Upcoming Accounting Changes for CCRCsJuly 13, 2012
By Jonathan H. Fink, CPA
In late May, the Financial Accounting Standards Board (FASB) finalized its deliberations on a rule change that will impact the way Continuing Care Retirement Communities (CCRCs) account for refundable entrance fees. Though the related Accounting Standards Update (ASU) has not yet been issued (issuance is expected later this year), the planned accounting changes may be significant to certain organizations.
The planned accounting change relates to how CCRCs account for and amortize refundable entrance fees. Currently, most CCRCs account for refundable entrance fees as a long-term liability and amortize the liability into revenue over the estimated life of the facility if the contract provides that the refund is made only upon reoccupancy. The theoretical basis for this is that entrance fees will be reflected as revenue over the useful life of the unit.
Under the anticipated ASU, this accounting approach will only continue to be permissible under certain contracts. In instances where the contract with the resident specifies that the refundable amount is limited to the proceeds from the entrance fees from reoccupancy, the current accounting for refundable fees is appropriate and no changes are needed. The CCRC would continue to record a deferred entrance fee liability for the refundable fees and amortize the amount into income over the estimated life of the facility.
In instances where the unit contract calls for a specific amount to be refunded without consideration of the amount of the successor occupant’s entrance fees, the CCRC is no longer permitted to recognize amortization revenue related to the refundable amount. In other words, the refundable entrance fee liability booked upon occupation of the unit would not be decreased until the corresponding refundable amount was refunded to that occupant and there would be no related amortization revenue.
The ASU will require a CCRC to reflect a cumulative adjustment in the year that the new accounting standard becomes effective. This change will result in certain amounts being reclassified from equity to liabilities. Furthermore, CCRCs will no longer report amortization revenue related to refundable entrance fees. These will be “book entries” only and will not impact cash flows. In addition, CCRCs should evaluate whether this accounting change could impact its compliance under existing debt covenants (for example, a debt to equity ratio).
The good news is that there is some time before this new accounting standard becomes effective. For public entities, it is effective for periods beginning after December 15, 2012. (Please note that, historically, the FASB has considered entities with public debt (CDA, CHEFA, etc.) to be ‘public entities’ for accounting standard purposes.) For non-public entities, the new standard is effective for periods beginning after December 15, 2013.
For impacted CCRCs, management may want to review its standard contract wording to determine if it makes sense, going forward, to limit refunds for future residents to reoccupancy amounts and not specify a dollar amount in the contract. Of course, such changes will need to be considered in the context of market demands, cash flow considerations, etc.
I would be happy to discuss with you how these accounting changes could potentially impact your company or organization. Please feel free to contact me with any questions or to discuss further at firstname.lastname@example.org or 860-561-6849.