ASC

ASC 440-954

Health Care Entities

440 Commitments

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In brief

IntermediateRecognitionSubsequent measurementDisclosureIndustry-specific

This subtopic governs the commitment of a continuing care retirement community (CCRC) to provide future services and the use of facilities to current residents under continuing-care contracts. The CCRC must recalculate that obligation annually and, if advance fees plus periodic fees are insufficient to cover the cost of future services and facilities, record a liability measured actuarially at the present value of future net cash flows, less deferred revenue (contract liability), plus depreciation of facilities to be charged to those contracts and any unamortized incremental costs of obtaining a contract. Extensive note disclosure about the contracts, liability, discount rate, escrow requirements, and refund policy is required.

Key points (7)
  • A CCRC's obligation to provide future services and the use of facilities to current residents must be calculated/measured annually to determine whether a liability is reported (440-954-25-2; 440-954-35-1).
  • A liability is recorded only when advance fees and periodic fees charged are insufficient to meet the costs of providing future services and facilities; it equals expected costs (resident-care, dietary, health care, facility, interest, depreciation, and amortization) over residents' remaining lives in excess of anticipated revenues, based on actuarial assumptions such as mortality and morbidity (440-954-35-2).
  • Measurement formula: present value of future net cash flows, minus the balance of deferred revenue (contract liability) under Topic 606, plus depreciation of facilities to be charged to the contracts, plus any unamortized incremental costs of obtaining a contract under Subtopic 340-40 (440-954-35-3).
  • The calculation is made by grouping contracts by type (for example, contracts with limits on annual fee increases versus contracts with unlimited fee increases) (440-954-35-3).
  • Cash inflows include contractually committed revenue, monthly fees with contractual increases, third-party payments, committed investment income, donor pledges, and deferred nonrefundable advance fees; cash outflows are operating expenses including interest but excluding selling and general and administrative expenses; the expected inflation rate is considered in setting the discount rate, and life spans used must be the same as those used to recognize revenue (440-954-35-3).
  • Contract types are all-inclusive, modified, and fee-for-service continuing-care contracts, with payment structured as advance fee only, advance fee with periodic fees, or periodic fees only (440-954-05-4; 440-954-05-6).
  • Required disclosures for each year presented: description of the CCRC and nature of the continuing-care contracts, carrying amount of the present-value liability (if not shown separately on the balance sheet), the discount interest rate, statutory escrow or similar requirements, and the refund policy and general amount of refund obligation (440-954-50-1).

For students. This is the classic CCRC "future service obligation" test: it is a loss-recognition style calculation done annually, so no liability appears if fees are adequate. Students often forget that the deferred revenue balance and unamortized contract acquisition costs are backed out of (or added to) the present value computation, and that SG&A is excluded from the cash outflows.

continuing care retirement communitycontinuing-care contractobligation to provide future services and use of facilitiesadvance fees and periodic feesrefundable advance feesactuarial assumptionspresent value of future net cash flowsdeferred revenue (contract liability)

Machine-generated study aid for ASC 440-954. Check the source paragraphs below.

440-954-00Status

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440-954-05Overview and Background

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440-954-05-1
This Subtopic provides guidance on commitments for health care entities within the scope of this Topic.

