IFRS 15 and Healthcare Services: Revenue Recognition Best Practices

Posted In | Finance | Accounting Software | Healthcare

International Financial Reporting Standards (IFRS) are globally accepted accounting principles for businesses to use when reporting financial information. One of these standards, IFRS 15, pertains to revenue from contracts with customers. In the healthcare services industry, this standard has critical implications for recognizing revenue from patient care. This article will delve into IFRS 15 as it pertains to healthcare services and discuss best practices for revenue recognition under this standard.

 

1. Understanding IFRS 15

IFRS 15, implemented in 2018, established a comprehensive framework for recognizing revenue from contracts with customers. The standard aims to improve the comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. It uses a five-step model:
 

  1. Identify the contract with a customer.
     

  2. Identify the performance obligations in the contract.
     

  3. Determine the transaction price.
     

  4. Allocate the transaction price to the performance obligations in the contract.
     

  5. Recognize revenue when (or as) the entity satisfies a performance obligation.
     

2. IFRS 15 Application to Healthcare Services

Healthcare providers generate revenue through various channels such as patient service revenue, non-patient service revenue (such as education and research), and third-party payers such as insurance companies. How revenue is recognized depends on the nature of the services provided and the terms of the agreement with the patient or payer. For example, in a contract for multiple services (e.g., consultation, treatment, and follow-up care), each service might be considered a distinct performance obligation under IFRS 15. The healthcare provider would then need to allocate the transaction price (the total amount to be paid by the patient or insurance company) to each performance obligation.

 

3. Best Practices for Revenue Recognition in Healthcare Services

Given the complexity of the healthcare services landscape, here are some best practices for revenue recognition under IFRS 15:
 

  1. Understand the Contractual Terms: The first step to accurately recognizing revenue is to fully understand the terms of the contract with the customer. This includes knowing when the entity's performance obligations are satisfied and when payment is due.

     
  2. Identify Performance Obligations: In a healthcare context, performance obligations might include procedures, treatments, or follow-up care. It's essential to identify each performance obligation in a contract to recognize revenue accurately.

     
  3. Allocate the Transaction Price: Once performance obligations have been identified, the transaction price must be allocated to each obligation based on its standalone selling price. This might involve estimating the selling price if it's not directly observable.

     
  4. Timely Recognition of Revenue: Revenue should be recognized when (or as) a performance obligation is satisfied, not necessarily when payment is received. This could be over time (as in the case of a treatment plan) or at a point in time (like a surgery).

     
  5. Maintain Detailed Records: Keeping meticulous records of contracts, performance obligations, transaction price allocations, and revenue recognition timing is vital to ensuring compliance with IFRS 15.

     
  6. Collaboration Between Departments: Inter-departmental collaboration, especially between medical, administrative, and finance departments, is crucial. This collaboration ensures a proper understanding of services rendered, their contractual basis, and the related financial transactions.

     
  7. Invest in Training and Automation: Staff should be trained on IFRS 15's implications, and investing in automated systems can help manage the complexity of contracts, performance obligations, and revenue recognition.

 

The application of IFRS 15 to healthcare services requires a deep understanding of both the standard and the specific nature of healthcare contracts. By following best practices, healthcare providers can not only ensure compliance but also provide greater transparency to stakeholders about the nature, amount, timing, and uncertainty of revenue and cash flows from contracts with patients and third-party payers.