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May 1991

SOP 90-8 for continuing care retirement communities. (Statement of Position)

by Pelfrey, Sandra

    Abstract- Greater numbers of elderly people are using the services of continuing care retirement communities (CCRC), leading the American Institute of Certified Public Accountants to issue Statement of Position 90-8, Audit Guide for Providers of Health Care Services, to guide accountants in the CCRC industry. CCRCs offer three levels of health care: personal care from doctors and nurses, hospital care for minor ailments, and skilled nursing care for individuals who cannot care for themselves. CCRCs require one-time nonrefundable advance fees from individuals so that they can be admitted as residents. The accounting rules for CCRCs require the typical disclosures of generally accepted accounting principles, as well as disclosures of refund policies, carrying amounts of future services' liabilities, and methods for the amortization of repayment and advance fees.

Health care providers have become more specialized in recent years and have created diverse approaches to satisfy society's medical needs. Some of the new avenues created have been ambulatory care centers, home health programs, and continuing care retirement communities (CCRCs). As the numbers of elderly individuals increase, more attention has been focused on meeting their unique health care needs.

CCRCs have been offered as an alternative to elderly individuals living in their own residences. Admittedly, CCRC life is not for everyone, and studies show that the majority of the elderly still prefer to remain in their own homes as long as possible. However, CCRCs do satisfy the needs of a growing number of retirees who are looking for security, a maintained standard of living, and camaraderie in their later years.

As health care avenues have changed, industry accountants and their auditors have been faced with the challenge of applying GAAP to the unique transactions of new health care practices. These unique transactions have generated a need for additional accounting and reporting guidance. Such expanded guidance has been provided in the Audit Guide for Providers of Health Care Services (Guide) (AICPA, 1990). The Guide includes accounting and auditing counsel for ambulatory care centers, home health agencies, nursing homes, CCRCs, and, of course, hospitals.



CCRCs are especially unique because the industry has changed a great deal during the past two decades. Arrangements for service made between individual residents and a CCRC have taken many forms. Contracts may include: 1) a guarantee of lifetime care financed by payment of a nonrefundable advance fee; 2) an ongoing monthly fee for service arrangement; or 3) a combination of the two. A combination of these agreements may have been used by a CCRC throughout its existence, making accountants' tasks even more difficult. And there has been no uniformity among CCRCs as to the accounting principles to apply to the many fee arrangement possibilities.

The AICPA issued Statement of Position 90-8 (SOP) entitled "Financial Accounting and Reporting by Continuing-Care Retirement Communities" to address the many accounting and reporting issues. One of the main issues is revenue recognition in situations where the obligation to render future service exists, especially when the length of future service is uncertain. The SOP further provides accounting treatment for transactions unique to this industry, such as revenue realization when nonrefundable edvance payments and refundable fee provisions exist and the accounting treatment of material out-of-pocket costs associated with finding tenants for new buildings.

What is a CCRC?

CCRCs have been in existence for over 20 years during which time they have passed through several evolutionary stages. In their earliest form, CCRCs were church-run homes that cared for aging ministers without families. Over time, they have broadened their horizons and opened their doors to individuals, both single and married, from diverse ethnic and religious backgrounds. Following in their early tradition, 97% of today's CCRCs are operated as nonprofit organizations.

While a nursing home is not a CCRC, a CCRC may include a nursing home. The New York Association of Homes and Services for the Aging defines a CCRC as "an organization established to provide a comprehensive, cohesive living arrangement for the elderly, philosophically oriented to the enhancement of the quality of life, and physically focusing on a core of services in a residential setting." Today's typical CCRC offers its residents (defined as an individual or couple) independent living facilities (that may carry with it a deed to the unit) and generally two or three levels of on-site health care. The levels of health care would include: 1) personal care from a physician or nurse with offices on the premises; 2) hospital care in a small setting, providing care for patients who are temporarily incapacitated, but are expected to improve; and 3) skilled nursing care for individuals not capable of caring for themselves and not expected to improve. Additional services that may be offered are housekeeping, prepared meals, and organized social activities. Many residents join CCRCs to be assured that they will not become a burden to their families and to obtain the peace of mind that accompanies the knowledge they will be cared for and have a home for the rest of their lives.

Coile and Grossman (1988) published the results of a survey that was conducted for the Healthcare Forum Journal. They stated that CCRCs had doubled in number (to 600) in the preceding three years, and was expected to double again by 1990. The average number of residents of the newer communities was 250. They also pointed out that CCRCs were not the product of any one region of the U.S., but could be found in most states.