Continuing Care Retirement Community

440-954-05-2
A continuing care retirement community expects to provide services and the use of facilities to individuals over their remaining lives under continuing-care contract agreements. The nature and extent of such services depend on such variables as the individual's age, health, sex, and economic status upon entering the continuing care retirement community.
440-954-05-3
Continuing care retirement community facilities may be independent or they may be affiliated with other health care facilities. They usually provide less intensive care than do hospitals. They generally supply required continuous nursing service or appropriate assistance to residents who have a wide range of medical conditions and needs.
440-954-05-4
Continuing care retirement communities use the following three basic types of contracts:
  1. a
    An all-inclusive continuing-care 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.
  2. b
    A modified continuing-care 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.
  3. c
    A fee-for-service continuing-care 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.
440-954-05-5
Many continuing-care contracts are similar to annuity contracts. Under those contracts, the continuing care retirement community assumes the risks associated with both of the following:
  1. a
    Estimating the amount of the advance fee and other fees to be paid by a resident
  2. b
    Determining whether such fees will be sufficient to cover the cost of providing a resident's required services and the use of facilities.
For some contracts, residents may share the future costs without limit. The continuing care retirement community has an obligation to provide future services for the length of the contract or the life of the resident. In certain circumstances, this obligation continues regardless of whether advance fees or periodic fees are sufficient to meet the costs of providing services to a resident.
440-954-05-6
A continuing care retirement community may require several different payment methods for services and the use of facilities. The following are the three most prevalent methods:
  1. a
    Advance fee only. Under this method, a resident pays an advance fee in return for future services and the use of facilities. Such services generally include continuing care retirement community housing-related services (for example, meals, laundry, housekeeping, and social services) and health care. These services usually are provided to the resident for the remainder of his or her life or until the contract is terminated. Additional periodic fees are not paid, regardless of how long a resident lives or if the resident requires more services than anticipated. Generally, the resident receives no ownership interest in the facility.
  2. b
    Advance fee with periodic fees. Under this method, a resident pays an advance fee and periodic fees for services and the use of facilities. Such periodic fees may be fixed, or they may be subject to adjustment for increases in operating costs or inflation or for other economic reasons.
  3. c
    Periodic fees only. Under this method, a resident pays a fee at periodic intervals for services and the use of the facilities provided by the continuing care retirement community. Such fees may be either fixed or adjustable.
440-954-05-7
An advance fee may be met by transferring a resident's personal assets (which may include rights to future income) or by paying a lump sum of cash to the continuing care retirement community. Advance fees received for future services may be refunded at the occurrence of some future event, such as death, withdrawal from the continuing care retirement community, termination of the contract, or reoccupancy of a residential unit. The amount of the refund generally is based on contractual provisions or statutory requirements.
440-954-05-8
Payment of an advance fee generally is required before a resident acquires a right to reside in an apartment or residential unit for life. A portion of advance fees may be refundable by rescission within a legally set time period or if a certain future event occurs, such as the death or withdrawal of a resident or termination of the contract. Some refunds are paid only if a residential unit is reoccupied.
440-954-05-9
Continuing care retirement community refund policies vary either by region or according to statutory requirements, but generally the amount of the refund is based on provisions specified in a contract. For example, some contracts require a refund of the advance fee, less a reasonable processing fee. Amounts refunded may be based on a fixed amount or percentage, an amount that declines to a fixed amount over time, an amount that declines to zero, or an amount based on the resale amount. Refunds may be contingent on vacating the unit, resale of the unit, or passage of a fixed period of time if the unit is not resold.
440-954-05-10
Some contracts between a continuing care retirement community and a resident stipulate that all or a portion of the advance fee may be refundable if the contract holder's unit is reoccupied by another person. The source of money for the payment is from the proceeds of the advance fees collected by the continuing care retirement community from the next resident of the reoccupied unit. The terms governing how the proceeds from the next resident are to be paid to the previous resident vary from contract to contract.

440-954-15Scope and Scope Exceptions

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Overall Guidance

440-954-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 954-10-15.

440-954-25Recognition

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Continuing Care Retirement Community

440-954-25-1
The continuing care retirement community assumes a risk in estimating the cost of future services and the use of facilities. Although many continuing care retirement communities are allowed contractually to increase periodic fees, some contracts may restrict increases in periodic fees and require continuing services without additional compensation.
440-954-25-2
Paragraph 954-440-35-1 requires that the obligation of a continuing care retirement community to provide future services and the use of facilities to current residents be calculated annually to determine whether a liability shall be recognized in the financial statements.
440-954-25-3
See Example 1 (paragraph 954-440-55-1) for an illustration of this guidance.

440-954-35Subsequent Measurement

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Continuing Care Retirement Community

440-954-35-1
The obligation of a continuing care retirement community to provide future services and the use of facilities to current residents shall be subsequently measured annually in order to determine whether a liability shall be reported in the financial statements.
440-954-35-2
If the advance fees and periodic fees charged are insufficient to meet the costs of providing future services and the use of facilities, the continuing care retirement community shall record a liability based on actuarial assumptions (such as mortality and morbidity rates), on estimates of future costs and revenues, and on the specific continuing care retirement community's historical experience and statistical data. The liability is equal to the amount that is expected to be incurred to provide services and the use of facilities to individuals over their remaining lives under continuing care contracts (including resident-care, dietary, health care, facility, interest, depreciation, and amortization costs) in excess of the related anticipated revenues.
440-954-35-3
The liability related to continuing-care contracts shall be the present value of future net cash flows, minus the balance of deferred revenue (contract liability) (see Topic 606), plus depreciation of facilities to be charged related to the contracts, plus any unamortized incremental costs of obtaining a contract (see Subtopic 340-40), if applicable. The calculation shall 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 forth. Cash inflows shall include revenue contractually committed to support the residents and inflows resulting from monthly fees including anticipated increases in accordance with contract terms. This shall include third-party payments, contractually or statutorily committed investment income from services related to continuing care retirement community activities, contributions pledged by donors to support continuing care retirement community activities, and the volume of deferred nonrefundable advance fees. Cash outflows shall be composed of operating expenses, including interest expense and excluding selling, and general and administrative expenses. Anticipated cost increases affecting these operating expenses shall be considered in determining cash outflows. The expected inflation rate as well as other factors shall be considered in determining the discount rate. In calculating the liability, the specific continuing care retirement community's historical experience or statistical data relating to the residents' life spans shall be used. The life spans used shall be the same as those used to recognize revenue. For a new continuing care retirement community, either relevant data of similar communities in the area or relevant national industry statistics may be used if they are deemed to be representative.
440-954-35-4
See Example 1 (paragraph 954-440-55-1) for an illustration of this guidance.

