Financial Reporting Policies of Lake County Nursing Home

The financial reporting policies of the Lake County Nursing Home conform to generally accepted accounting principles (GAAP). The Governmental Accounting Standards Board (GASB) is responsible for establishing GAAP for state and local governments through its pronouncements (statements and interpretations). Governments are also required to follow the pronouncements of the Financial Accounting Standards Board (FASB) issued through November 30, 1989, (when applicable) that do not conflict with or contradict GASB pronouncements. Although the Nursing Home has the option to apply FASB pronouncements issued after that date, it has chosen not to do so. The more significant accounting policies established in GAAP and used by the Nursing Home are discussed below.

 A. Financial Reporting Entity

The Lake County Nursing Home (Sunrise Home) was organized in 1979 by Lake County, pursuant to Minn. Stat. §§ 376.55-.60 to provide long-term care services. The 55-bed intermediate care facility opened April 1, 1980, and subsequently became a skilled care nursing facility in 1986. The Lake County Nursing Home Board supervises the Nursing Home’s operations and consists of seven members: the five County Commissioners and two lay members appointed by the Commissioners. The Lake County Nursing Home Board contracts with Ecumen to manage the Nursing Home. As part of this agreement, Ecumen maintains the general ledger, bill payment, and payroll functions.

The Nursing Home’s financial statements are included in Lake County’s financial statements as an enterprise fund.

B. Basis of Presentation - Fund Accounting

The Nursing Home’s operations are accounted for with a set of self-balancing accounts that comprise the assets, liabilities, equities, revenues, and expenses. Enterprise funds are used to account for operations that provide a service to citizens financed primarily by charges to users of that service and activities where the periodic measurement of net income is deemed appropriate for capital maintenance, public policy, management control, accountability, or other purposes.

C. Basis of Accounting

The Nursing Home maintains its financial records on the accrual basis of accounting.

Revenues are recorded when earned, and expenses are recorded when a liability is

incurred, regardless of the timing of related cash flows. When both restricted and unrestricted resources are available for use, it is the Nursing Home’s policy to use restricted resources first and then unrestricted resources as needed.

 D. Assets and Liabilities

1. Cash and Cash Equivalents

The Nursing Home has defined cash and cash equivalents to include unrestricted cash held with Lake County as part of its pooled cash and investments account. The Lake County pooled investment account is treated as a cash equivalent because the Nursing Home can deposit or effectively withdraw cash at any time without prior notice or penalty. Cash equivalents also include petty cash held in a demand deposit account. Resident trust accounts are not considered to be cash

equivalents.

2. Deposits and Investments

The Nursing Home’s cash balance is combined with Lake County as part of its pooled cash and investments account. Investments are reported at their fair value at September 30, 2010, based on market prices.

3. Receivables

The Nursing Home receivables are reported net of an allowance for uncollectible accounts of $3,532.

4. Inventories and Prepaid Items

Inventories are valued at cost using the first in/first out method. Inventories are recorded as expenses when consumed. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items.

 5. Capital Assets and Depreciation

Capital assets are defined by the Nursing Home as assets with an initial, individual cost equal to or in excess of $1,000 and an estimated useful life of at least five years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation.

The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets’ lives are not capitalized.  Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets is included as part of the capitalized value of the assets constructed. Property, plant, and equipment of the Nursing Home are depreciated using the straight-line method over the following estimated useful lives:

Assets

Years

Land improvements

8-10

Buildings and improvements

5-40

Furniture and equipment

5-15

6. Compensated Absences

Nursing Home personnel policies provide that employees may accumulate up to 24 days of vacation leave. The unused accumulated vacation leave is recognized in the financial statements.

Nursing Home employees may accumulate up to 170 days of sick leave. Employees are not compensated for unused sick leave, except upon retirement, and then only if retirement is due to a mandatory age requirement or meets the requirement qualifications of the Public Employees Retirement Association.

