The public is entitled to assurance that the Continuing Care contractual promises made can be kept and that providers will honor them. Entrance fees are paid at inception, but many benefits only come due later in life. This arrangement requires a high degree of trust and financially sound organizations that manage their finances appropriately.
Financial practices should match the consideration required from residents to the benefits they are promised in return. It is inappropriate that residents’ large, up-front investments are used to provide financial security to passive investors in debt securities and that residents are placed at risk of loss.
The industry today largely adheres to Generally Accepted Accounting Principles (GAAP) as promulgated by the American Institute of Certified Public Accountants (AICPA) and codified by the Financial Accounting Standards Board. CCRC accounting is prescribed differently from that of other industries, which violates the consistency principle fundamental to sound accounting.
The prescribed accounting also departs from the matching principle. There is no requirement that revenue recognition be matched to the contractual and other obligations that the revenues are intended to fund. There is a need for a Statutory Accounting Standard so that financial provisions better ensure that CCRC promises made can be kept.
In addition to unmatched accounting valuation standards, accounting for certain “refund” liabilities is questionable. Some “refunds” at death or withdrawal are made contingent on a successor resident paying an Entrance Fee at least as great as the amount of the refund.
Current GAAP accounting allows funds subject to call as refund obligations to be taken into income which can leave the organization financially vulnerable and unable to meet its refund liabilities. The AICPA rationalization for this surprising practice is that:
“In those situations, the CCRC’s own funds will never be used to make the refunds to the prior resident; instead, the CCRC is effectively facilitating the transfer of cash between the successor resident and the prior resident.” (National Association of Insurance Commissioners Submission at #68).
The National Association of Insurance Commissioners prescribes Statutory Accounting Standards for insurance companies which can be readily adapted for CCRCs. Statutory Accounting…
- is developed by regulators with independence from the audit industry and its clients, and
- emphasizes consumer interests in sound financial practices over the transitory interests of investors in period earnings based on the presumption of a perpetual going concern.