Update for CCRCs With Refundable Entrance Fee Contracts
The American Institute of Certified Public Accountants (AICPA) released its updated
Audit and Accounting Guide for Health Care Entities (“Health Care Audit Guide”) in October 2011. An area of the guide relating to entrance fees refundable upon re-occupancy was under scrutiny earlier this year, but remained unchanged.
In May 2011, we shared the potential impact of the updated and revised Health Care Audit Guide. At that time, providers raised specific concerns about the possible addition of language to Chapter 14, “Financial Accounting and Reporting by Continuing Care Retirement Communities.” That language, if included in the guide, would have required CCRCs that offered entrance fee contracts with refunds based upon re-occupancy to review their contracts and verify if they were able to continue to defer and amortize revenue over the useful life of the facility. In addition, there was no transition guidance provided.
“This decision does not mean that CCRCs with refund upon re-occupancy plans are out of the woods related to the potential for accounting, disclosure, and reporting changes,” says Chad Kunze, health care principal with LarsonAllen.
Clarification on advance fees
The Financial Accounting Standards Board (FASB) is in a process of periodically updating the Accounting Standards Codification (ASC) for “minor technical drafting errors.” In October 2011, FASB issued a 210-page exposure draft that contains “clean up” language over many topics, including ASC 954-430-25-1, which directly relates to CCRC advance fees. The proposed wording that would be added is as follows (emphasis is ours):
“When a contract between a continuing care retirement community and a resident stipulates that a portion of the fees will be paid to a current resident or their designees, only to the extent of the proceeds of re-occupancy of the contract holder’s unit, that portion shall be accounted for as deferred revenue, provided that legal and management policy and practice support the withholding of refunds under this condition.”
If this change is approved, contracts that do not limit the refund to the proceeds of re-occupancy of the contract holder’s unit would not qualify for revenue deferral and amortization.
“A positive result of this proposed change to the ASC is that organizations affected would be allowed to apply transitional guidance,” Kunze says. This would allow the disclosure to be in the form of an accounting change (cumulative effect adjustment) and not a restatement.
Send comments to FASB by December 13
Accounting and health care industry professionals continue to discuss the proposed ASC changes. The comment period for this exposure draft extends to December 13, 2011. There is no projected effective date specified at this time.
Cline Comer, a LarsonAllen principal and member of the AICPA Health Care Expert Panel and Guide Revision Task Force, says, “We encourage representatives from impacted organizations to weigh in on this matter and provide comments on the exposure draft.”
Submit comments to FASB by email or post to:
director@fasb.org
Attn: Technical Director
File Reference No. 2011-190
FASB
401 Merritt 7
PO Box 5116
Norwalk, CT 06856-5116
How we can help
LarsonAllen’s health care professionals can help assess the impact of the changes on your organization, as well as 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.