Compensation is equal to ten percent of the accumulated sick leave; any balance of accumulated sick leave is used to pay single coverage medical insurance for a maximum of two years. The liability for compensated absences reported in the financial statements consists of vested sick leave and unvested sick leave likely to become vested. The liability has been calculated using the vesting method, in which leave amounts for both employees who currently are eligible to receive termination payments and other employees who are expected to become eligible in the future to receive such payments upon termination are included. Compensated absences are accrued when

incurred. The compensated absences liability is recognized in the financial statements for the year ended September 30, 2010, in the amount of $103,015. Unvested sick leave of Nursing Home employees at September 30, 2010, is $70,234, and is not reported as a liability in the financial statements.

Revenues

Operating revenues, such as daily service revenues, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Nonoperating revenues, such as interest income and contributions and donations, result from nonexchange transactions or incidental activities.

Third-Party Reimbursement Agreements The Nursing Home participates in the Medicaid program administered by the Minnesota Department of Human Services. The Nursing Home bills the Department of Human Services (DHS) monthly based on the applicable rate and number of days for every eligible resident. DHS subsequently reimburses the Nursing Home. The Medicaid occupancy for these facilities during the fiscal year ended September 30, 2010, was 73 percent. Net patient revenue is reported at estimated net realizable amounts from Medicare, a third-party payor. Retroactive adjustment estimates are revised in future periods as adjustments become known. Revenue from the Medicare and Medicaid programs accounted for 5 percent and 65 percent, respectively, of the Nursing Home’s net patient revenues for the year ended September 30, 2010. Laws and regulations governing the Medicare and Medicaid program are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility the recorded estimates will change by a material amount in the near term. The September 30, 2010, net patient service revenue decreased by approximately $44,288 due to an estimated contractual adjustment for Medicare and decreased by $35,708 due to an estimated contractual adjustment for Medicaid.

Risk Management The Nursing Home is exposed to various risks of loss related to torts; theft of, damage to, or destruction of assets; errors or omissions; injuries to employees; and natural disasters. The Nursing Home purchases commercial insurance coverage and employee health care coverage to manage these risks. The Nursing Home’s risk of loss associated with injuries to employees is covered by Lake County’s membership in the Minnesota Counties Intergovernmental Trust (MCIT) Workers’ Compensation Division. The risk associated with the Nursing Home’s operation has not been separately identified. The Workers’ Compensation Division of MCIT is self-sustaining based on the contributions charged, so that total contributions plus compounded earnings on these contributions will equal the amount needed to satisfy claims liabilities and other expenses. MCIT participates in the Workers’ Compensation Reinsurance Association with coverage at $450,000 per claim in 2010. Should the MCIT Workers’ Compensation Division liabilities exceed assets, MCIT may assess the County in a method and amount to be determined by MCIT. There were no significant reductions in insurance from the previous year or settlements in excess of insurance coverage for any of the past three fiscal years. 6. Subsequent Events Subsequent to the date of Lake County Nursing Home’s financial statements, September 30, 2010, Lake County entered into an agreement to sell the Nursing Home and all related assets. The sale was completed in December 2010.

The Lake County Nursing Home Board annually adopts an accrual basis budget. Following is a summary of the operating budget compared with actual operations for the year ended September 30, 2010.

Capital Leases Payable In January 2008, the Nursing Home entered into a lease agreement to finance a copier. The lease runs for five years with interest at 6.35 percent and monthly payments of $210. At lease expiration, the copier will become the Nursing Home’s property and, as such, it has been recorded as a capital asset. The copier is carried at a cost of $10,748, less accumulated depreciation of $4,961.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Year ended

Budget ($)

Actual ($)

Variance favorable unfavorable ($)

Operating revenues

3,614,698

3,850,780

236,082

Operating expenses

3,556,487

3,785,914

(229,427)

Operating Income (Loss)

58,211

64,866

6,655

Nonoperating revenues (expenses)

2,089

(1,208)

(3,297)

Change in Net Assets

60,300

63,658

3,358

The basic financial statements referred to above present fairly, in all material respects, the financial position of the Lake County Nursing Home as of September 30, 2010, and the changes in its financial position and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1.A., the financial statements present only the Lake County Nursing Home Enterprise Fund and are not intended to present fairly the financial position of Lake County and the results of its operations and the cash flows of its proprietary funds in conformity with accounting principles generally accepted in the United States of America.