{Evolution of the Entrance Fee}
LeadingAge Michigan Finance & Strategy, October 27, 2015
Evolution of the Entrance Fee
Objectives:
• Revisit the Continuing Care Community Disclosure Act to
discuss the application of the Act and review an example of the
application of the Act.
• Explore the accounting rules of entrance fee contracts and
review an example of the application of the accounting standards.
• Review various demographics to see how they might impact
our assessment of accounting for entrance fees and the
operations of a continuing care retirement community in
Michigan.
Continuing Care Community Disclosure Act
The evolution continuing care communities in Michigan dates
back to 1976 when the Living Care Disclosure Act was
passed.
• Rules were put in place in 1991 to govern the issuance of entrance fees
• A task force was created to look at the Act and recommend changes, but
nothing materialized
• In 2010, the State reached out to Aging Services of Michigan to address
changes to the Act
From 1976 to now, complexities in entrance fee agreements increased, new
service models were created (CCRC without Walls), accounting rules have
evolved, and focus on consumer protection has increased.
1
Continuing Care Community Disclosure Act
Definitions from the Act:
• Entrance fee means money paid in a lump sum or installments or property
transferred pursuant to a continuing care agreement before initiation of
continuing care for one or more individuals and that confers the right to the
continuing care.
• Refundable portion of an entrance fee means the component of an entrance
fee that is refundable to the member or his or her estate under the terms and
conditions of the continuing care agreement, but excludes the amortized
component of an entrance fee.
• Nonrefundable portion of the entrance fee means the amortized component
of an entrance fee and any other component of an entrance fee that is not
refundable upon termination of the member under the terms and conditions of
a continuing care agreement.
• Amortized component of an entrance fee means the portion of an entrance
fee that is amortizable to reflect the cost of continuing care, multiplied by 1.5
percent for each month from the time of occupancy to the termination of
membership by death or other cause.
Continuing Care Community Disclosure Act
How does the Act impact communities?
• Considerations from the definitions identified:
o Is the split between refundable and nonrefundable portions of an entrance
fee dictated by the entrance fee contract or by the legal amortization that
has occurred during the resident’s occupancy of a living unit?
o What is the balance used in calculating the amount of the legal
amortization at 1.5 percent per month?
• Community’s registration period will be tied to their year end and the filing is
due within 120 days of their year end. This should be considered in planning
for financial statement audits. With current financial information included in the
registration, the audited financial statements will need to be completed in a
timely manner to allow for adequate time to complete the registration.
• A consent letter for inclusion of the audited financial statements in the
registration package is now required. Audit standards require auditors to
review the registration package, specifically the disclosure statement that
includes certain financial information. Best practice would be to have a draft of
your disclosure statement available during your audit process to allow your
auditors to review this documentation timely and provide the consent letter
along with delivery of your audited financial statements.
Legal Amortization of Entrance Fees
Facts
• Entrance fee is $250,000 and 75/25 refundable/nonrefundable
• The full entrance fee has been established as the cost of providing
continued care for the resident
• Sales fees and refurbishment amounts are excluded from the example
Calculation
• First year of entrance fee
o 1.5 percent of entrance fee = $3,750
o 12 months of legal amortization = $45,000
• Potential refund if resident moves out after year one
o $205,000, made up of:
$187,500 refundable balance
$17,500 of unamortized nonrefundable balance
2
Accounting for Entrance Fees
A whole chapter (chapter 14) in the AICPA Healthcare Accounting
and Auditing Guide is devoted to accounting for entrance fees,
which is referred to in the standards as “advance fees”.
The first assessment to be made is the type of contract you have.
ASC 954-605-05-8 describes the 3 basic types of contracts:
• An all-inclusive entrance fee contract includes residential facilities, meals, and
other amenities. It also provides long-term nursing care for little or no increase
in periodic fees, except to cover normal operating costs and inflation. (Full list of
future service obligations)
• A modified entrance fee contract also includes residential facilities, meals, and
other amenities. However, only a specified amount of long-term nursing care is
provided for little or no increase in periodic fees, except to cover normal
operating costs and inflation. After the specified amount of nursing care is used,
residents pay either a discounted rate or the full per diem rates for required
nursing care. (Have a finite amount or discounted future service obligations)
• A fee-for-service entrance fee contract includes residential facilities, meals, and
other amenities as well as emergency and infirmary nursing care. Access to
long-term nursing care is guaranteed, but it may be required at full per diem
rates. (No specific future service obligation, typical contracts seen in Michigan)
Accounting for Entrance Fees
The next step is to assess the fees and payment methods,
identified in ASC 954-605-05-10
Advance fees are entrance fee amounts reported on the balance sheet as a
liability, while periodic fees are the monthly fees charged to residents for
services and the use of the facilities they reside in.
