1. Organization and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2015

Notes

1. Organization and Summary of Significant Accounting Policies

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Description of the Business

Global Healthcare REIT, Inc. (the Company or Global) was organized with the intent of operating as a real estate investment trust (REIT) for the purpose of investing in real estate and other assets related to the healthcare industry.  Prior to the Company changing its name to Global Healthcare REIT, Inc. on September 30, 2013, the Company was known as Global Casinos, Inc.  Global Casinos, Inc. operated two gaming casinos which were split-off and sold on September 30, 2013.  Simultaneous with the split-off and sale of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (WPF) in a transaction accounted for as a reverse acquisition whereby WPF was deemed to be the accounting acquirer.

The Company intends to make a REIT election under sections 856 through 859 of the Internal Revenue Code of 1986, as amended. Such election will be made by the Board of Directors at such time as the Board determines that we qualify as a REIT under applicable provisions of the Internal Revenue Code.

The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers.  As of December 31, 2015, the Company owned nine healthcare properties which are leased to third-party operators under triple-net operating terms.

Basis of Presentation

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities (VIE’s) for which the Company has determined itself to be the primary beneficiary.  Third party equity interests in subsidiaries and VIE’s are recognized as noncontrolling interests in the consolidated financial statements. All significant inter-company balances and transactions have been eliminated in consolidation.

The Company is the primary beneficiary of a VIE if the Company has the power to direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb losses or receive benefits from the VIE that could be significant to the Company.  If the interest in the entity is determined not to be a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which the Company has control and/or substantive participating rights under the respective ownership agreement.

There are judgments and estimates involved in determining if an entity in which the Company has an investment is a VIE.  The entity is evaluated to determine if it is a VIE by, among other things, determining if the equity investors as a group have a controlling financial interest in the entity and if the entity has sufficient equity at risk to finance its activities without additional subordinated financial support.

Use of Estimates and Assumptions

The preparation of consolidated financial statements in conformity with U.S. GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Significant estimates included herein relate to the recoverability of assets, the purchase price allocation for properties acquired, and the fair value of certain assets and liabilities.  Actual results may differ from estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted Cash

Restricted cash consisted of the following as of December 31:

	2015	2014
Funds held in escrow related   to construction projects	$ 7	$ 205,710
Funds held in escrow under the terms of   notes or bonds payable for purposes of   paying future debt service costs	541,828	698,447
	$ 541,835	$ 904,157

For the years ended December 31, 2015 and 2014, the change in restricted cash related to construction projects in the amounts of $205,703 and $(205,710) has been presented in cash flows from investing activities.  The change in restricted cash related to debt service of $156,619 and $(345,901) for the years ended December 31, 2015 and 2014, respectively, has been presented in cash flows from financing activities.

Concentration of Credit Risk

The Company maintains deposits in financial institutions that at times exceed the insured amount of $250,000 provided by the U.S. Federal Deposit Insurance Corporation (FDIC).  The excess amounts at December 31, 2015 and 2014 were $291,845 and $968,117, respectively. The Company believes the financial institutions it uses are credit worthy and stable.  The Company does not believe that it is exposed to any significant credit risk in cash and cash equivalents or restricted cash.

Property and Equipment

In accordance with purchase accounting guidance established for entities under common control, the property and equipment acquired from entities under common control are stated at their carrying value on the date of acquisition.  Property and equipment not acquired from entities under common control is recorded at its estimated fair value. Estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of properties using standard industry valuation techniques.

Upon acquisition of real estate properties, the Company determines the total purchase price of each property and allocates this price based on the fair value of tangible assets and intangible assets, if any, acquired and any liabilities assumed.  Information used to determine fair value includes comparable sales values, discount rates, capitalization rates, and lease-up assumptions from a third party appraisal or other market sources.

Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred.

Any subsequent betterments and improvements are stated at historical cost.  Depreciation is provided using the straight-line method over the estimated useful lives of the assets.  Useful lives of the assets are summarized as follows:

Land Improvements	15 years
Buildings and Improvements	30 years
Furniture, Fixtures and Equipment	10 years

Impairment of Long Lived Assets

When circumstances indicate the carrying value of property and equipment may not be recoverable, the Company reviews the property for impairment.  This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. This estimate considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property and equipment. During the year ended 2014, estimated fair value is determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of the property using standard industry valuation techniques.

