Allowance for Doubtful Accounts

6 Months Ended

Jun. 30, 2020

On January 1, 2020 (the "adoption date"), the Company replaced its previous incurred loss impairment model for estimating credit losses on accounts and notes receivables with an expected loss model prepared in accordance with ASC 326. While the incurred loss impairment model had the Company recognize credit losses when it was probable that a loss had been incurred, ASC 326 requires the Company to estimate future expected credit losses on such instruments before an impairment may occur. On the adoption date, the Company recorded an initial increase of $42.2 million to the Company's allowance for doubtful accounts, with an offset recorded as an opening adjustment to retained earnings.

In making the Company’s credit evaluations, management considers the general collection risk associated with trends in the long-term care industry. The Company establishes credit limits through payment terms with customers, performs ongoing credit evaluations and monitors accounts on an aging schedule basis to minimize the risk of loss. Despite the Company’s efforts to minimize credit risk exposure, customers could be adversely affected if future industry trends, including those related to COVID-19, change in such a manner as to negatively impact their cash flows. The full effects of COVID-19 on the Company’s customers are highly uncertain and cannot be predicted. As a result, the Company’s future collection experience can differ significantly from historical collection trends. If the Company’s customers experience a negative impact on their cash flows, it could have a material adverse effect on the Company’s results of operations and financial condition.

The Company evaluates its accounts and notes receivable for expected credit losses quarterly. Accounts receivables are evaluated based on internally developed credit quality indicators derived from the aging of receivables. Notes receivable are evaluated based on internally developed credit quality indicators derived from Management’s assessment of collection risk. The Company manages note receivable portfolios using a two tiered approach by disaggregating standard notes receivables, which are promissory notes in good standing, from those who have been identified by Management as having an elevated credit risk profile due to a trigger event such as bankruptcy. At the end of each period the Company sets a reserve for expected credit losses on standard notes receivable based on the Company’s historical loss rate. Notes receivable with an elevated risk profile, which are from customers who have filed bankruptcy, are subject to collections activity or are slow payers that are experiencing financial difficulties, are aggregated and evaluated to determine the total reserve for the class of receivable.

The guidance in ASC 326 permits entities to make an accounting policy election not to measure an estimate for credit losses on accrued interest if those entities write-off accrued interest deemed uncollectible in a timely manner. The Company follows an income recognition policy on all interest earned on notes receivable. Under such policy the Company accounts for all notes receivable on a non-accrual basis and defers the recognition of any interest income until receipt of cash payments. This policy was established, recognizing the environment of the long-term care industry, and not because such notes receivable are necessarily impaired. Accordingly, the Company does not record a credit loss adjustment for accrued interest. For the three and six months ended June 30, 2020, the Company recognized $0.4 million and $1.0 million in interest income from notes receivables.

As part of the Company’s adoption of ASC 326, there are additional disclosures required to be made on a class of financing receivable basis. The following table presents the Company’s two tiers of notes receivable further disaggregated by year of origination as of June 30, 2020:


	Notes Receivable
	Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Total
	(in thousands)
Notes Receivable
Standard notes receivable	$	8,127	$	13,619	$	17,669	$	26,429	$	275	$	1,602	$	67,721
Elevated risk notes receivable	$	—	$	604	$	—	$	5,511	$	—	$	2,421	$	8,536

Current-period gross write-offs	$	—	$	—	$	411	$	—	$	1,721	$	36	$	2,168
Current-period recoveries	—		—		—		—		—		—		—
Current-period net write-offs	$	—	$	—	$	411	$	—	$	1,721	$	36	$	2,168

The following table provides information as to the status of payment on the Company’s notes receivable which were past due as of June 30, 2020:


	Age Analysis of Past-Due Notes Receivable as of June 30, 2020
	0-90 Days		91 - 180 Days		Greater than 181 Days		Total
	(in thousands)
Notes Receivable
Standard notes receivable	$	638	$	433	$	3,075	$	4,146
Elevated risk notes receivable	1,035		767		5,829		7,631
	$	1,673	$	1,200	$	8,904	$	11,777

The following table provides a summary of the changes in the Company’s allowance for doubtful accounts on a portfolio segment basis for the three and six months ended June 30, 2020:


	Allowance for doubtful accounts
Portfolio Segment:	March 31 2020		Write-Offs¹		Bad Debt Expense		June 30 2020
	(in thousands)
Accounts Receivables	$	74,389	$	(9,987)	$	1,897	$	66,299

Notes Receivables
Standard notes receivable	$	11,654	$	(1,721)	$	1,936	$	11,869
Elevated risk notes receivable	6,237		(447)		28		5,818
	$	17,891	$	(2,168)	$	1,964	$	17,687
Total accounts and notes receivable	$	92,280	$	(12,155)	$	3,861	$	83,986

1.Write-offs are shown net of recoveries. During the three months ended June 30, 2020, the Company collected $0.8 million of accounts receivables that were recovered subsequent to being written-off.


	Allowance for doubtful accounts
Portfolio Segment:	December 31, 2019		Cumulative effect of ASC 326 adoption¹		Write-Offs²		Bad Debt Expense		June 30, 2020
	(in thousands)
Accounts receivable	$	39,903	$	36,709	$	(14,396)	$	4,083	$	66,299

Notes receivable
Standard notes receivable	$	6,667	$	5,236	$	(1,721)	$	1,687	$	11,869
Elevated risk notes receivable	5,823		291		(447)		151		5,818
Total notes receivable	$	12,490	$	5,527	$	(2,168)	$	1,838	$	17,687
Total accounts and notes receivable	$	52,393	$	42,236	$	(16,564)	$	5,921	$	83,986

1.Represents the pre-tax one-time adjustment to the Company’s 2020 opening retained earnings balance in accordance with the adoption of the CECL accounting guidance.

2.Write-offs are shown net of recoveries. During the six months ended June 30, 2020, the Company collected $0.8 million of accounts receivables that were recovered subsequent to being written-off.