Important Financial Reporting Issues For Continuing Care Retirement Communities (CCRC)

            In the last few years there have been actions taken by Federal regulators that require the management of CCRCs to make some important decisions.

            In 2005, the Securities and Exchange Commission (SEC) required a publicly traded CCRC development and management company to restate their financial statements and report all refundable amounts due to residents as a current liability.  Current accounting practice calls for these refundable amounts to be recorded as long-term liabilities.  While this change would not have a significant impact on the publicly traded company, it would seriously impact a significant number of the nonprofit CCRC providers around the country.  The American Institute of Certified Public Accountants (AICPA) requested the Financial Accounting Standards Board (FASB), the primary accounting standard setting authority in this country, to review this issue and reconcile the differences between the SEC’s position and current accounting practice related to this issue.  On February 1, 2006, the Board of Directors of the FASB chose not to accept their staff’s recommendation to issue guidance through the release of a FASB Staff Position and decided not to issue any guidance on the appropriate way to classify entrance fees and deferred revenue on the balance sheet of a CCRC.

            This is important to CCRCs because the FASB’s action or non-action on this matter leaves the decision to the board and management of each individual CCRC.  The FASB Board acknowledged that not addressing the issue will “create diversity in practice within the CCRC industry (primarily between public and nonpublic entities).” 

            A second issue relating to CCRC entrance fees involves how they are treated for income tax purposes by the provider and the resident.  Current tax law classifies refundable entrance fees paid to a “qualified” CCRC as below-market loans.  For tax purposes, a below-market loan is treated as a loan bearing a current market interest rate, which results in the resident being taxed on imputed interest payments.  CCRC residents do receive an exception to the extent that the refundable portion of their entrance fee does not exceed a statutory stated amount ($163,000 for 2006) and no interest is imputed.

            Over the years, there has been some confusion over the application of the below-market loan rules to Continuing Care Contracts resulting in possible non-compliance by a significant number of CCRCs.  In addition, the IRS has been liberal in enforcing this section of the statutes (Code Sec. 7872 (g)).  Recently, Congress took up this issue and a Conference Committee has agreed to eliminate below-market loan treatment for “qualified” CCRCs. 

            A qualified CCRC is defined as a community, which is designated to provide services under Continuing Care Contracts.  These contracts include an independent living component, assisted living and/or nursing facility.  “Qualified” contracts allow the residents and their spouses to use the CCRC service for life.  The CCRC must provide housing, as appropriate for the health of each resident and their spouse, through independent, assisted, and/or skilled settings.  This new legislation is good for CCRC providers. 

            However, there are still issues that CCRC providers need to consider.  The first issue is that the exemption is effective January 1, 2006 through December 31, 2010.  This legislation also deals with capital gain rates and the provisions of the entire bill that are “sunset” as of the end of calendar year 2010.  The last issue is that each provider will need to determine if their contracts meet the requirements of a “qualified Continuing Care Contract”.  The providers should then address this issue with their legal and financial advisor.

Each of the above items deals directly with CCRCs and should be addressed by CCRC management.  If you have questions regarding these issues, contact Moore Stephens Lovelace, P.A. at (800) 929-2981, (478) 474-5401 or www.mslcpa.com.