1.	Business and Summary of Significant Accounting Policies

(a) Business

HMS is a leading provider of cost containment solutions in the U.S. healthcare marketplace. Using innovative technology as well as extensive data services and powerful analytics, the Company delivers coordination of benefits, payment integrity, and health management and engagement solutions through its operating subsidiaries to help healthcare payers improve performance and outcomes. The Company is managed and operates as

one

business segment with a single management team that reports to the Chief Executive Officer. The Company serves state Medicaid programs, commercial health plans, federal government health agencies, government and private employers, child support agencies, and other healthcare payers and sponsors. Together the various services help the Company’s customers recover improper payments; prevent future improper payments; reduce fraud, waste and abuse; better manage the care that members receive; and ensure regulatory compliance.

The consolidated financial statements and notes herein are unaudited. Accordingly, they do

not

include all of the information and notes required by U.S. GAAP for complete financial statements. These statements include all adjustments (consisting of normal recurring accruals) that management considers necessary to present a fair statement of the Company’s results of operations, financial position and cash flows. The results reported in these unaudited consolidated financial statements should

not

be regarded as necessarily indicative of results that

may

be expected for the entire year. It is suggested that these unaudited consolidated financial statements be read in conjunction with the Company’s consolidated financial statements as of and for the year ended

December 31, 2016

which were filed with the SEC as part of the

2016

Form

-K. The consolidated balance sheet as of

December 31, 2016

included herein was derived from audited financial statements, but does

not

include all disclosures required by U.S. GAAP.

The preparation of the Company’s unaudited consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, primarily accounts receivable, intangible assets, fixed assets, accrued expenses, estimated liability for appeals, the disclosure of contingent liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. The Company’s actual results could differ from those estimates.

These unaudited consolidated financial statements include HMS accounts and transactions and those of the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(b) Summary of Significant Accounting Policies

There have been

material changes to the Company’s significant accounting policies that are referenced in the

2016

Form

-K.

Recently Adopted Accounting Pronouncements

March 2016,

the FASB issued ASU

No.

2016

09,

Compensation – Stock Compensation (Topic

718

): Improvements to Employee Share-Based Payment Accountin

g, (“ASU

2016

09”

) that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits will

longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows Companies to repurchase more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the cash flows statement and provides an accounting policy election to account for forfeitures as they occur. ASU

2016

is effective for annual reporting periods beginning after

December 15, 2016,

including interim periods within such annual reporting periods with early adoption permitted. The Company elected to early adopt the new guidance in the

fourth

quarter of fiscal year

2016

which requires us to reflect any adjustments as of

January 1, 2016,

the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax benefits in the provision for income taxes rather than paid-in capital for all periods in fiscal year

2016.

Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had

impact to retained earnings as of

January 1, 2016,

where the cumulative effect of these changes are required to be recorded. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The Company elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented which resulted in an increase to both net cash from operations and net cash used in financing of

$0.01

million for the

three

months ended

March 31, 2016.

Adoption of the new standard resulted in the recognition of net excess tax benefits in the provision for income taxes rather than paid-in capital of

$0.1

million for the

three

months ended

March 31, 2016.

The presentation requirements for cash flows related to employee taxes paid for withheld shares had

impact to any of the periods presented on the consolidated statements of cash flow since such cash flows have historically been presented as a financing activity.

November 2015,

the FASB issued ASU

2015

17,

Income Taxes (Topic

740

): Balance Sheet Classification of Deferred Taxes

(“ASU

2015

17”

). ASU

2015

simplifies the current presentation of separately classifying deferred tax assets and deferred tax liabilities as current and noncurrent in a classified balance sheet by requiring companies to present them as noncurrent. ASU

2015

17,

as amended, is effective for annual reporting periods beginning after

December 15, 2016,

including interim periods within such annual reporting periods with early adoption permitted. The Company elected to early adopt the new guidance in the

fourth

quarter of fiscal year

2016.

The Company elected to apply the presentation requirements for the balance sheet retrospectively to all periods presented which resulted in a decrease to total current assets and total long term liabilities of

$7.5

million at

December 31, 2016.

