On Feb. 1, 2018, the AICPA Health Care Entities Revenue Recognition Task Force (RRTF) released its working draft on the application of the Financial Accounting Standards Board’s (FASB) ASC 606, Revenue from Contracts with Customers (ASC 606), to Continuing Care Retirement Community (CCRC) Contracts. The working draft is focused on Type A life care contracts that are all-inclusive continuing care contracts and that include residential facilities, other amenities, access to healthcare services, and primary assisted living and nursing care, for little or no increase in monthly fees (Type A). The working draft is open for public comment until April 2, 2018.
The implementation guidance will not be authoritative, nor is it intended to be a "one-size-fits-all" interpretation of the impact the standard will have on all healthcare entities.
The goal of the implementation guidance provided by this working draft is to provide views on how healthcare entities may apply ASC 606 to revenue contracts. The implementation guidance will not be authoritative, nor is it intended to be a “one-size-fits-all” interpretation of the impact the standard will have on all healthcare entities.
ASC 606, a principles-based standard
As ASC 606 is a principles-based standard, the working draft discusses various key judgments that the CCRC will need to evaluate to apply the framework of ASC 606, the most significant of which include: 1) whether entrance fees are deemed to have a significant financing component; 2) whether nonrefundable entrance fees or monthly fees paid by a resident in a Type A life care contract provide a material right to the resident; and 3) how often relevant assumptions such as life expectancies should be updated.
CCRC revenue recognition: potential patterns
The working draft outlines the following potential CCRC revenue recognition patterns based on the RRTF’s application of these judgments to a Type A contract:
Refundable entrance fees: The working draft indicates that generally, refundable entrance fees received from the resident should be recorded as a liability at the inception of the resident agreement and not included in the transaction price. This outcome is similar to current FASB guidance.
Monthly fees: The working draft suggests that the CCRC should generally recognize monthly fees as revenue when the services for the month are performed. This is also in line with current practices for most CCRCs.
Nonrefundable entrance fees: The working draft introduces three possible revenue recognition approaches for Type A life care contracts: time-based, cost-to-cost, or other.
- The time-based approach allocates the nonrefundable entrance fee in an equal amount to each month, which is consistent with a methodology used by many CCRCs under the current revenue recognition guidance.
- Under the cost-to-cost approach, the nonrefundable entrance fee would be allocated based on when the future estimated costs or services are transferred to a CCRC resident.
- When applying the other approach, CCRCs would allocate the transaction price to the optional periods by reference to the goods and services expected to be provided and corresponding expected consideration for those future goods or services.
The working draft provides illustrative examples of all of these approaches. Judgment will need to be applied by the CCRC to determine which approach is appropriate under the framework in the new accounting standard.
In determining their implementation plan for ASC 606, CCRCs should read the final guidance in its entirety in the AICPA Revenue Recognition Guide to assist in making key judgments for specific contracts.