A continuing care retirement community (CCRC) takes a large payment from a resident at move-in and promises housing, services and, under life care contracts, health care for life. That single contract creates the three hardest audit questions in the sector: what part of the fee is revenue, what part is a liability, and whether future costs will exceed future revenue.
How entrance fees are accounted for
The core guidance sits in ASC Topic 954, Health Care Entities. The split depends on whether the fee can be returned.
Refundable portion. Money the community has to give back is a liability, not revenue.
Nonrefundable portion. Recorded as deferred revenue and recognized into income over the estimated remaining life expectancy of the resident.
Refunds limited to reoccupancy proceeds. ASU 2012-01 (issued May 2012) restored the full refundable amount as a liability for contracts that do not limit the refund to the reoccupancy proceeds of the specific unit. Deferred revenue treatment is left for contracts that do carry that limit. The auditor reads the contract language and the refund history to see which case applies. The change can also affect the future service obligation offset described below.
The obligation to provide future services
Even if the deferred revenue is right, the community can owe more than it has collected. The test compares the present value of expected future costs of serving residents with the present value of expected future revenues plus unamortized deferred revenue. When costs exceed those inflows, the community records a liability for the shortfall. The estimate rests on actuarial inputs such as mortality, morbidity, length of stay, cost inflation and the discount rate.
Life expectancy therefore drives two numbers: the amortization period for nonrefundable fees and the future service obligation (FSO) calculation. Stale inputs misstate both.
Risk areas
- Classification of fees. Refundable versus nonrefundable, and which refund triggers apply per contract type.
- Amortization period. Life expectancy tables, turnover history and whether adjustments are made when a resident leaves early. What happens to the unamortized balance when a resident leaves depends on the contract.
- FSO estimate. Actuary independence, discount rate and cost inflation. This is an accounting estimate under AU-C 540.
- Resident-contract diversity. Life care, modified, fee-for-service, rental and refundable plans each follow a different path.
- Regulatory reporting. Many states that license CCRCs require disclosure statements, reserve calculations and audited financial statements, so GAAP statements and regulatory filings must agree.
- Debt covenants. Bond-financed communities carry days cash on hand and debt service coverage tests. Classification of refundable fees can move the ratios. See debt classification and covenants.
- Going concern. Occupancy during fill-up and refund obligations on turnover can strain liquidity. See going concern.
Audit procedures
- Obtain the entrance fee rollforward by unit: opening deferred revenue, fees received, amortization, terminations, closing balance. Agree totals to the general ledger.
- Select residents and trace the receipt to the signed residency agreement, the cash deposit, and the refundable or nonrefundable split.
- Recompute amortization for a sample using the stated life expectancy and review the table's source.
- Evaluate the specialist's work on the FSO. Read the actuary's report, test the data given to the actuary (resident census, ages, service levels, cost per resident day), and compare assumptions to history.
- Test refund liabilities by reviewing resale and reoccupancy history and the contract terms on refund timing.
- Vouch resident accounts receivable for monthly service fees and test the allowance.
- Compare the financial statements to state regulatory reports.
- Review covenant calculations and bond compliance certificates.
Worked example
Example: Maple Ridge has a resident who paid a $400,000 entrance fee, 90% refundable on the contract terms and 10% nonrefundable.
- Nonrefundable portion: $40,000. Estimated remaining life expectancy: 10 years. Annual amortization: $4,000.
- Refundable portion: $360,000 recorded as a liability.
At year-end the resident has been in place 3 years. Unamortized deferred revenue is $28,000. The resident moves out in year 4 after 3.5 years: assume the contract provides that the remaining deferred revenue of $26,000 is recognized as the obligation ends, and the $360,000 refund becomes payable according to the contract (for example, on reoccupancy).
For the FSO, management's actuarial model projects the present value of future costs for the community's residents at $52.0 million, against present value of future revenues of $49.5 million and unamortized deferred revenue of $1.5 million. The inflows total $51.0 million. The shortfall is $1.0 million, recorded as a liability. If the actuary's discount rate was lowered, the shortfall would rise, so the auditor tests the rate against market evidence.
PBC items to request
- Residency agreement templates and a schedule of all contract types
- Entrance fee rollforward, by unit, with refund terms
- Resident census with ages and service levels
- Actuarial report for the FSO with data provided to the actuary
- Life expectancy table and amortization workpaper
- State disclosure statement, reserve filings and licensing correspondence
- Bond covenant calculations and compliance certificates
- Reoccupancy and refund history
See the PBC list guide for request structure.
Red flags
- Amortization period lengthened with no change in resident population
- Refundable fees reclassified to deferred revenue without a contract change
- FSO moving to zero while occupancy or costs worsen
- Refund liabilities rising faster than new entrance fees
- Regulatory filings that do not agree to the audited statements
Sources
- Pease Bell, "CCRC accounting for advance fees": https://www.peasebell.com/insights/ccrc-accounting-advance-fees/
- CLA, "FASB Ruling Affects CCRC Entrance Fee Accounting": https://www.claconnect.com/en/resources/articles/fasb-ruling-affects-ccrc-entrance-fee-accounting
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