Advances Due To and From Related Parties

The Company will periodically advance cash to and receive cash from various related parties as a part of the normal course of business.  We will not make any advances to related parties that would violate the provisions of the Sarbanes-Oxley Act. The Company plans to monitor these non-interest bearing advances on a continual basis, evaluating the creditworthiness of the related party and its ability to repay the advance, generally using the strength and projected cash flows of the underlying related party operations as a basis for extending credit.  The Company records allowances for collection against the advances or writes off the account directly, when factors are present that indicate the related party may not be able to repay the advance.

Notes Receivable

The Company evaluates its notes receivable for impairment when it is probable the payment of interest and principal will not be made in accordance with the contractual terms of the note agreements. Once a note has been determined to be impaired, it is measured to establish the amount of the impairment, if any, based on the fair value of the note using present value of expected future cash flows discounted at the note’s effective interest rate.  If the fair value of the impaired note receivable is less than the recorded investment in the note, a valuation allowance is recognized.

Deferred Loan Costs

Deferred loan costs are amortized over the life of the related loan using the straight-line method, which approximates the effective interest method.  For the years ended December 31, 2015 and 2014, deferred loan costs paid totaled $78,972 and $690,784, respectively.  Amortization expense for the years ended December 31, 2015 and 2014 totaled $241,358 and $47,455, respectively.  Accumulated amortization totaled $273,714 and $111,329 as of December 31, 2015 and 2014, respectively.  Deferred loan cost amortization is included as a component of interest expense in the consolidated statements of operations.

Goodwill

Goodwill represents the excess of a Company’s purchase price over the fair value of the identifiable assets acquired and liabilities assumed in a business combination. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred.  Management initially performs a qualitative analysis of goodwill using qualitative factors to determine if it is more likely than not that the fair value of the Company is less than its carrying amount including goodwill. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events. If after assessing the totality of events or circumstances, the Company determines through the qualitative assessment that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary, and performing the two-step impairment test is not required.  (See Note 8: “Goodwill”)

Warrant Liability

Warrants to purchase the Company’s common stock with nonstandard antidilution provisions, regardless of the probability or likelihood that may conditionally obligate the issuer to ultimately transfer assets, are classified as liabilities and are recorded at their estimated fair value at each reporting period in accordance with ASC 815 “Derivatives and Hedging.” Any change in fair value of these warrants during the reporting period is recorded as a component of Other (Income) Expense on the Company’s Consolidated Statements of Operations.

Revenue Recognition

The Company’s leases may be subject to annual escalations of the minimum monthly rent required under each lease.  The accompanying consolidated financial statements reflect rental income on a straight-line basis over the term of each lease.  Cumulative adjustments associated with the straight-line rent requirement are reflected in Prepaid Expenses, Deferred Loan Costs, and Other in the consolidated balance sheets and totaled $107,032 and $136,037 as of December 31, 2015 and 2014, respectively.  Adjustments to reflect rental income on a straight-line basis totaled $0 and $102,037 for years ended December 31, 2015 and 2014, respectively.

Rent receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible amounts.  An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements.  The Company also maintains an allowance for deferred rent receivables arising from the straight line recognition of rents.  Such allowances are charged to bad debt expense in the accompanying consolidated statements of operations.  Our determination of the adequacy of these allowances is based primarily upon evaluations of the tenant’s financial condition, security deposits, lease guarantees and current economic conditions and other relevant factors.

When the lessee is the owner of any improvements, any lessee improvement allowance that is funded by the Company is treated as a lease incentive and amortized as a reduction of revenue over the lease term.  As of December 31, 2015 and 2014, deferred lease incentives totaled $0 and $10,000, respectively.  Amortization of deferred lease incentives totaled $10,000 and $4,000 for the years ended December 31, 2015 and 2014, respectively.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.

The Company accounts for stock-based compensation in accordance with the provision of ASC 505, “Equity Based Payments to Non-Employees” (“ASC 505”), which requires that such equity instruments are recorded at their fair value on the measurement date. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options and warrants and the closing price of the Company’s common stock for common share issuances.

Fair Value Measurements

The Company utilizes the methods of fair value measurement as described in ASC 820 to value its financial assets and liabilities. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Income Taxes

The Company will elect to be taxed as a REIT at such a time as the Board of Directors, with the consultation of professional advisors, determines the Company qualifies as a REIT under applicable provisions of the Internal Revenue Code.  The Company cannot predict for which tax year that election will be made.  Therefore, applicable taxes have been recorded in the accompanying consolidated financial statements.

The Company uses the asset and liability method of accounting for income taxes.  Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates resulting from new legislation is recognized in income in the period of enactment.  A valuation allowance is established against deferred tax assets when management concludes that the “more likely than not” realization criteria has not been met.  The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.

