Recent regulatory moves aimed at greater transparency and consistency in the structure of joint venture valuations may impact how hospices approach these partnerships.
The Financial Accounting Standards Board (FASB) recently introduced a new rule that will require newly formed joint ventures (JVs) to disclose the net value of each participating asset at the onset of solidifying these deals. The requirement will take effect for all JVs with a formation date on or after Jan. 1, 2025.
A main driver behind the updated standard is that much diversity exists in how and when JVs currently assess and disclose the value of their individual and combined assets, the agency stated. The FASB is a private organization recognized by the U.S. Securities and Exchange Commission’s (SEC) as the national standard-setter for accounting among public companies, including health care providers.
“To reduce diversity in practice and provide decision-useful information to a joint venture’s investors, the [FASB] Board decided to require that a joint venture apply a new basis of accounting upon formation,” the agency stated in a report. “By applying a new basis of accounting, a joint venture, upon formation, will recognize and initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance).”
Breaking down the new JV accounting rule
The new accounting rule may have impacts on how hospices seek to combine forces with one another, as well as other providers across the car continuum, according to Adam Royal, attorney at the law firm Husch Blackwell.
“We see a lot of hospices combining in various ways through these consolidations right now, just trying to get a bigger geographic service area and expanding their service lines and offerings,” Royal told Hospice News. “What really seems to be an impetus behind these is building economies of scale with more efficiencies, but combining and defining those operations in a joint venture agreement can be a challenge. Determining value can carry some volatile market conditions based on the evaluation method.”
Generally accepted accounting principles (GAAP), which are developed by the FASB, do not currently provide “specific authoritative guidance” on how a joint venture should recognize initially measurable assets and liabilities upon the formation of these transactions, the organization stated in its report.
The absence of more standardized guidance results in varying accounting practices around how and when JVs measure their individual and combined assets, the agency indicated.
Some JVs initially measure net assets at fair value at the formation date, while others define its worth in carrying amounts, the FASB stated. A carrying value bases a JV’s equity on each involved company’s existing balance sheets, taking into account existing assets, the cost of financial liabilities and depreciations over time. In the fair value method, each party agrees on a valuation based on current market conditions.
The update addresses how companies account for contributions made to a joint venture in their separate financial statements upon formation, the FASB indicated. According to the agency, the new rule is intended to:
- Provide decision-useful information to investors and other allocators of capital (collectively, investors) in a joint venture’s financial statements
- Reduce diversity in practice
Though the update will not apply to JVs formed before January 2025, early adoption of the rule is “permitted in any interim or annual period in which financial statements have not yet been issued or made available, either prospectively or retrospectively,” the FASB stated.
Understanding the impacts on hospice JVs
Hospitals and health systems looking to bring their hospice assets into a JV may be subject to more scrutiny of how they measure and disclose financial information around these service lines. Likewise for hospices, palliative and primary care providers evaluating their value.
A key takeaway for hospices when it comes to understanding the new accounting rule is how it could impact the future outlook for JV partnerships, according to Royal.
The new rule is another iteration of rising regulatory oversight that could have an impact on more than just JV transactions, he said. The accounting update is part of a larger trend towards addressing malfeasance and fraud, Royal indicated.
“The application of this guidance really rings a lot of familiar bells from the sort of broader regulatory landscape around fair market and carrying value and having a ‘golden standard’ for avoiding anti-kickback concerns around those,” Royal said. “The regulatory climate in hospice is having a substantial chilling effect on traditional M&A transactions and consolidations across the board because of the burdens associated with transferring or changing agreements. With joint ventures and consolidations, these may have been a bit more appealing with triggering less severe regulatory implications. But there is no transaction that is immune to regulatory scrutiny.”
Among the opportunities of the new JV accounting rule is that it could provide greater transparency around how these partnerships are structured and operate in the hospice space, according to Tom Lillis, partner at Stoneridge Strategic Consulting. The consulting company is a division of Stoneridge Partners, home, hospice and behavioral health care mergers and acquisitions firm headquartered in Louisville, Kentucky.
The increased transparency driving the rule could have positive impacts on hospice program integrity alongside financial and regulatory pressures for JVs, Lillis indicated. Striking a balance in cost and structure could complicate the process of developing a JV, but not ultimately to a point of deterrence among interested parties, he stated.
“What we’re seeing more of in hospice is an attempt to clean up the space and get to the next chapter of good activity and good actors,” Lillis told Hospice News. “So, we’ll continue to see more of these JVs and consolidation in the space, but it’s going to come with more pressure to perform both clinically and financially in the market. It’s anticipating that the other shoe is going to drop in these enhanced regulatory requirements and handling that compliance load can make things less attractive and add cost to these deals. But overall, there’s a lot more interest in joint ventures for health systems in their home health and hospice assets.”