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changes in settlement estimates be disclosed in accordance with SOP 94-6 Additional guidance on these matters can be found in SOP 00-1, Auditing Health Care Third-Party Revenues and Related Receivables For health care companies that are SEC registrants, reserves related to third-party settlements represent an area of increased SEC scrutiny, due to SEC s concerns over the potential use of reserves to manipulate earnings by accruing larger-than-necessary reserves under the guise of conservatism and then reversing those excess accruals to boost earnings when needed in subsequent periods Registrants are expected to review the propriety of the reserve amounts each quarter and increase or decrease the accrual based on new events or changes in facts and circumstances When signi cant adjustments are reported, the SEC staff may inquire about the registrant s policy on establishing and relieving third-party reserves and ask what new facts and circumstances occurred that triggered the adjustment in the particular period in which it was reported In some cases, the SEC staff is requiring HCOs to provide detailed disclosures in the notes to the nancial statements and the Management Discussions and Analysis (MD&A) on reserve changes and to explain the reasons for reserve adjustments (g) BAD DEBTS The Guide de nes bad debt expense as the provision for actual or expected uncollectibles resulting from the extension of credit The provision for bad debts should be determined on an accrual basis and reported as an expense (h) CHARITY CARE Providers often render services free of charge (or at discounted rates) to individuals who have no means to pay for them The accounting for the write-off of charges pertaining to charity services is similar to that for bad debts; an allowance for charity services should be established, which is a valuation account related to patient accounts receivable The provision for charity services should be determined on an accrual basis and accounted for as a deduction from gross revenue Special rules apply to the reporting of charity care in the provider s nancial statements According to the Guide, charity care results from an entity s policy to provide health care services free of charge to individuals who meet certain nancial criteria Because no cash ows are expected from these services, charges pertaining to charity services do not qualify for recognition as revenue in the provider s nancial statements The provider is considered to have given away the services, rather than having sold them Receivables reported in the balance sheet for health care services and the related valuation allowance similarly should not include amounts related to charity care These prohibitions hold true on the face of the nancial statements and in any note disclosures or supplemental schedules that accompany the nancial statements However, the Guide does not intend for all mention of charity care to disappear from the nancial statements Charity care represents an important element of the services provided by many facilities Accordingly, the Guide requires speci c disclosures regarding charity care to be made in the notes to the nancial statements A statement of management s policy with regard to providing charity care, and the fact that charity services do not result in the production of revenue, should be included in the entity s summary of signi cant accounting policies The level of charity care provided for each of the years covered by the nancial statements also must be disclosed in the notes to the nancial statements The level of care provided may be measured in a variety of ways, such as at established rates, costs, patient days, occasions of service, or other statistics The method used to measure the charity care should also be disclosed These disclosures are applicable to for-pro t providers as well as not-for-pro t providers The Guide recognizes that distinguishing charity care write-offs from bad debt write-offs is not easy in the health care environment Because charity care results from an entity s policy to provide health care services free of charge to individuals who meet certain nancial criteria, the establishment of a formal management policy clearly de ning charity care should result in a reasonable determination, according to the Guide Some facilities ay choose to provide information concerning gross service revenue and deductions from revenue in either the notes to the nancial statements or in a supplemental schedule.

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