Income (Loss) Per Common Share

Basic income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period.  Diluted net income (loss) per share is computed based on the weighted average number of common shares and potentially dilutive common shares outstanding. The calculation of diluted net income (loss) per share excludes potential common shares if the effect would be anti-dilutive. Potential common shares consist of incremental common shares issuable upon the exercise of warrants and shares issuable upon the conversion of preferred stock.

The following table details the calculation of the weighted average number of common shares and dilutive common shares used in diluted income (loss) per share as of December 31:

	2015	2014
Weighted Average Number of Common Shares Used in Basic Income (Loss) Per Share	21,996,909	19,456,590
Effect of Dilutive Securities:
Common Stock Warrants	-	2,188,303
Convertible Preferred Stock	-	357,143
Weighted Average Number of Common Shares and Dilutive Potential Common Shares Used in Diluted Income (Loss) Per Share	21,996,909	22,002,036
Anti-Dilutive Equity Awards Excluded from Effect Dilutive Securities	-	176,788

Comprehensive Income

For the periods presented, there were no differences between reported net income (loss) and comprehensive income (loss).

Immaterial Correction

During the third quarter of 2015, the Company revised previously reported amounts due to an error related to an overstatement of debt and a corresponding understatement in noncontrolling interests as of December 31, 2014.  In accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 250, “Accounting Changes and Error Corrections,” the Company evaluated the materiality of the error from quantitative and qualitative perspectives, and concluded that the error was immaterial to the Company’s prior period interim and annual consolidated financial statements.  The correction of the immaterial error resulted in a decrease to Debt, Net of $800,000 and a corresponding increase for the same amount to Noncontrolling Interests in the Company’s Consolidated Balance Sheets as of December 31, 2014.  This immaterial correction of an error had no impact on the Company’s Consolidated Statements of Operations or Cash Flows in any period.

Prior Period Adjustment

The Company determined that certain warrants issued in 2014, 2013 and 2012 which contained antidilution provisions were not recorded correctly in the consolidated financial statements.  This error resulted in an understatement of a warrant liability and an overstatement of stockholders’ equity.  The Company assessed the materiality of the warrant liability error on the consolidated financial statements for the year ended December 31, 2015 in accordance with SEC Staff Accounting Bulletin Nos. 99 and 108 (“SAB 99” and “SAB 108”) and concluded that the impact of such adjustments would have been material to the consolidated financial statements had they been corrected in their entirety in 2015. The Company also concluded that, had the error been corrected within its consolidated financial statements for the year ended December 31, 2014, the impact of the adjustment would not have been material to that period.  Therefore, the cumulative error as of January 1, 2015 has been recorded as a prior period adjustment in the amount of $(1,247,443) to Retained Earnings (Accumulated Deficit), resulting in a net adjustment to Stockholders’ Equity of $(1,247,443).

The Consolidated Statement of Operations for the year ended December 31, 2014 has not been adjusted as the impact of the correction of the error on net income is not material to those consolidated financial statements. In considering whether the Company should amend its previously filed Form 10-K for prior years, the Company’s evaluation of SAB 99 considered that the aggregate impact of the warrant liability adjustment was not material to the Company’s net income (loss), had no impact on operating cash flows, and had an insignificant impact on the Consolidated Balance Sheets.  In aggregate, the Company does not believe it is probable that the views of a reasonable investor would have been changed by the correction of this item in the 2014, 2013 or 2012 consolidated financial statements in an amended Form 10-K.  Accordingly, the correction of the error was made to the Consolidated Statement of Stockholders’ Equity as described above using the SAB 108 approach.

Recently Issued Accounting Pronouncements

During April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant and Equipment; Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 modifies the requirements for reporting discontinued operations. Under the amendments in ASU 2014-08, the definition of discontinued operation has been modified to only include those disposals of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 was applied prospectively for periods beginning the quarter ended March 31, 2014. The Company disposed of its Scottsburg Healthcare Center on March 10, 2014 and recognized a loss upon disposition as a component of income from continuing operations for the year ended December 31, 2014.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.”  This ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  The new standard is effective for the Company on January 1, 2017.  Early application is not permitted.  The standard permits the use of either the retrospective or cumulative effect transition method.  We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.  We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40):  Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Before this new standard, there was minimal guidance in U.S. GAAP specific to going concern. Under the new standard, disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.”  The new standard requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt.  The standard is effective for interim and annual periods beginning after December 31, 2015 and is required to be applied on a retrospective basis.  Early adoption is permitted.  We expect that the adoption of ASU 2015-03 will not have a material effect on the Company’s financial position, results of operations or cash flows.