CCRCs Should Review Proposed Clarification for Refundable Entrance Fees
Senior living finance executives expressed a good deal of interest in the AICPA’s
proposed revisions to the
Audit and Accounting Guide for Health Care Entities at LarsonAllen’s
webinar covering the guide’s proposed changes. The
draft version of the revised guide is in exposure stage, with comments accepted through June 6, 2011. Representatives from continuing care retirement communities (CCRCs), in particular, noted the potential modification in accounting, reporting, and disclosure for refundable entrance fees. The potential for change resides with the addition of language in Chapter 14, “
Financial Accounting and Reporting by Continuing Care Retirement Communities.”
Potential modification in accounting, reporting and disclosures
Chapter 14 of the revised guide’s working draft includes paragraphs 14.23 and 14.26, which were not previously included in the guide’s prior versions. Proposed paragraph 14.26 states:
"If the resident agreement does not stipulate that the refundable amount is limited to the proceeds of sale/re-occupancy of the contract holder’s unit, the advance fee would be accounted for and reported as a liability, as discussed in paragraph 14.19.”
This added language is intended to clarify the requirements that allow amortization of refundable entrance fees: amortization is permissible only when an organization’s policy and contract language specify that refunds are limited to the proceeds of sale and re-occupancy of the previous contract holder’s unit. Some providers and professionals believe this was the intent of AICPA Statement of Position 90-8, which was incorporated into the guide a number of years ago.
Amortization hinges on re-occupancy but doesn’t consider modified terms
Anecdotal information and feedback we’ve received indicate that a number of providers and professionals may have followed a prevailing practice of amortizing refundable entrance fees when there were “refund upon re-occupancy” provisions, but not always to the extent of strictly limiting refunds to proceeds of re-occupancy or to exact contract terms. Over the years, changes in marketing and buyer expectations have led to modified terms and contract types even when the “refund upon re-occupancy” provisions remained. It would appear that with this new paragraph and its restrictive language, providers that do not, and have not, met the requirements of proposed paragraphs 14.22–14.26 would not be allowed to amortize refundable entrance fees.
Previous inappropriate application of generally accepted accounting procedures (GAAP) would require a restatement of affected financial statements if the change were identified as being material in nature. CCRCs should review their policies and contract terms if they have historically amortized refundable entrance fees based upon “refund upon re-occupancy” provisions.
Concern has also been raised by various individuals that if the joint revenue recognition project of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) moves forward, refundable entrance fees may not meet the requirements for revenue recognition, even if the requirements of paragraphs 14.22–14.26 are met. This revenue recognition project is expected to be concluded and a final standard issued before the end of 2011, but no effective date has been published. It would likely not be effective before 2014 or perhaps even 2015.
Cline Comer, a LarsonAllen principal and member of the AICPA Health Care Expert Panel and Guide Revision Task Force, says, “The topic of revenue recognition for refundable entrance fees has been the subject of extensive discussion. We encourage representatives from impacted organizations to weigh in on this matter and provide comments to the AICPA.”
Send comments to the AICPA by June 6
Those interested or affected by this change may submit comments to the AICPA through June 6, 2011, by email or post to:
Anne Mundinger
Accounting & Auditing Publications
American Institute of Certified Public Accountants
220 Leigh Farm Road, Durham, NC 27707
amundinger@aicpa.org
How we can help
LarsonAllen’s health care professionals can help assess the impact of the changes on your organization, as well help to interpret and apply the provision to your contracts and current practices.
Cline Comer, Health Care Principal
ccomer@larsonallen.com or 704-998-5206
Chad Kunze, Health Care Principal
ckunze@larsonallen.com or 314-925-4321
View our health care principals.