Coopers & Lybrand also conducted research on the CCRC industry. In its 1985 study, the accounting firm classified the elderly into three age groups: 1) the young old (65-74 years); 2) the older elderly (75-84 years); and 3) the very old (85 or more years). This study showed that the majority of the residents of CCRCs were from the older elderly group, and that these individuals generally entered the community between the ages of 70 and 75, living there for approximately 13 years.


There is a high cost associated with establishing a CCRC. A study of CCRCs conducted by the Institute of Health Planning in Madison, Wisconsin, indicated that the average cost of building a CCRC housing more than 200 residents is $33.7 million. These costs plus the costs associated with providing services are expected to be recaptured through fees assessed to residents.

Early CCRCs (pre-1970) drafted financing agreements that provided for residents to enter by paying a sizeable and nonrefundable advance fee. In many instances, this advance fee was accompanied by minimal fees that were generally payable at regular intervals, and were often from residents' monthly Social Security checks. The amount of nonrefundable advance fees charged had been based upon the age of the future resident and the estimated remaining years of occupancy. These fees guaranteed residents housing and care for life.

Many CCRCs adopted payment and fee schedules based upon actuarial probabilities in much the same manner that insurance companies do. Retirement communities have been able to survive the uncertainty of subsequent years' operating costs by using life insurance principles and pooling individual risks.

In order to be able to feel comfortable in using the life expectancy concept, most CCRCs have been established to provide services for 200 or more residents.

Two factors have caused financial problems for individual CCRCs. First the average life expectancy of the elderly, especially those who give attention to good nutrition and regular exercise, has increased. At the same time competition for CCRC residences has increased. As a result, CCRCs have felt an increased financial strain. Many CCRCs have had to change their financing arrangements to make their units competitive and more marketable, while at the same time reducing the risks of uncertain costs and life expectancy.

CCRCs appear to be opting for contracts that require fee-for-service codicils instead of those with nonrefundable advance fees. Where advance fees are still being used, the fees have been substantially increased. CCRCs appear to be shifting the risks associated with providing future services to the resident. It is important to note that CCRCs cannot often respond in a timely fashion to such financial changes; they must honor all existing contracts first.

Nonrefundanble Advance Fees

Nonrefundable advance fees represent one-time payments that provide a resident admittance to a specific CCRC. These fees often provide that residents will have a home for the remainder of their lives. They may also provide for admittance to a skilled nursing facility on-site, to an affiliated institution, or to another autonomous institution with which the CCRC has a contractual agreement to cover the transfer of residents. Because of these guarantees, the nonrefundable advance fee is generally a sizeable sum. Many institutions provide that the major portion of this fee can be returned to the resident should that resident desire to leave within a specified period after the agreement has been signed. The amount that could be returned is referred to as the refundable portion.

The accounting treatment of the nonrefundable advance fees has generally been to defer recognizing the revenue until future periods. The method of amortizing into revenue has varied greatly among institutions. The SOP provides that each nonrefundable advance fee be recorded as deferred revenue and recognized as revenue over future periods using the shorter of: 1) the estimated remaining lives of the residents or joint and last survivor life expectancy of each pair of residents occupying the same unit; or 2) the contract term.

Determining the life expectancy of residents requires use of actuarial calculations to determine remaining life spans for the institution's specific residents, and the calculation should be adjusted annually. The amortized amount should not exceed the amount actually available to the CCRC under state regulations, contract provisions, or management policy.

Refundable Fees

Refundable fees represent those amounts that may be returned to a resident or designated representative at some future time or as the result of a future event. They are generally included in contracts to give prospective residents the ability to change their minds after they have moved in, should they decide that the CCRC is not suited to their needs. Prior to the SOP, these amounts had been classified as liabilities and recognized as revenue at the end of the trial period. The SOP provides that these amounts continue to be classified as liabilities and that when the refundable provision has been removed, the amount be transferred to a deferred revenue account, and be amortized using the straight-line method over the remaining lives of the residents or the contract period, if shorter.

Disclosure requirements include reporting the gross amount of contractual refund obligations under contracts in existence at balance sheet date, as well as the CCRC's refund policy. In addition, any amounts refunded should be disclosed in the financing section of the statement of cash flows.

Advance Fees Refundable on

Death or Withdrawal

Another marketing tool that CCRCs are using is the inclusion of another form of refundable fee. The terms of such fees provide for a resident or his or her estate to receive a specified amount upon resale of the unit if the unit had originally been sold and deeded to the resident. CCRCs have reported these fees in a variety of manners, ranging from liabilities and deferred income to owner's equity. The SOP states that these refundable fees should be classified as deferred revenue, provided that law and management policy and practice support the withholdings of refunds under this condition. Furthermore, this deferred revenue should be amortized over the remaining life of the facility.


