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BP Business Economic Loss Claim Appeal 2017-1495: Bad Debt Is Variable Expense

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The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms

Claimant, a hospital general trust fund located in Opelousas, Louisiana, appeals the denial of its BEL claim on the basis it failed to satisfy the causation requirements of Exhibit 4B of the Settlement Agreement. Claimant asserts the Settlement Program(SP) wrongfully treated bad debt it suffered as a variable expense and not as contra-revenue or reduction in revenue, resulting in claimant failing to satisfy causation requirements. Claimant argues that according to general accounting standards bad debts for health care entities are treated differently than for non-health care entities, and are considered an offset to patient revenue instead of a variable expense.
BP contends that Exhibit 4D of the Settlement Agreement specifically provides that bad debt is a variable expense and that the SP followed it and policies 361 and 295 in
its treatment of bad debt.A review of the record discloses that claimant is a health care facility with a percentage of patients who do not fulfill payment of their  accounts. Claimant in its P&Ls used bad debt as an offset to revenue when computing its “net income” for a given year or period. Claimant argues this practice is consistent with general accounting standards and “net revenues” referenced in Exhibit 4B,paragraph iii A,of the Settlement Agreement.
The SP in paragraph 12 of the Calculation Notes, styled “Bad Debts”, explained its decision: “***As bad debt is a retroactive recognition of generated income that was not received,Accounting Review created contra and adjustment accounts to move the account ‘Bad Debts’ from the revenue section to the expense section of the P&Ls for the claim calculation.***”. This adjustment is reasonable and conforms to Exhibit 4D of the Settlement Agreement and its characterization of bad debt as a variable
expense.The Settlement Agreement was a negotiated instrument whose content and application sometimes conflict with generally accepted accounting principles. In such instances such as here the Settlement Agreement is preemptive and controls.
Policy 361 instructs that the SP shall adhere to the classification of expenses listed in Exhibit 4D unless the expense does not fit the mold. There is no question an uncollectable account receivable should be considered a “bad debt.” Policy295 also has relevancy.It prohibits the SP from calculating revenue patterns on the basis of amounts derived from gross profits,net profits or net income.In fact, Exhibit 4B and its causation requirements are couched in terms of “total revenue” and not “net revenues.” The SP acted properly. There is no error. Accordingly,the decision of the Claims Administrator is affirmed and the appeal of claimant is denied.

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