440-954-50Disclosure

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Continuing Care Retirement Community

440-954-50-1
A continuing care retirement community shall disclose all of the following in its notes to the financial statements for each year presented:
  1. a
    A description of the continuing care retirement community and the nature of the related continuing-care contracts entered into by the continuing care retirement community
  2. b
    The carrying amount of the liability to provide future services and the use of facilities related to continuing-care contracts that is presented at present value in the financial statements (if not separately disclosed in the balance sheet)
  3. c
    The interest rate used to discount that liability to provide future services
  4. d
    The statutory escrow or similar requirements
  5. e
    The refund policy of the continuing care retirement community and the general amount of refund obligation under the existing contracts.

440-954-55Implementation Guidance and Illustrations

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Illustrations

440-954-55-1
This Example illustrates the guidance in Sections 954-440-25 and 954-440-35. This Example has the following assumptions:
  1. a
    All residents pay a $ 50,000 fee, which is refundable less 2 percent per month for the first 36 months. After that period, none of the fee is refundable. The continuing care retirement community opened on 1/1/X4.
  2. b
    An additional periodic fee of $1,000 is payable monthly with a 5 percent increase annually.
  3. c
    The asset recognized for the incremental cost of obtaining the contract on 12/31/X6 is assumed to be $17,000.
  4. d
    The deferred revenue (contract liability) on 12/31/X6 is assumed to be $27,027.
440-954-55-2
The following tables illustrate the present value of net cash flow on 12/31/X6.
  • "Estimated Remaining Life (in Months) on 12/31/X6" Estimated Cash Inflows Resident 19X7 19X8 19X9 20X0 A 36 " $12,000 " " $12,600 " " $13,230 " - B 22 " 12,000 " " 10,500 " - - C 27 " 12,000 " " 12,600 " " 3,308 " - D 38 " 12,000 " " 12,600 " " 13,230 " " $2,315 " Estimated cash inflows " $48,000 " " $48,300 " " $29,768 " " $2,315 "
  • "Estimated Remaining Life (in Months) on 12/31/X6" Estimated Cash Outflows Resident 19X7 19X8 19X9 20X0 A 36 " $10,000 " " $12,000 " " $15,000 " - B 22 " 15,000 " " 11,000 " - - C 27 " 14,000 " " 17,000 " " 5,000 " - D 38 " 8,000 " " 12,000 " " 14,000 " " $4,000 " Estimated cash outflows " $47,000 " " $52,000 " " $34,000 " " $4,000 " Recapitulation 19X7 19X8 19X9 20X0 Cash inflows " $48,000 " " $48,300 " " $29,768 " " $2,315 " Cash outflows " (47,000)" " (52,000)" " (34,000)" " (4,000)" " $1,000 " " $(3,700)" " $(4,232)" " $(1,685)" Present value of net cash flows discounted at 10 percent " $(7,137)"
440-954-55-3
The following tables illustrate the depreciation of facilities to be charged to current residents.
  • Original cost of facility " $17,000,000 " Cost of facility allocable to revenue-producing service areas " $(2,000,000)" Cost of facility to be allocated to residents (including common areas) " $15,000,000 " Useful life 40 years Annual depreciation using straight-line method " $375,000 " Number of residents expected to occupy the facility 200 Annual depreciation per resident " $1,875 " Monthly depreciation per resident $156
  • Resident "Estimated Remaining Life (in Months) on 12/31/X6" 19X7 19X8 19X9 20X0 A 36 " $1,875 " " $1,875 " " $1,875 " - B 22 " 1,875 " " 1,560 " - - C 27 " 1,875 " " 1,875 " 468 - D 38 " 1,875 " " 1,875 " " 1,875 " $312 Yearly estimated depreciation of facilities to be charged to current residents " $7,500 " " $7,185 " " $4,218 " $312 Total estimated depreciation of the use of facilities to be charged to the current residents " $19,215 "
440-954-55-4
The following table illustrates the liability for providing future services and the use of facilities to current residents.
  • Present value of future net cash outflows " $7,137 " Minus: Deferred revenue (contract liability) on 12/31/X6 " $(27,027)" Plus: Depreciation to be charged to current residents " $19,215 " Asset recognized for the incremental cost of obtaining the contract—see paragraph 954-440-55-1(c) " $17,000 " (a) Liability for providing future services and the use of facilities to current residents on 12/31/X6 " $16,325 " (a) "These numbers are for illustrative purposes only and no inference has been made as to the recoverability of the $17,000."

440-954-60Relationships

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Related subtopics