Application of FASB ASC 606, Revenue from Contracts with Customers, to Continuing Care Retirement Community Contracts
By Frank Miceli, Partner, Assurance Services
The accounting for Continuing Care Retirement Communities (“CCRCs”) has always been a highly specialized area that requires a significant level of estimation and subjectivity. For CCRCs, the implementation of the Financial Accounting Standards Board Accounting Standards Codification 606, Revenue from Contracts with Customers (FASB ASC 606), will continue this tradition of complexity and the need for sophisticated accounting models and tracking. On February 1, 2018, the American Institute of Certified Public Accountants (AICPA) Healthcare Industry Revenue Recognition Task Force published Issue #8-3, “Application of FASB ASC 606, Revenue from Contracts with Customers, to Continuing Care Retirement Communities,” with proposed wording to be included in the AICPA Revenue Recognition Guide.
Issue #8-3 focuses on what has been commonly referred to in the CCRC industry as “Type A” life care contracts. In these arrangements, a resident enters into an all-encompassing agreement that includes both residential facilities and amenities, as well as access to healthcare services, consisting most commonly of assisted living and skilled nursing components. It is common for an incoming resident to pay an upfront entrance fee that can include both refundable and non-refundable components, along with an ongoing monthly fee that usually includes little or no increase over the duration of the contract, other than for inflation or increases in operating cost.
In the February 1, 2018, publication of Issue #8-3, the task force outlined its position on a few key considerations relating to FASB ASC 606 implementation. Some of these considerations lead down the path of treatment that is consistent with current practice, while others lead to a new era of CCRC accounting. For monthly fees, in general, the task force believed that fee revenue should be recognized by the CCRC as monthly services are performed. This treatment of monthly fees is generally consistent with current practice. For non-refundable fees, the task force believed that those fees represent a payment for what is referred to in ASC 606 as a “material right” to future goods and services from the CCRC. As such, the revenue from a non-refundable entrance fee containing a material right for future goods and services should be recognized when the underlying goods are transferred or services are performed. Three acceptable methods for such revenue recognition were outlined in within the publication as follows:
- Time-Based Measurement: The time-based measurement looks very similar to current methodology, with equal amounts allocated each month over the remaining life of the resident. This method appears to be more appropriate when the nature of the CCRC’s performance obligations is to make the residential, social, or healthcare services available on an as-needed basis for as long as the resident is in the facility. The example provided within the publication shows a resident whose non-refundable entrance fee is amortized into income based on that resident’s expected remaining life. The remaining estimated life is reassessed at every measurement period, with the remaining amount recognized in income when the resident expires.
- Cost-to-Cost Method: The cost-to-cost method projects the anticipated costs for the various levels of care (i.e., independent living, assisted living, and skilled nursing) over the remaining life of the resident. This method requires some historical or other data to estimate when a particular resident is expected to access these various levels of care, along with a projection of what those levels of care would cost in the future. Once these projections are made, revenue is recognized proportionately in conjunction with the costs being incurred.
- Alternative Method per FASB ASC 606-10-55-15: This method is provided in ASC 606’s Example 51, “Option that provides the customer with a material right (renewal option).” It requires the CCRC to allocate the transaction price to the goods and services expected to be provided and the corresponding consideration (i.e., monthly fees).
CCRCs’ implementation of these and other provisions of ASC 606 and the impacts to comparability remains to be seen. The above three methods could produce significantly different patterns of revenue recognition, and the selection of which method to use appears to be somewhat subjective in nature. In addition, there are other significant considerations that will require professional judgement including whether or not the contract with the customer includes a financing component or an imbedded lease component. Financial statement users, including financing sources and regulatory bodies, will need to be aware of these significant changes as they are implemented and evolve, and should also pay close attention to the financial statement disclosures to determine the impacts of adoption.