These are substantial costs involved in the process of leasing new CCRC units. These costs include advertising, sales salaries, and commissions. To the extent that these costs relate to the acquisition of CCRC contracts with future revenue-generating potential they should be deferred. The SOP provides that these costs should be capitalized through the date of substantial occupancy, but no later than one year from the date of completion of construction. These deferred initial direct costs should then be amortized on a straight-line basis over the average expected remaining lives of the residents, or the contract term, if shorter. This practice would involve only newly built facilities or major additions to existing facilities. Any costs involved in subsequent lease or sale of the same unit to a new resident should be expensed as incurred.



There is a possibility that future periods will experience losses as the result of contracts that have been signed during current or prior periods. Terms of these contracts may guarantee future services at no additional cost to the resident or at a fee that will not adequately cover the cost of rendering services. If such a situation exists, a loss should be recognized as soon as it is probable that future losses will be incurred. The SOP outlines the methodology for determining the amount of loss that should be recorded. The liability for future services is equal to the amount that the present value of future net cash outflows plus future depreciation of facilities and unamortized initial direct costs that relate to the same units exceeds the unamortized deferred revenue. Any positive balance resulting from this calculation will be recorded as a loss and a liability in the current period. This requirement of the SOP will affect those CCRCs that have residents with contracts that provide for little or no increase in their monthly fees.

Because many CCRCs have changed to a fee-for-service contract, this provision of the SOP will not generally affect them. The liability calculation would not be required as long as new contracts allow fee increases that will adequately cover any changes in future costs.


In addition to usual GAAP disclosures, the SOP provides that CCRCs disclose the following:

* CCRCs refund policy;

* Basis and methods of amortizing repayable fees;

* Method of amortizing nonrefundable dvance fees; and

* The carrying amount of the liability for future services (to the extent that it exists) and the range of interest rates used to discount that liability.


The provisions of SOP 90-8 are effective for fiscal years beginning on or after December 15, 1990. The SOP calls for retroactive application of any required changes in accounting principles; this restatement should be made for as many years as practicable. If retroactive restatement is not practicable, the financial statements presented should be restated for as many consecutive years as practicable. The cumulative effect of the change should then be included in the net income of the earliest year presented in the current financial statements. If it is not practicable to restate any prior years, the cumulative effect should be included in net income in the year in which the changes are first applied. For that year, the following should be disclosed: the effect on income before extraordinary items, net income, and (for public companies) related per share amounts.


The growth of the CCRC industry has prompted the AICPA to respond by offering accounting and reporting guidance. The SOP should provide consistency and comparability to an industry that has unique transactions and contracts that bind individual institutions to long- term commitments. Industry accountants and their auditors must be aware of the proposed requirements of the SOP so that they are cognizant of the data that will be needed and can determine the best methods of gathering the information. Because the impact of this SOP will be applied retroactively, CCRCs should begin thinking of how they will gather and tabulate the necessary information.


Accounting Standards Division, American Institute of Certified Publi Accountants. Statement of Position 90-8: Financial Accounting and Reporting by Continuing Care Retirement Communities. November 28, 1990.

American Institute of Certified Public Accountants, Audits of Providers of Health Care Services. AICPA, 1990.

Coile, Russes C. and Grossman, Randolph M. The Continuum of Care, Healthcare Forum Journal. 1988 Track Series, 52-54.

Coopers & Lybrand. A Layman's Guide to--Health Care V: Continuing Care Retirement Communities. 1985.

Grimaldi, Paul L. Establishing Fees for Continuing Care Retirement Communities. Health-care Financial Management. February 1987.

Healthcare Financial Management Association. Principles and Practices Statement No. 9: Accounting and Reporting Issues Related to Continuing Care Retirement Communities. November 1986.

Riche, Martha Farnsworth. Retirement Life Style Pioneers. American Demographics. January 1986, 42--56.

Tell, Eileen J., Wallack, Stanley S., and Cohen, Marc A. New Directions in Life Care: An Industry in Transition. The Milbank Quarterly. Vol. 65, No. 4, 1987.

Sandra Pelfrey, MBA, CPA, is Assistant Professor of Accounting at Oakland University in Rochester, Michigan. She is a member of the AICPA, the Healthcare Financial Management Association, and the Institute of Internal Auditors, Ms. Pelfrey has published articles in several Journals.

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