Digital Health Innovation Accounting: Financial Reporting for Emerging Technologies
in Healthcare
Introduction
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
Technological innovation in the healthcare sector has accelerated rapidly in recent years.
Emerging technologies such as artificial intelligence, virtual reality, telemedicine, and
blockchain are beginning to transform how medical care is delivered and paid for. This digital
transformation of the healthcare industry poses many new challenges for financial
accounting and reporting standards. Traditional accounting principles and practices may no
longer adequately capture the value of investments in emerging digital health technologies
or reflect new business models centered around data, software, and services rather than
physical products and facilities. As a result, establishing clear financial reporting guidelines
for digital health innovation will be crucial to ensuring transparency and informed decision-
making in healthcare finance going forward.
This paper will examine key accounting issues raised by emerging digital health
technologies and propose guidelines for adapting financial reporting standards to better
represent their financial impact. Specifically, it will analyze challenges around capitalizing
and valuing investments in research and development (R&D) of new digital health tools,
classifying intangible assets derived from data and software, and accounting for revenue
streams from software as a service (SaaS) business models. Recommendations will be
made for clarifying accounting treatment of these areas through updates to generally
accepted accounting principles (GAAP). The goal is to support a more accurate and
complete picture of healthcare organizations' financial positions as their business
increasingly incorporates digital innovation.
Accounting for Digital Health R&D Expenditures
One of the primary areas where emerging technologies are testing traditional accounting
practices relates to R&D expenditures. Significant investment is now being directed towards
developing new applications of technologies like AI, VR/AR, robotics, sensors, and
personalized genetics in areas such as disease diagnosis, remote patient monitoring,
surgical robotics, digital therapeutics, and more. However, current GAAP provides limited
and ambiguous guidance around capitalizing costs associated with developing intangible
digital assets as opposed to expensing them immediately.
For R&D activities that are not eligible for capitalization, all associated costs must be
expensed in the period incurred under FASB Concept Statement No. 5 and ASC 730. This
can overly distort short-term financial statements and understate the long-term value of
digital projects still in development phases. It also creates challenges for comparability
between organizations pursuing innovation strategies to varying degrees. At the same time,
qualifying costs for capitalization requires meeting the "technological feasibility" threshold,
which is difficult to apply objectively to intangible software and technology assets.
To address this, GAAP should be updated to permit capitalization of certain digital health
R&D costs that meet well-defined criteria demonstrating economic value and technical
feasibility. For example, costs directly attributable to the development of specific
technological solutions could be capitalized once prototype testing achieves predefined
validation milestones. General R&D overheads would remain expensed unless clearly
contributing to qualifying projects. Capitalized development costs would then be amortized
over estimated economic lives of resulting technologies rather than expensed immediately.
More flexibility would better capture long-term value without compromising objectivity or
comparability.
Accounting for Digital Health Intangible Assets
A related issue concerns how to classify and value intangible assets arising from digital
health technologies and data assets once developed. While physical equipment and facilities
can be reliably valued and depreciated, quantifying the financial value of "soft" assets like
algorithms, software code, data repositories, brand recognition, and network effects poses
unique challenges. Current accounting rules around internally generated intangibles provide
little practical guidance here.
One concern is around data assets accumulated through platforms, EHR systems, remote
devices, telehealth visits and other digitally-enabled care services. Valuable datasets
containing clinical, genomic, social, and behavioral information on patients are now routinely
collected, yet their accounting treatment remains ambiguous. Clarifying that datasets
meeting size, security, and use criteria can be capitalized as intangible assets would give a
truer picture of companies' strategic data-related investments and resources.
Additionally, GAAP should recognize algorithms, codebases, and other technical "know-
how" embedded within digital tools as distinct intangible assets once developed. Their value
resides in technological rather than legal protections but merits separate classification and
amortization over estimated useful lives. Capitalizing qualifying internally generated software
separately from generic IT systems and infrastructure investments achieves a similar goal to
patents in capturing innovation value over time.
Finally, new consideration must be given to network-effect driven assets like user networks,
referral relationships, brand equity, and market position that emerge alongside digital
platforms. While difficult to value precisely, their long-term importance to digital health
businesses justifies exploring recognition either through capitalization or supplementary non-
financial reporting. Lack of specific GAAP guidance should not preclude representing such
strategically critical yet "soft" resources on companies' balance sheets.
Accounting for Digital Health Business Models
A final key area is how to account for emerging digital health business models centered
around delivering ongoing software and data services rather than one-off product sales.
Examples include electronic health record systems, patient engagement apps, telehealth
platforms, digital symptom trackers, and AI clinical decision support tools all offered on a
subscription or usage basis. These software as a service (SaaS) models represent a
transition towards “users not owners,” recurring rather than upfront revenues, and valuation
based on long-term user retention rather than individual transactions.
Currently, GAAP does not adequately distinguish accounting for software licenses versus
ongoing access and support services. It risks mischaracterizing SaaS revenues that are
more fairly recognized ratably over contractual periods versus upfront. The resulting “lumpy”
revenue distortion fails to reflect underlying business performance and subscription
economics.
To provide useful information, GAAP should recognize key attributes of digital health SaaS
models:
1) Revenue from licensing software should be separated fromrecurring access/support
services
2) Access revenues representing continuing performance obligations should be recognized
ratably over contractual periods
3) Upfront implementation/customization fees representing distinct services should continue
one-time recognition
4) Contract acquisition/origination costs requiring amortization should exclude sales
commissions tied to recurring revenues
Distinguishing revenue streams in this manner achieves a truer matching of expenses to
associated revenues without compromising transparency. It better portrays the ongoing
value derived from digital service relationships versus isolated transactions.
Broader financial reporting should also reflect key SaaS operating metrics like annual
recurring revenues, customer retention/churn, average revenue per user, and
contract/bookings values to supplement GAAP revenues. Non-GAAP metrics provide
valuable supplemental context around digital business performance and outlook. Guidance
acknowledging such alternative indicators would improve communications without
compromising comparability or oversight.
Conclusion
In conclusion, establishing clear accounting practices for capturing investments in digital
health technologies and representing new service-based business models will be essential
as innovation transforms healthcare. Traditional accounting principles have struggled to
keep pace with strategic shifts towards intangible assets, recurring revenues, and long-term
user relationships centered on access models.
While complete alignment with existing GAAP frameworks may not always be practical given
digital healthcare’s unique attributes, targeted updates and supplemental financial metrics
are needed. Specific recommendations include permitting capitalization of qualifying R&D
costs to better reflect long-term value; classifying datasets, algorithms and internally
developed technology as distinct intangible assets; and recognizing recurring access
revenue and deferred contract acquisition costs separately for digital subscription services.
Adopting these practices achieves the core financial reporting objectives of presenting a true
and fair view of companies’ economic positions and performance over time. It supports
operators, investors and other stakeholders around informed strategic planning and resource
allocation decisions as digital technologies play an increasingly transformative role in
healthcare financially and clinically. Accounting standards must accommodate ongoing
innovations in both care delivery and finance to ensure accurate and useful disclosure going
forward.
