Living In Tweenerville: An Accounting Uncertainty for Continuing Care Retirement Communities (CCRCs)

It’s an interesting time for health care organizations with resident contracts accounted for under Chapter 14, Financial Accounting and Reporting by Continuing Care Retirement Communities, of the current AICPA Guide to Health Care Entities (the guide). Controversy is centered on a draft document on the AICPA website attached to the Sept. 7-8 FinREC meeting agenda.

This draft document for Chapter 15 (draft guide) is authored by the AICPA Health Care Accounting and Audit Guide Revision Task Force (the task force); Bob Wright, a partner in the Rockford, Ill., office of McGladrey & Pullen, is a member of the task force. “People are finding this document and concluding that it is authoritative; it will not even be exposed until late spring 2011 with a planned release, assuming comments from the exposure period are resolved, in January 2012,” comments Wright.

If the draft guide represented a potential change in GAAP, it would have to be reviewed by the FASB. FASB review and approval is currently not contemplated as the rewrite is considered an update and clarification of existing guidance. Towards this objective of clarification, para. 15.19 and 15.20 of the draft guide state that when a portion of a contract is fully refundable, or when the refundable amount is fixed, known or estimable, it is accounted for as a liability with any remaining amount accounted for as deferred revenue (amortization methods are not discussed in this article).

The current guide calls for contracts with fees refundable “only to the extent of the proceeds of re-occupancy” to be treated as deferred revenue (para. 14.16 and 14.17). The task force has responded to the current environment, where decreasing requirements for entrance fees are more common, by adding several new clarifying paragraphs to the draft guide.

The addition that is creating significant interest is para. 15.26 of the draft guide, which states that refundable contracts without a limitation to the proceeds from re-occupancy (unlimited refundable contracts) are to be accounted for as a liability as opposed to deferred revenue. The underlying concept is that the possibility for the owners of the CCRC to be out-of-pocket for a portion of the refund exists, and, therefore, liability reporting is appropriate. “The task force considers proposed para. 15.26 to be a clarification of the original intent of the guide, not new guidance,” says Wright.

In practice, many CCRCs recorded all contracts refundable upon re-occupancy as deferred revenue based on para. 14.16 and 14.17 of the guide, regardless of limitations on refundability. The pre-2009 economic environment was characterized by increasing contract amounts; as a result, limitations were not commonly found in contract language. The draft guide para. 15.26 addition is clearly linking re-occupancy and a limitation to proceeds from re-occupancy to arrive at liability accounting.

Based on the commentary and feedback the task force is receiving from providers and CPA firms, this is creating a potential issue for many CCRC owners that used deferred revenue accounting for unlimited refundable contracts. These CCRC providers are faced with a conundrum. If the draft guide is clarifying existing guidance, should CCRCs change the accounting used for their unlimited refundable contracts before the update guide is released? If yes, how should that change be accounted for? Change in accounting method? If the method is wrong, then the change would be from non-GAAP to GAAP, which would be the correction of an error, requiring restatement.

What if the task force concludes this is a pervasive issue and transitional guidance is needed to provide a consistent methodology to correct and clear communication to regulators and other financial statements users? A restatement prior to the final issuance of the draft guide would prevent a provider from benefitting from any transitional guidance.

Normally, a task force does not respond to issues until the guidance is exposed and they receive comments. The inclusion of the draft guide on the AICPA website has advanced this timing, creating a gap between now and the planned January 2012 release for CCRC providers with unlimited refundable contracts currently being accounted for as deferred revenue. Those providers are living in Tweenerville, and the stakes are high in that town.

For more information on the process to comment on the exposure draft, please contact your local McGladrey & Pullen health care professional or Susan Davis at 515.281.9275.

If the task force does not act on this issue in upcoming meetings, when the exposure draft is issued in the spring, Tweenerville CCRC providers need to comment on the exposure draft. For more information on the process to comment on the exposure draft, please contact your local McGladrey health care professional or McGladrey & Pullen Partner Susan L. Davis at 515.281.9275.

About the Author
Susan L. Davis is a partner in the Des Moines, IA office of McGladrey & Pullen, LLP. The senior life and services organizations that Susan serves own or manage over 40,000 resident units. They include continuing care retirement organizations, home health care, long-term care and hospice.