If material, it will be important to establish a communication plan for consumers because some communities may no longer recognize “amortization income.”
FASB Ruling Affects CCRC Entrance Fee Accounting
The Financial Accounting Standards Board (FASB) finalized an accounting standards update (ASU) on May 30 that changes the way continuing care retirement communities (CCRCs) account for refundable advance fees.
This ruling comes as a follow up to the October 2011 technical corrections exposure draft that contained proposed amendments to Topic 954, Health Care Entities, which clarified the accounting procedures regarding refundable advance fees.
At the meeting, the board decided to finalize without change the amendments related to accounting for refundable advance fees by CCRCs. Those amendments will be included as a separate ASU to be issued concurrently with the technical corrections ASU.
How will this impact your organization?
“CCRCs that do not have language in their contract that specifically limits refunds to the reoccupancy proceeds of the specific unit, will have a cumulative effect adjustment — which is a change in accounting principle,” says Cline Comer, a health care partner with CliftonLarsonAllen. “This will restore the liability to the full refundable amount under the contract, with a corresponding reduction of net assets.”
FASB is expected to approve and issue the ASU by July 2012.
Transition guidance and effective dates
The board decided that adjustments as a result of the CCRC amendment should be recorded as a cumulative effect of a change in accounting principle as of the earliest period presented. The board also decided that the CCRC amendments will be effective as follows, with early adoption permitted:
- For public entities, fiscal periods beginning after December 15, 2012
- For non-public entities, fiscal periods beginning after December 15, 2013
What should you do?
Initially, an affected CCRC will need to assess the impact of the change and its materiality to your financial statements. If material, it will be important to establish a communication plan for consumers, because some communities may no longer recognize “amortization income.” This may create operating losses in their financials.
Gray area still remains
What is not specifically addressed is the potential impact on Type A CCRCs that are able to offset their future services obligation (FSO) calculation by the amount of deferred revenue relating to these contracts. If the deferred revenue is no longer recorded, that would appear to eliminate the offset to the FSO. It appears that any adjustment to the FSO would also be subject to the same transition provisions (cumulative effect adjustment).
How we can help
CliftonLarsonAllen’s health care professionals can assist you in assessing the impact of the changes on your organization, as well as help interpret and apply the provision to your contracts and current practices.
Cline Comer, Health Care Partner
firstname.lastname@example.org or 704-998-5206
Mario McKenzie, Health Care Partner
email@example.com or 704-491-5534
Chad Kunze, Health Care Partner
firstname.lastname@example.org or 314-925-4321