Business and Summary of Significant Accounting Policies

(a) Business

HMS is a leading provider of cost containment solutions in the U.S. healthcare marketplace. Using innovative technology as well as extensive data services and powerful analytics, the Company delivers coordination of benefits, payment integrity, and health management and member engagement solutions through its operating subsidiaries to help at-risk healthcare organizations recover improper payments; prevent future improper payments; reduce fraud, waste and abuse; better manage the care their members receive; and ensure regulatory compliance. The Company serves commercial health plans, state government agencies, federal programs, at-risk providers, pharmacy benefit managers and employers.

The accompanying consolidated financial statements and notes are unaudited. Accordingly, they do

not

include all of the information and notes required by U.S. GAAP for complete financial statements. These statements include all adjustments (consisting of normal recurring accruals) that management considers necessary to present a fair statement of the Company’s results of operations, financial position and cash flows. The results reported in these unaudited consolidated financial statements should

not

be regarded as necessarily indicative of results that

may

be expected for the entire year. It is suggested that these unaudited consolidated financial statements be read in conjunction with the Company’s consolidated financial statements as of and for the year ended

December 31, 2016

which were filed with the SEC as part of the

2016

Form

-K. The consolidated balance sheet as of

December 31, 2016

included herein was derived from audited financial statements, but does

not

include all disclosures required by U.S. GAAP.

The preparation of the Company’s unaudited consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, primarily accounts receivable, intangible assets, fixed assets, accrued expenses, estimated liability for appeals, the disclosure of contingent liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. The Company’s actual results could differ from those estimates.

HMS is managed and operates as

one

business segment, with a single management team reporting to the Chief Executive Officer. The unaudited consolidated financial statements include HMS accounts and transactions and those of the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(b) Summary of Significant Accounting Policies

There have been

material changes to the Company’s significant accounting policies that are referenced in the

2016

Form

-K.

Recently Adopted Accounting Pronouncements

March 2016,

the FASB issued ASU

No.

2016

09,

Compensation – Stock Compensation (Topic

718

): Improvements to Employee Share-Based Payment Accounting

, (“ASU

2016

09”

) that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits are

longer separately classified as a financing activity apart from other income tax cash flows. The standard also allows companies to repurchase more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the cash flows statement and provides an accounting policy election to account for forfeitures as they occur. ASU

2016

was effective for annual reporting periods beginning after

December 15, 2016,

including interim periods within such annual reporting periods with early adoption permitted. The Company elected to early adopt the new guidance in the

fourth

quarter of fiscal year

2016

which required us to reflect any adjustments as of

January 1, 2016,

the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax benefits in the provision for income taxes rather than paid-in capital for all periods in fiscal year

2016.

Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had

impact to retained earnings as of

January 1, 2016,

where the cumulative effect of these changes were required to be recorded. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The Company elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented which resulted in an increase to both net cash from operating activities and net cash from financing activities of

$1.9

million for the

nine

months ended

September 30, 2016.

Adoption of the new standard resulted in the recognition of net excess tax benefits in the provision for income taxes rather than paid-in capital of

$1.9

million for the

three

and

nine

months ended

September 30, 2016.

Additionally, for the

three

and

nine

months ended

September 30, 2016,

income tax expense decreased and net income increased

$1.9

million and earnings per share increased

$0.02

as compared to previously reported amounts. The presentation requirements for cash flows related to employee taxes paid for withheld shares had

impact to any of the periods presented on the consolidated statements of cash flow since such cash flows have historically been presented as a financing activity.

Recently Issued Accounting Pronouncements

May 2014,

the FASB issued ASU

No.

2014

09,

Revenue from Contracts with Customers

(Topic

606

) (“ASU

2014

09”

), which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The FASB has recently issued several amendments to the standard. ASU

2014

is effective for annual reporting periods beginning after

December 15, 2017,

including interim periods within such annual reporting periods with early adoption permitted. The Company does

not

plan to early adopt this guidance and therefore will adopt on

January 1, 2018.

The guidance permits

two

methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company will adopt ASU

2014

using the modified retrospective method. The Company, with the assistance of external consultants, has developed and is currently following an implementation plan. In connection with the implementation plan, the Company has performed a review of a significant number of historical contracts and is in process of assessing the overall financial statement impact of this assessment. Depending on the results of the Company’s assessment, there could be material changes to the timing and recognition of revenues and certain associated expenses. The Company expects to complete the assessment process, including quantifying the overall impact to the Company’s results of operations by the end of the

fourth

quarter of

2017.

February 2016,

the FASB issued ASU

No.

2016

02,

Leases (Topic

842

)

(“ASU

2016

02”

). ASU

2016

will require most lessees to recognize a majority of the company’s leases on the balance sheet, which will increase reported assets and liabilities. ASU

2016

is effective for annual reporting periods beginning after

December 15, 2018

including interim periods within such annual reporting periods with early adoption permitted. The Company has

not

early adopted this guidance and is currently evaluating the impact on the Company’s consolidated financial statements of adopting this guidance. The Company does

not

expect this to have a material impact to the Company’s results of operations.

August 2016,

the FASB issued ASU

No.

2016

15,

Statements of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments

(“ASU

2016

15”

)

ASU

2016

clarifies where certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for annual reporting periods beginning after

December 15, 2017,

and for interim reporting periods within such annual periods. The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance. The Company does

not

expect this to have a material impact to the Company’s consolidated financial statements.

January 2017,

the FASB issued ASU

No.

2017

01,

Business Combinations (Topic

805

) – Clarifying the Definition of a Business

(“ASU

2017

01”

). The amendments are effective for annual periods beginning after

December 15, 2017,

including interim periods within those periods. The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance. The Company does

not

expect this to have a material impact to the Company’s consolidated financial statements.

January 2017,

the FASB issued ASU

No.

2017

04,

Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment

(“ASU

2017

04”

). ASU

2017

simplifies the manner in which an entity is required to test for goodwill impairment by eliminating Step

from the goodwill impairment test. The amendment is effective for public entities that are SEC filers prospectively for their annual, or any interim, goodwill impairment tests in fiscal years beginning after

December 15, 2019.

Early adoption is permitted for all entities for interim or annual goodwill impairment tests performed on testing dates after

January 1, 2017.

The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance. The Company does

not

expect this to have a material impact to the Company’s consolidated financial statements.

May 2017,

the FASB issued ASU

No.

2017

09,

Compensation – Stock Compensation (Topic

718

) – Scope of Modification Accounting

(“ASU

2017

09”

). ASU

2017

finalizes previous proposals regarding the complexity around share-based payment awards for modifications. The amendment is effective for public entities that are SEC filers for annual and interim periods beginning after

December 15, 2017.

Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have

not

yet been issued. The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance. The Company does

not

expect this to have a material impact to the Company’s consolidated financial statements.