Now that we’ve got your attention…
In a 1964 ruling on obscenity, Supreme Court Justice Potter Stewart famously quipped that while it may be difficult to define what’s obscene, “I know it when I see it.”
Well, the same can be said of revenue recognition (how’s that for a segue?).
Sure, you know when you’ve generated revenue.
But from an accounting perspective, it’s not so easy to define.
And that’s a big problem in mergers and acquisitions when buyers and sellers fundamentally rely on these numbers to determine value.
These reporting challenges pop up in health care all the time.
Take for example the “oh-so-common-if-it-doesn’t-happen-it’s-an-exception” situation where services are provided before the documentation required to bill is obtained, and you know there’s a distinct probability that you won’t be able to get every box checked, signature required, or file properly papered to bill a bill. So, do you book the revenues when the product is delivered, as the “matching principle” of GAAP demands? Or do you wait until you can drop a bill, pass go, and maybe collect $200?
It’s only going to get worse as value-based purchasing models – where providers can earn bonuses based upon outcomes – proliferate.
If you wait until the bonus is paid, revenues will be understated for products and services provided up to that point and then overstated when the aggregate bonus is booked. And if you accrue an estimated bonus that you subsequently don’t receive?
Well, that’s why they have rocks and hard places.
Now some of you may be thinking that “over time, it all comes out in the wash.”
Maybe. If you’re not growing. Or shrinking. Or seeing shifts in product mix. Or payor mix.
So, probably not.
Moreover, when a buyer is laying out millions of dollars to buy a company, that wash won’t, well, wash.
So, what’s the answer?
Well, if you’re looking for definitive precision, good luck.
The reality is that there are many reasonable and acceptable ways to recognize revenues. That’s why what used to be called billing and collections is now revenue cycle management.
Accordingly, it’s incumbent upon buyers and sellers alike to define methodologies before a preliminary agreement is proffered – and evaluated.
If not, you’ll surely recognize a price change when you see it.
And if you’re on the wrong end of that change, you’ll probably think it’s obscene.