In February 2022, the AICPA issued Technical Q&A (TQA) 6400.71, “Accounting by a Recipient Entity for Vaccines or Other Pharmaceuticals, Medical Supplies, or Equipment Received for Distribution to Specified Parties”. The Inquiry addressed whether a not-for-profit or for-profit health care entity that receives items free of charge to dispense to specified patients should recognize the fair value of the items within their financial statements. TQA is for both not-for-profit and for-profit health care providers.
Generally, vaccines or other pharmaceuticals, medical supplies or equipment are required to be dispensed by a licensed health care entity only to the specified patient or patients and free of charge to the specified patients. If these items cannot be dispensed to the specified party or parties, the healthcare entity must either return the items to the resource provider or have them destroyed. Distribution logistics aside, there are accounting considerations for health care groups of which your organization should be aware.
Classifying the Transaction
Not-for-profit or for-profit healthcare entities should first consider whether the above-described matter is an exchange transaction or part of an exchange transaction or a non-exchange transaction by reviewing the facts and circumstances of the arrangement between the resource and healthcare provider. An exchange transaction is a reciprocal transfer between two entities in which both parties receive commensurate value.
If determined to be an exchange transaction, the guidance in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, should be applied for both not-for-profits and for-profit entities and be recorded at fair value.
Non-exchange Transaction (Contribution)
Accounting for non-exchange transactions (essentially contributions) vary depending on whether your organization is for-profit or not-for-profit. For-profit healthcare entities should note that there is no specific guidance in U.S. GAAP applicable to for-profit healthcare entities that receive transfers from governmental agencies. However, this TQA specifies that ASC Topic 958-605, Not-for-Profit Entities — Revenue Recognition can be applied by analogy and be recorded at fair value.
For not-for-profit healthcare organizations, if the transaction is determined to be a non-exchange transaction, your organization should then apply the guidance within ASC 958-605 and record the contribution at fair value.
All healthcare entities that determine the arrangement is a non-exchange transaction will also have to assess whether their organization has variance power over the donated items. Variance power is “the unilateral power to redirect the use of the transferred assets to another beneficiary”.
Once again, the accounting is slightly different depending on your entity. Not-for-profit health care organizations would recognize contributions of nonfinancial assets and a corresponding expense. For-profit entities would recognize other income or grant income.
If your organization determines it does not have variance power, then it is acting as an agent or in a custodial capacity. In these scenarios, you would recognize the items received as an asset and a corresponding liability.
Additional Points for Not-for-Profits
For not-for-profit entities that determine the arrangement meets the criteria to be a non-exchange transaction will need to prepare for the presentation and disclosure requirements in FASB’s ASU 2020-07 Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets. The recent change, which is effective for annual periods beginning after June 15, 2021, will affect accounting for non-exchange transactions. Please see our recent article for further information on this topic.
For More Information
If your organization has any questions or concerns about accounting for free contributions of vaccines or other pharmaceuticals, medical supplies or Equipment, please contact a member of our team.
Published on April 19, 2022
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