Accounting Standards Update for Continuing Care Retirement Communities
In July 2012, the Financial Accounting Standards Board (FASB) issued an update based upon the diversity in practice in applying Health Care Entities (Topic 954). This update is effective for years beginning after December 15, 2012, for public entities and for years beginning after December 15, 2013, for nonpublic entities.
The purpose of this update is to clarify the situations in which recognition of deferred revenue for refundable advance fees is appropriate. The update impacts all continuing care retirement communities that have resident contracts providing a payment of a refundable advance fee upon reoccupancy of that unit by a subsequent resident. When a contract includes this stipulation, the portion of the refundable advance fee that will be paid to current residents or their designees (only to the extent of the reoccupancy proceeds of a contract holder’s units) should be accounted for as deferred revenue, provided that legal and management policy and practice support the withholding of refunds under this condition. The resulting deferred revenue should be amortized to income over future periods based on the remaining useful life of the facility. All other refundable entrance fees, not contingent upon reoccupancy, should be accounted for and reported as a liability. Nonrefundable advance fees should be treated as deferred revenue and amortized over future periods based upon the estimated life of the resident or the contract term, if shorter.
Continuing care retirement communities need to review their contract language and accounting methodology relative to these advance fees to ensure proper recording. Changes in the financial statements of the organization should be applied retrospectively by recording a cumulative-effect adjustment to opening retained earnings (or unrestricted net assets) as of the beginning of the earliest period presented.