AC599 Unit 10 Final Accounting Capstone Report Example

One Question From Proposal to Recommendation: A Unit 10 Final Capstone Report on a Health Claims Reserve

[Student Name]

Purdue University Global

AC599: Graduate Capstone in Accounting

Unit 10 Final Capstone Report

[Instructor Name]

[Date]

Hollis Creek Supply, its lender, vendors and every figure are composite; the standards, actuarial guidance, framework and texts cited are real.

Page One

Question. Does the year-end balance for health claims already incurred but still unpaid reflect what the plan owes?

Answer. No. The books carry $410,000; the evidence supports $661,300 owed, alongside $38,000 due back from the stop-loss carrier, so the net gap is $213,300. The best estimate's range is $571,000 to $684,000; the recorded amount lies outside it.

Recommendation. Record the adjustment, agree the covenant treatment with the bank before the certificate, evaluate the $208,200 that relates to 2025, adopt a written policy, re-derive completion factors quarterly under the new deductible design, bring in an actuary before the next year end and add the reserve to monthly controls.

Chapter 1: The Problem and Its Readers

Hollis Creek, a fourteen-branch distributor with about 380 employees, has self-funded its health plan for three years, reserving one month of paid claims at each year end. The rule was never tested. Three readers depend on the figure: the bank, whose fixed-charge coverage covenant of 1.20 was met at 1.22 in June; the owners, whose distributions stop for two quarters after a breach; and the controller, who must set a policy before the January deductible change lengthens the claims pipeline.

Chapter 2: The Standards

The accrual of incurred but unpaid claims follows the rule for contingencies: a liability is recorded when probable and reasonably estimable, at the best estimate within a range (Financial Accounting Standards Board, 1975). Actuarial guidance on incurred health claims describes completion factor and per-member methods and requires attention to any change in plan design or claim handling (Actuarial Standards Board, 2011). Recoveries from stop-loss insurance are recognized separately when probable, and offset only where a right of set-off exists between the same parties (Kieso et al., 2019). The auditor will evaluate the data, method and assumptions (American Institute of Certified Public Accountants, 2020).

Chapter 3: Method and Evidence

Three years of claims, laid out by service month against payment month, were reconciled to the cash Hollis Creek funded to the administrator, with one July 2025 difference of $14,200 traced to a provider refund. Completion factors from fully developed months were applied to months at least two lags old; a per-member projection of $453 a month, trended for inflation, covered November and December. Pharmacy claims used a one-lag factor. The method was tested by applying it as of December 31, 2025 and comparing with actual run-out (Friedland, 2010; Bluhm, 2012).

Chapter 4: Analysis

Medical incurred but unpaid claims total $612,400: $45,500 for October and earlier, $108,900 for November and $458,000 for December. With $48,900 of pharmacy claims added, the plan owes $661,300 in total. The stop-loss receivable is $38,000. The hindsight test applied to 2025 estimated $574,000 against actual run-out of $588,200, within 2.4 percent; the rule of thumb had booked $380,000, about a third too little.

Chapter 5: Findings

The reserve is short by $213,300 net. Of that, $208,200 relates to 2025 and $5,100 to 2026. If the full adjustment enters 2026 covenant earnings, coverage falls from about 1.22 to about 1.17; if the bank treats the prior-year portion as out of period, coverage stays at about 1.22. The cause was a rule adopted once and never compared with the claims data the administrator sent every month.

Chapter 6: Recommendation

Seven steps, each with an owner, cost and deadline, run from the year-end entry and the February 15 bank conversation through a written policy by February 28, quarterly factor re-derivation from March 31, an actuarial engagement by September 30 and a monthly control by April 30. The plan's cash cost for 2027 runs between eleven and twenty-four thousand dollars, with roughly forty staff hours (Committee of Sponsoring Organizations of the Treadway Commission, 2013).

The report's single most important number is not the $213,300 shortfall but the 2.4 percent hindsight error, because it shows that a method using only data Hollis Creek already had would have stated last year's reserve almost exactly, which is what justifies every recommendation that follows.

Chapter 7: Limitations

Four limits apply. The history behind the completion factors is short, roughly two years of months that have finished paying out. The projection for the newest months assumes costs keep following their recent path. Processing speed at the administrator was checked only through September. And the estimate does not reflect the 2027 deductible change, which affects only later claims but will change the pattern the method depends on.

Chapter 8: Scope Changes, Dated

October 14: March 2024 lag data added after the administrator resent it. November 4, after the seminar checkpoint: the stop-loss recovery moved out of the liability and onto its own asset line, because offset against premiums is not a right of set-off against the claims liability. November 4: the range added to every summary. November 4: the 2027 deductible change kept out of the estimate but added to the policy recommendation.

Chapter 9: What the Capstone Taught

The habit at the center of the problem, a rule of thumb that felt reasonable and was never checked, is common in accounting estimates. The remedy was not a sophisticated model but a comparison of the rule with what actually happened, using data that had been arriving every month.

A Note to the Next Analyst

Whoever estimates this reserve next year will face a different payment pattern, because higher deductibles delay when claims reach the plan. The method in this report still applies, but the completion factors must come from 2027 data as it develops, not from the old design. The quarterly comparison in the recommendation is how the next analyst will see the change happening.

Acknowledgments of Method

The estimate depends on data the administrator and pharmacy manager supplied; the reconciliation to cash is what made that data usable. The seminar checkpoint changed two presentation choices, both documented above, and neither changed the net figure.

A reader who wants to repeat the work needs only the administrator's report, the pharmacy report, enrollment and the stop-loss contract, all listed in the evidence plan with their holders.

Appendices

Appendix A, the reconciled lag triangle. Appendix B, the completion factors and range. Appendix C, the hindsight test. Appendix D, the recommendation table. Appendix E, a cross-reference tracing each figure in the report to the unit that first produced it.

References

Actuarial Standards Board. (2011). Incurred health and disability claims (Actuarial Standard of Practice No. 5). Actuarial Standards Board.

American Institute of Certified Public Accountants. (2020). Auditing accounting estimates and related disclosures (Statement on Auditing Standards No. 143). AICPA.

Bluhm, W. F. (Ed.). (2012). Group insurance (6th ed.). ACTEX Publications.

Committee of Sponsoring Organizations of the Treadway Commission. (2013). Internal control: Integrated framework. COSO.

Financial Accounting Standards Board. (1975). Accounting for contingencies (Statement of Financial Accounting Standards No. 5). FASB.

Friedland, J. (2010). Estimating unpaid claims using basic techniques. Casualty Actuarial Society.

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.