 22.08%.

Staffing shortages 
Much like the occupancy trend, nursing facilities faced staffing issues even before the pandemic. From 2018 to 2020, the average number of full-time employees dropped at a higher rate, 37.1%, than admissions, 15.7%. Data from the Bureau of Labor and Statistics and CMS Payroll Based Journal reporting shows nursing facilities lost 14.5% of their employees from 2019-2021 and assisted living facilities lost 7.7% over the same time period. This unprecedented loss of employment across the industry is leading to burnout and will contribute to future turnover.

This loss of full-time employees has created a ripple effect across the healthcare sector. Nursing facilities are unable to fully staff beds and have had to decline new admissions. This is causing strain on hospital systems as they are unable to place patients in post-acute facilities, creating a back log in hospitals and driving up the cost of care.

While the industry continues to experience challenges recruiting and retaining employees, the labor market is starting to swing in the favor of providers. Some healthcare sectors have recovered to pre-pandemic staffing levels. Providers are also starting to report lower utilization of contract labor.

While the industry continues to experience challenges recruiting and retaining employees, the labor market is starting to swing in the favor of providers. 

Minimum staffing requirement
CMS is expected to propose a new minimum staffing rule by early spring 2023. Federal law currently requires Medicare and Medicaid certified nursing homes provide 24-hour licensed nursing services, which are “sufficient to meet nursing needs of their residents”. CMS issued a request for information (RFI) as part of the Fiscal Year 2023 Skilled Nursing Facility Prospective Payment System Proposed Rule. CMS received over 3,000 comments with differing points of view but prevailing themes from patient advocacy groups regarded care of residents, factors impacting facilities' ability to recruit and retain staff, differing Medicaid reimbursement models, and the cost of implementing a minimum staffing requirement. In addition to the RFI, CMS launched a study that includes analysis of historical data and site visits to 75 nursing homes. 

In a study conducted by the American Healthcare Association, it is estimated an additional 58,000 to 191,000 FTEs will be needed (at a cost of approximately $11.3 billion) to meet the previously recommended 4.1 hours per patient day minimum staffing requirements.

One potential consequence of the minimum staffing requirement is higher utilization of agency staffing. Nursing facilities saw a 14.5% decrease in staffing through the pandemic and are still struggling to recruit and retain full-time staff. To meet the minimum staffing requirements, providers may need to fill open positions with temporary staffing. 

Provider Relief Funds (PRF) 

Don’t forget if you received PRF funds in excess of $10,000 between July 1 and December 31, 2021, Phase 4 reporting period opened January 1, 2023, and will close March 31, 2023.
Many of the changes to the industry brought on by the pandemic are likely to remain. Facilities who are putting a focus on their staff and working to create a positive work environment are likely to keep employees for longer.

While there are many challenges in the current environment, they were made to be met, and we are here to help. If you have any questions or would like to talk about your specific needs, please contact our senior living team. Wishing you a successful 2023.
 

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Status of the senior living industry: The good, the bad, and the uncertain

Read this if you are subject to SOC examinations.

In late October 2022, the American Institute of Certified Public Accountants’ (AICPA’s) Assurance Services Executive Committee (ASEC) released an update to the System and Organization Control (SOC) 2 reporting guide. Significant updates have been made to the Description Criteria implementation guidance and the Trust Services Criteria points of focus. Overall, the changes provide clarity around several recent and emerging industry topics and continue to promote reporting quality and consistency.

Summary of changes

Available for use now, the AICPA updates for SOC 2 examinations are significant and may require additional time and attention from companies who currently have a SOC 2 report or are planning on working toward compliance. High-level updates include incorporating new attestation standards (e.g., SSAE-20 and SSAE-21):

  • Updates to the Description Criteria implementation guidance for additional clarity regarding certain disclosure requirements, guidance on disclosure of how controls meet the requirements of a process or control framework, and guidance on disclosure of information about the risk assessment process and specific risks
  • Updates to the points of focus that support the application of the Trust Services Criteria that better reflect the ever-changing technology, legal, regulatory, and cultural risks, data management requirements, particularly related to confidentiality, and differentiating between a data controller and a data processor for privacy engagements
  • Incorporating, where appropriate, updates included in the AICPA Guide Reporting on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting (SOC 1 guide)
  • Incorporating, where applicable, additional guidance included in the AICPA Guide Reporting on an Examination of Controls Relevant to Security, Availability, Processing Integrity, Confidentiality, or Privacy in a Production, Manufacturing, or Distribution System (SOC for supply chain guide), particularly related to the risk assessment guidance

Additional updates

Other updates from the AICPA include, but are not limited to, the following:

  • Making qualitative materiality assessments (from the AICPA whitepaper on materiality)
  • Considering the service organization’s use of software applications and tools (from the SOC Tools FAQ)
  • Considering the operation of periodic controls that operated prior to the period covered by the examination
  • Considering management’s use of specialists
  • Performing and reporting in a SOC 2+ engagement (including an updated illustrative service auditor’s report)
  • Addressing considerations when the service organization has identified a service commitment or system requirement related to meeting the requirements of a process or control framework (such as HIPAA, ISO, or NIST)
  • Supplements and several appendices were removed and will be replaced with links to the appropriate documents on the AICPA website

If you currently have or will be working toward a SOC 2 report, it’s essential to understand the impact to the SOC 2 reporting process. Early preparation will help your organization stay ahead of the curve when it comes to achieving compliance. It is also essential to help ensure that frameworks are aligned and controls are in place to effectively guard against cybersecurity risks and protect sensitive data. If you have questions about SOC audits, or your specific situation, please contact our SOC Audits team. We’re here to help.

