CCRC Accounting for Entrance Fees – A “Change” or a “Clarification” – Thoughts and Considerations
Jun 13, 2011
In April 2011, the AICPA released a working draft of the AICPA Audit and Accounting Guide - Health Care Entities guide (the “Draft Guide”). The draft represents the first comprehensive revision of the guide since 1996 and addresses various matters including certain financial reporting and accounting for continuing care retirement communities (CCRCs). A topic in the draft of particular interest is the guidance and clarification on accounting for fees refundable to residents only from reoccupancy proceeds of a contract holder’s unit.
A brief history is important to understand the implications the proposed guidance contained in the Draft Guide could have on CCRCs. In past practice, if contracts contained a refund provision which limited the timing of the refund until the unit was reoccupied, many CCRCs treated the refund liability as deferred revenue and the resulting deferred revenue was amortized into income over future periods (typically over the estimated remaining useful life of the facility). Many CCRCs derived this accounting treatment from their interpretation of the guidance included in the current version of the AICPA Audit and Accounting Guide - Health Care Entities.
For entrance fee contracts that merely limit the timing of the refund to re-occupancy of the unit and do not specifically limit the amount of the refund to the proceeds of the next occupant’s entrance fee, clarification provided in the draft guide will likely cause a change in the accounting for the refundable portions of these entrance fee contracts.
Paragraphs 14.23 and 14.26 are included in the draft guide in an effort to provide clarity to the codification sections that address accounting for refundable entrance fees that are contingent upon reoccupancy.
Paragraph 14.23 provides that for entrance fee contracts between a CCRC and resident that stipulate that all or a portion of the entrance fee may be refundable if the contract holder’s or similar unit is reoccupied by another person, that the contracts have to clearly limit the refund amount to the proceeds received from the reoccupancy. If the proceeds received from reoccupancy are insufficient to pay the entire amount of the refund, the refund payment is limited to the amount of reoccupancy proceeds (as such, payable only to the extent of the proceeds of reoccupancy). In these situations, resources of the CCRC would not be utilized to make up any shortfall. If these conditions are present, the refundable portion of the entrance fee should be accounted for as deferred revenue, provided that legal and management policy and practice support the withholding of refunds under this condition. Similar amounts received from new residents in excess of the amount to be paid to previous residents or their designees also should be deferred.
Paragraph 14.26 continues the topic and notes that if the entrance fee contract does not stipulate that the refundable amount is limited to the proceeds of sale and reoccupancy of the contract holder’s unit, the entrance fee would be accounted for and reported as a liability (and not amortized).
CCRCs should address various factors when evaluating their current accounting for the refundable portion of its entrance fee contracts. The change in the economic environment, the declining value of real estate, and the lack of home sales have caused some CCRCs to consider allowing entrance fee units to be reoccupied by resident with rental contracts (no entrance fees required) and reduce entrance fee contract amounts to remain competitive. These changes in the landscape, the new guidance provided by the draft guide, and changes in management practices of CCRCs should cause CCRCs to reevaluate their current accounting policy for refundable entrance fees.
Information in the AICPA guide is not intended to be authoritative and is meant to provide clarity to the codification and the original intent of the guide, so, the question about how to treat the clarification/change in accounting needs to be addressed. For CCRCs, the most important thing you can do now is to assess whether or not you will need to change your accounting for the refundable portion of entrance fees either due to a change in practice or as a result of the clarification provided by the draft guide. Dependent on the responses to the draft guide and the overall pervasiveness of this issue in the industry, transitional guidance could be provided by the task force.
We believe the clarification in the guide regarding the accounting for the refundable portion of entrance fees represents a logical treatment of the refundable portion of entrance fees, recognizing that the accounting is dependent on the terms and conditions of individual contracts as well as the practices of the CCRC, and appears consistent with the standards reflected in the FASB Accounting Standards Codification.
We are committed to monitoring the issue and will provide you updates on the draft guide, along with insights as to the recommended treatment and accounting of entrance fees.
If you have any comments or observations regarding the above discussion on the accounting for entrance fees or any other accounting and reporting considerations, please contact your Plante & Moran health care specialist.