Advance fees are amortized into income as dictated by the contract terms
and split between refundable and nonrefundable portions. Contracts for
advance fees should identify the allocation between refundable and
nonrefundable portions. Each component has a separate assessment that
must be performed before amortization revenue can be determined.
Periodic fees are recognized in income when they are realized or realizable
and earned, which typically occurs when they are billed to the resident.
Accounting for Entrance Fees
Treatment of Refundable Balances
Typically, refundable advance fees are to be reported as a liability until repaid to
the resident, allocated between current and noncurrent liabilities depending
upon the community’s own history of refunds and the terms of the contract.
ASU 2012-01 provided additional guidance on treatment of refundable advance
fees. It allows for amortization of refundable advance fees into income
consistent with the method for calculating depreciation on the unit being
occupied. Under ASU 2012-01, the amortization of refundable advance fees is
allowed ONLY if legal and management policy and practice support the
withholding of refunds under the following conditions:
• All or a portion of the advance fee may be refundable if the contract holder’s
unit is reoccupied by another person (refund paid only upon reoccupancy, not
before)
• The refund amount is limited to the extent of the proceeds of reoccupancy of
a contract holder’s unit (refund is limited to the amount of refundable advance
fees received from the new advance fee)
3
Accounting for Entrance Fees
Amortization Revenue on Nonrefundable Balances
Amortization, described in ASC 954-430-35-1, is to be recorded into income
over future periods in the following manner:
• Based on estimated life of the resident or on the contract term, if shorter.
• Amortization period shall be adjusted annually based on actuarially
determined, estimated, remaining life expectancy of each individual or on
the joint and last survivor life expectancy of each pair of residents
occupying the same unit.
• The straight-line method shall be used to amortize deferred revenue
except in certain circumstances when costs are expected to increase at a
significantly higher rate than future revenues in the later years of
residence.
According to ASC 954-430-35-2, if a community has sufficient historical
experience and relevant statistical data about life expectancies, it should
consider that information when determining the remaining life of residents. A
community with insufficient historical experience or reliable actuarial data
may use relevant data of similar communities within that area, relevant
national industry statistics, or other appropriate data.
Basis for Amortization
There are a variety of factors to consider when applying ASC 954-430-35:
• Is the community able to track relevant data to allow them to develop
sufficient historical experience on life expectancy of residents and the use
of contracts over that period of time? If the answer is no, which is typically
the case, other appropriate data should be used.
• What is “other appropriate data” when evaluating a period to amortize a
nonrefundable advance fee into income?
o Typically, communities look to an established life expectancy table,
like the ones provided in a later slide.
o Does the community have any experience that can allow them to
adjust the standard life expectancy tables published by the Social
Security Administration?
• Is life expectancy shorter than legal amortization periods identified in the
Continuing Care Community Disclosure Act? At no point should the
accounting amortization schedule amortize the nonrefundable advance
fee into income sooner than legal amortization.
Where can I get life expectancy tables?
There are various websites that post life expectancy
tables, with periodic updates:
Social Security Administration
http://www.ssa.gov/OACT/STATS/table4c6.html
Michigan Department of Health & Human Services
http://www.michigan.gov/mdhhs/0,5885,7-339-73970_2944_4686---,00.html
http://www.mdch.state.mi.us/pha/osr/deaths/lifeall.asp
4
Accounting Amortization of Entrance Fees
Facts
• Entrance fee is $250,000 and 75/25 refundable/nonrefundable
• Sales fees and refurbishment amounts are excluded from the example
• Resident is a male, age 85 (life expectancy of 5.81 years)
Calculation
• First year of entrance fee
o Nonrefundable balance of $62,500 ($250,000 multiplied by 25 percent)
o Divide nonrefundable amount by 5.81 years = $10,757 year one amortization
revenue
• Historical rate of amortization
o In review of a published life expectancy table from 1976, for an 85 year old
male, the life expectancy was 5.3 years, which would have produced an
annual amortization amount of $11,792 (9 percent higher than the 2011 table
utilized in the calculation above)
Life expectancy table used is from the Social Security Administration website (2011 table) and Centers
for Disease Control and Prevention (historical life expectancy tables).
Accounting Amortization of Entrance Fees
What if resident moves out in year three?