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Navigating changes to the SOC 2 guide

Read this if you are interested in well-being. This will be the first of two articles. This first article will focus on awareness. 

When the United States Surgeon General, Dr. Vivek Murthy, recently announced five priority areas of focus that represented “the most pressing public health issues of our time,” workplace well-being was one of the areas identified. According to the Current Priorities of the US Surgeon General website, the priority on workplace well-being aims to address the “numerous and cascading impacts for the health of individual workers and their families, organizational productivity, the bottom-line for businesses, and the US economy.” 

US Surgeon General current priorities:

  1. Workplace well-being
  2. Address the impacts of COVID-19
  3. Health misinformation
  4. Health worker burnout
  5. Youth mental health

Worker stress a growing challenge to employee well-being in many areas

The Surgeon General’s workplace well-being framework discusses many dimensions of well-being, with a focus on mental health. Research cited in the report suggests that worker stress levels grew from 2020 to 2021. In a different 2021 survey of 1,500 US adult workers across for profit, not-for-profit, and government sectors, 84% of respondents reported at least one workplace factor (e.g., emotionally draining work, challenges with work-life balance, or lack of recognition) that had a negative impact on their mental health. In most cases, the workplace factors contributing to stress can be managed or mitigated by integrating well-being into organizational planning and workforce development. 

Another study conducted by Mental Health America surveyed 11,000 workers across 17 industries in the US in 2021. It found that 80% of respondents felt that their workplace stress negatively affected their relationships with friends, family, and coworkers. The study also found that only 38% of those who know about their organization’s mental health services would feel comfortable using them. Statistics like this underscore the need for more deliberate efforts on the part of employers to provide services that support employees’ well-being. 

Well-being and human needs

At the core of the Surgeon General’s framework are five essentials of well-being and their associated “human need” components, all of which center around worker voice and equity. 

Well-being essential Human need
Protection from harm Safety
Security
Connection and community Social support
Belonging
Work-life harmony Autonomy
Flexibility
Mattering at work Dignity
Meaning
Opportunity for growth Learning
Accomplishment

As Dr. Murthy wrote in the introduction to the report, “We have the power to make workplaces engines for mental health and well-being. Doing so will require organizations to rethink how they protect workers from harm, foster a sense of connection among workers, show them that they matter, make space for their lives outside work, and support their long term professional growth.”

Parallels with BerryDunn’s well-being consulting approach

BerryDunn’s well-being approach aligns with the framework suggested by the Surgeon General. Today’s most effective well-being programs are multi-dimensional and emphasize a culture-first approach. In our experience, the most successful well-being programs are those that emphasize well-being as both a personal responsibility and a shared value that is promoted through policies, benefits, and cultural norms. 

For more information on how your organization can create and deliver a program that supports employees in the various aspects of well-being, or if you have other questions specific to your organization, please contact our Well-being consulting team. We’re here to help.

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Surgeon General identifies workplace well-being as a 2023 priority

Read this if your organization is required to report on Provider Relief Funds.

On October 27, 2022, HRSA released an update to its Post-Payment Notice of Reporting Requirements for Provider Relief Funds (PRF) and American Rescue Plan (ARP) funds, the first update since June 11, 2021. Although many of the updates are used to add the additional reporting periods for PRF (Periods 5 through 7) and incorporate ARP into the reporting requirements, there are several things you can do to prepare and understand the nuances of Period 4 reporting. By way of a reminder, here are the remaining reporting time periods: 

Be aware. Did you know?

Before we provide a refresher on the data elements you need to prepare your portal submission, here are some very important elements to be aware of:

  1. Phase 4 and ARP payments are required to be maintained in interest-bearing accounts.
  2. ARP monies must be utilized before any unspent general PRF distributions. 
  3. ARP distributions cannot be transferred or allocated to another recipient, because distributions were determined specific to the historical claims data of the qualifying recipient. If reporting is performed at the parent level, parent entities can still report on the ARP payments received by their subsidiaries.
  4. PRF and ARP monies can be used for lost revenues only through the end of the quarter in which the Public Health Emergency (PHE) ends. Currently, the PHE has been extended through April 11, 2023.
  5. Reporting through the HRSA portal will be on a cumulative basis. This may provide you the opportunity to change your option election for lost revenue (for the cumulative period) or correct for previous reporting errors.