Recently Issued Accounting Pronouncements

May 2014,

the FASB issued ASU

2014

09,

Revenue from Contracts with Customers

(Topic

606

) (“ASU

2014

09”

), which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The FASB has recently issued several amendments to the standard, including: principal versus agent considerations; clarification on accounting for licenses of intellectual property and identifying performance obligations; narrow scope-improvements and practical expedients; and technical corrections and improvements. ASU

2014

is effective for annual reporting periods beginning after

December 15, 2017,

including interim periods within such annual reporting periods with early adoption permitted. The Company does

not

plan to early adopt this guidance and therefore will adopt on

January 1, 2018.

The guidance permits

two

methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company is in the process of determining the adoption method but preliminarily expects to use the modified retrospective method. The Company, with the assistance of external consultants, has developed and is currently following a preliminary implementation plan. One major element of this plan involves reviewing historical contracts to quantify the impact that adoption will have on the Company’s operations. Depending on the results of the Company’s review, there could be material changes to the timing and recognition of revenues and certain associated expenses. The Company expects to complete the review of historical contracts and the overall assessment process, including selecting a transition plan and an assessment of the overall impact to the results of operations by the end of the

third

quarter of

2017.

February 2016,

the FASB issued ASU

2016

02,

Leases (Topic

842

)

(“ASU

2016

02”

). ASU

2016

will require most lessees to recognize a majority of the Company’s leases on the balance sheet, which will increase reported assets and liabilities. ASU

2016

is effective for annual reporting periods beginning after

December 15, 2018

including interim periods within such annual reporting periods with early adoption permitted. The Company has

not

early adopted this guidance and is currently evaluating the impact on the Company’s consolidated financial statements.

August 2016,

the FASB issued ASU

No.

2016

15,

Statements of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments

(“ASU

2016

15”

)

The amendment clarifies where certain cash receipts and cash payments are presented and classified in the statement of cash flows. Current guidance does

not

include specific guidance on the

eight

classification issues presented in the amendments, which are intended to reduce diversity in practice with respect to classification and presentation of such cash receipts and payments. The amendments are effective for annual reporting periods beginning after

December 15, 2017,

and for interim reporting periods within such annual periods. The Company is currently evaluating the impact on the Company’s financial statements.

January 2017,

the FASB issued ASU

No.

2017

01,

Business Combinations (Topic

805

) – Clarifying the Definition of a Business

(“ASU

2017

01”

). ASU

2017

finalizes previous proposals regarding shareholder concerns that the definition of a business is applied too broadly. The guidance assists entities with evaluating whether transactions should be accounted for as acquisitions of assets or of businesses. The amendments are effective for annual periods beginning after

December 15, 2017,

including interim periods within those periods. The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance.

January 2017,

the FASB issued ASU

No.

2017

04,

Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment (

“ASU

2017

04”

). This amendment simplifies the manner in which an entity is required to test for goodwill impairment by eliminating Step

from the goodwill impairment test. Step

measures goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendment simplifies this approach by having the entity (

) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (

) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. The amendment is effective for public entities that are SEC filers prospectively for their annual, or any interim, goodwill impairment tests in fiscal years beginning after

December 15, 2019.

Early adoption is permitted for all entities for interim or annual goodwill impairment tests performed on testing dates after

January 1, 2017.

The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance.

May 2017,

the FASB issued ASU

No.

2017

09,

Compensation – Stock Compensation (Topic

718

) – Scope of Modification Accounting

(“ASU

2017

09”

). ASU

2017

finalizes previous proposals regarding the complexity around share-based payment awards for modifications. The amendment simplifies the terms or conditions for applying modification accounting unless all of the following are satisfied: (

) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (

) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (

) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendment is effective for public entities that are SEC filers for annual and interim periods beginning after

December 15, 2017.

Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have

not

yet been issued. The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance.

Other new pronouncements issued but

not

effective until after

March 31, 2017,

if any, are

not

expected to have a material impact on the Company’s financial position, results of operations or liquidity.