On July 24, 2012, the FASB issued guidance addressing the accounting for refundable entrance fees received by continuing care retirement communities. In summary, the FASB clarified that a continuing care retirement community should classify the refundable entrance fee as deferred revenue only when its resident contract provides for repayment of the fee upon reoccupancy, the repayment is limited to the proceeds received from the new occupant, and the entity's policy and practice is to enforce the refund limitation. Otherwise, the entrance fee is classified as a liability. This In brief article provides further information on the new guidance.
On July 24, 2012, the FASB issued guidance1 addressing the accounting for refundable entrance fees received by continuing care retirement communities. In summary, the FASB clarified that a continuing care retirement community should classify the refundable entrance fee as deferred revenue only when its resident contract provides for repayment of the fee upon reoccupancy, the repayment is limited to the proceeds received from the new occupant, and the entity's policy and practice is to enforce the refund limitation. Otherwise, the entrance fee is classified as a liability.
Continuing care retirement communities (CCRCs) provide residents with a combination of residential, social, and health care services. Residents do not own the underlying real estate. Instead, they purchase lifetime access to the community's services. In most cases, new residents must pay an entrance fee (or "advance fee") in order to join a community. These entrance fees can be quite large and typically correlate to the average price of homes in the retirement community's market area.
The extent to which entrance fees are refundable is set forth in the resident agreement. If fees are refundable, the refund payment typically is made only after the unit is assigned to a new resident and a new entrance fee is collected.
Some resident agreements further stipulate that if the fee collected from the new resident is less than the amount refundable to the prior resident, that refund is limited to the amount of funds received from the new resident. In those situations, the CCRC would not reflect a liability for the refund obligation. Instead, ASC 954-430, Health Care Entities—Deferred Revenue, indicates that the entrance fee represents deferred revenue that is amortized into income over the life of the facility.
In practice, however, some CCRCs have applied the guidance for deferred revenue more broadly, irrespective of whether the refund amount is contractually capped at the amount of proceeds received from the next resident. The new accounting standard update (ASU) was issued to eliminate diversity in practice.
The ASU clarifies that refundable entrance fees are reported as deferred revenue that is amortized into income over the life of the facility only when:
If those circumstances do not exist, the entity should report the refundable fee as a liability.
The new guidance applies to CCRCs with resident agreements that provide for refunds of entrance fees upon receipt of a fee from a subsequent occupant. Entities that have historically reported deferred revenue in situations where the contract does not limit the amount of refund to the proceeds of reoccupancy would likely have a reclassification from deferred revenue to a refund liability, an increase in the refund liability, and a reduction of retained earnings (or net assets) and revenue for previously amortized deferred revenue. Such a reclassification may also potentially trigger recognition of a liability associated with the obligation to provide future services.
For public entities (including CCRCs that are conduit obligors in municipal bond financing arrangements), the ASU is effective for fiscal periods beginning after December 15, 2012. A one-year deferral is provided for nonpublic entities. Early adoption is permitted.
The amendments will 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
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact Victoria Brennan (1-973-236-4720), Bradley Williams (1-973-236-4718), Anslem Oshionebo (1-973-236-4280), or Karen Pfeil (1-973-236-4344) in the National Professional Services Group.
1Accounting Standard Update No. 2012-01, Continuing Care Retirement Communities—Refundable Advance Fees
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