Event
Legal
Accounting
Recording liability
$250,000
$250,000
Year one amortization
$45,000
$10,757
Year two amortization
$17,500
$10,757
$0
$40,986
$187,500
$187,500
Year three amortization
Refund paid - end of year three
Other Accounting Considerations
Future service obligations (ASC 954-440-35)
The obligation of a community to provide future services and the use of facilities to
current residents should be calculated annually in order to determine whether a
liability should be reported in the financial statements. The liability related to
entrance fee contracts should be the present value of future net cash flows, minus
the balance of unamortized deferred revenue, plus depreciation of facilities to be
charged related to the contracts, plus unamortized costs of acquiring the related
initial entrance fee contracts, if applicable. The calculation should be made by
grouping contracts by type, such as all contracts with a limit on annual increases in
fees, contracts with unlimited fee increases, and so on.
What does this mean?
Typically, the liability for providing future service obligations is below the entrance
fee liability already recorded, so no additional adjustment is necessary. That does
not release a community from the responsibility of evaluating the potential future
service obligation and documenting their assessment of the liability against the
amounts recorded on their balance sheet.
5
Other Accounting Considerations
Costs of acquiring initial entrance fee contracts
Advertising costs incurred in connection with acquiring initial entrance fee
contracts should be accounted for in conformity with the guidance in ASC 720-35,
which allows for the capitalization of those advertising costs. ASC 954-340-35-1
states that capitalized costs should be amortized to expenses on a straight-line
basis over the average expected remaining lives of the residents under the
contract or the contract term, if shorter.
Start-up costs are expensed as incurred, in accordance with ASC 720-15. ASC
954-720-25-7 states the costs of acquiring entrance fee contracts after a
community is substantially occupied or one year following completion should be
expensed when incurred.
When does this apply?
When a new community is built, you are able to capitalize the marketing costs
associated with the new residents entering into a new entrance fee. The costs
should be expensed after the timeframe described above. Similar to the entrance
fee amortization revenue, the costs should be amortized into expense over the life
expectancy of the resident.
Other Accounting Considerations
Revenue recognition (ASU 2014-09)
New revenue recognition standards have been issued, but in July 2015, FASB
deferred the implementation date for public entities for reporting periods beginning
after December 15, 2017 (reporting period ending December 31, 2018).
Implementation of the new revenue recognition standard is likely to have an impact
on the accounting for entrance fees and should be considered as the
implementation date approaches.
Projected Growth of Seniors
Source - Across the
States 2012: Profiles of
Long-Term Services and
Supports, published by
the AARP Public Policy
Institute.
6
Senior Population Demographics
60%
50%
48%
40%
35%
30%
27%
25%
20%
18%
16%
10%
0%
Any Trouble Hearing
Any Trouble Seeing
Men
No Natural Teeth
Women
The table above provides the percentage of individuals age 65 and older who reported having any
trouble hearing, seeing, or have no natural teeth.
Source - NCHS 2008 study.
Flow of Residents Moving In and Out
Then (2004) and Now (2015)
Annual resident turnover
• Then - 32.8 percent
• Now - 37.6 percent
Implied length of stay
• Then - 42 months
• Now - 32 months
Occupancy
• Then - 93.0 percent
• Now - 91.7 percent
Data presented is the median for independent living units, derived from the annual State of Senior
Housing report published by the American Seniors Housing Association.
Who is Moving In?
Independent Living Residents, Then (2001) and Now (2012)
Age upon entering an independent living unit
• Then - 79 years of age
• Now - 84 years of age
Using a cane
• Then - 18 percent
• Now - 24 percent
Using a walker
• Then - 11 percent
• Now - 32 percent
Data derived from an ASHA Study of Independent Seniors, published in 2012.
7
Impact of Age of Entry
Facts of Entrance Fee • Entrance fee of $250,000
• 75 percent refundable
• Resident moves in on the first day of the year
• Resident is a male
First year amortization with age of 79 - $7,217 (8.66 yrs)
First year amortization with age of 85 - $10,757 (5.81 yrs)
Phil Alt in Independent Living
http://www.socialsecurity.gov/OACT/population/longevity.html?__utma=176294311.103455
159.1444410705.1444410705.1444410705.1&__utmb=176294311.5.9.1444410740343&__
utmc=176294311&__utmx=&__utmz=176294311.1444410705.1.1.utmcsr=google|utmccn=(organic)|utmcmd=organic|
utmctr=(not%20provided)&__utmv=-&__utmk=187015912
Questions…
EDIT IN MASTER: CLIENT OR PRESENTATION NAME
PLANTE MORAN
8
Thank you
Philip Alt, MSA, CPA
Healthcare Associate
Plante & Moran, PLLC
634 Front Ave. NW
Suite 400
Grand Rapids, MI 49504
(616) 643-4128
[email protected]
EDIT IN MASTER: CLIENT OR PRESENTATION NAME
PLANTE MORAN
9