Steps for reporting the required data elements

As a result of changes in requirements and the ARP distribution, the steps for reporting have morphed. Data will be entered in the following order:

  1. Interest earned on PRF payments prior to Phase 4
  2. Interest earned on Phase 4 and ARP payments 
  3. Other assistance received
  4. Use of ARP payments for eligible expenses
  5. Use of ARP payments for lost revenues 
  6. Use of Nursing Home Infection Control (NHIC) Distribution payments
  7. Use of General and Targeted Distribution payments for eligible expenses
  8. Use of General and Targeted Distribution payments for lost revenues
  9. Net unreimbursed expenses attributable to COVID-19

Although PRF and ARP funds have similar utilization, it is important to review the Terms and Conditions associated with each distribution to help ensure compliance that the funds are used appropriately.  

Data elements you will need

The following is a category overview of the data elements that will be requested as you complete your portal submission:

  1. Reporting entity identifying information
  2. Associated subsidiary questionnaire—TIN(s), total PRF Targeted Distributions
  3. ARP subsidiary attestation
  4. Acquired or divested subsidiary information
  5. Interest earned on PRF and ARP payments
  6. Tax status and Single Audit information 
  7. Other assistance received, broken down by quarters:
    a.   Department of the Treasury or SBA
    b.   FEMA
    c.   HHS COVID Testing
    d.   Local, state, and tribal government assistance
    e.   Business insurance
    f.    Other
  8. Use of ARP payments (and related earned interest) on eligible expenses
  9. Use of ARP payments (and related earned interest) on lost revenues attributed to COVID 
  10. Use of NHIC Distribution payments
  11. Use of PRF General and Targeted Distribution payments (and related earned interest) on eligible expenses
  12. Use of PRF General and Targeted Distribution payments (and related earned interest) on lost revenues attributed to COVID
  13. Net unreimbursed expenses
  14. Personnel, patient, and facility metrics
  15. Survey

Two reminders for reporting expenses and lost revenues:

  1. Recipients with qualifying expenses of $500,000 or more will need to report expenses in greater detail. As a refresher, the expanded categories are as follows:

    General and Administrative (G&A) expense categories: Mortgage/rent, insurance, personnel, fringe benefits, lease payments, utilities/operations, and other G&A

    Healthcare related expense categories: Supplies, equipment, IT, facilities, and other health care related expenses
  2. Patient service revenue must be reported at net and broken down by payor (Medicare Part A & B, Medicare Part C, Medicaid/CHIP, commercial, self-pay, and other)

The final step in the portal is to complete the required survey, which often catches recipients off-guard as they grow weary toward the end of rigors of the submission and ready to cross the finish line. Be prepared to respond to questions on the impact the PRF and ARP payments have made for your organization, whether the benefits have been overall operations, solvency, staff retention, COVID operations, etc.

HRSA audits—next steps

In addition to a federal Single Audit requirement when a recipient expends more than $750,000 of federal funding in one year (regardless of whether those federally sourced funds came directly from the federal government or were passed from a state or local government), HRSA may also perform its own audits of recipients. These audits will address the data used by the recipients to report on their usage of PRF and ARP monies. Recipients will need to provide support for lost revenue and expenses that justify the use of the funds that they received.

The HRSA is going to drill down on the revenue numbers, specifically looking at the general ledger (GL) and other select revenue tests. On the expenses side, they are going to review the GL, invoice dates, payments and more.

To complete this audit, HRSA will require a significant amount of supporting documentation. Ideally, most of these documents should already have been copied and set aside as support in anticipation of financial reporting requirements. Below is a partial list of items that could be requested during the audit:

  • GL details
  • Listing of expenses reimbursed with PRF and ARP payments grouped into specified categories
  • Listing of patient care revenue by payor
  • Listing of other sources of assistance
  • Listing of expenses reimbursed with the other assistance received
  • Detailed inventory listing of IT supplies
  • Budget attestation from CEO or CFO and board minutes showing ratification of the budget before March 27, 2020
  • Documentation of lost revenue methodologies
  • Audited financial statements
  • CMS cost reports for Medicare and Medicaid
  • Other supporting documentation

If certain documentation isn’t available, recipients will need to request copies from their vendors. Missing documentation may make it difficult to justify the use of funds and may result in recipients having to repay a portion or all of their provider relief funding.

It is possible that certain expenses were not allowable under PRF and ARP. However, that doesn’t necessarily mean recipients will have to repay their funds. Recipients may have other lost revenue or expenses that would be allowed under PRF and ARP—but only if they have the documentation to prove it. That’s why it’s crucial that recipients have all relevant documentation for expenses and lost revenue over the periods they received provider relief funding.

To get ready for a potential HRSA audit, there are at least three immediate steps you should take:

  • Select a responsible point person. One person should be responsible for coordinating the process to help ensure that nothing falls through the cracks or is overlooked. 
  • Keep your PRF/ARP filing reports on hand. Pull any related supporting documentation and collate it into one place if it isn’t already.
  • Identify what support is needed by doing a gap analysis. Determine where you need additional support or expertise and seek to close these gaps before the notification of any audit process.

Insufficient documentation may result in the recapture of provider relief funding by the HRSA. Fortunately, a lack of documentation is preventable with the right support and resources in place. If you would like more information or have any questions about your specific situation, please contact us. We’re here to help.

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Are you ready for PRF Period 4 reporting?