Southeast Healthcare, Inc..(SHI) is a holding company that operates, on a for-profit basis, several hospitals and clinics throughout the southern United States. SHI has been very successful in all of its healthcare ventures. As a result, SHI expanded its operations this period by opening two continuing care retirement centers (CCRCs). These CCRCs provide an upscale living environment along with first class medical care for retirees.
SHI plans to open CCRCs throughout the south. Their marketing plan is to open CCRCs only in communities that are successfully marketing themselves as retirement communities. SHI believes there is tremendous potential for growth in providing this type of service, and SHI feels that it is well positioned to take advantage of this opportunity.
The two CCRCs that are now open provide first-class living arrangements to the retirees. SHI provides different levels of living arrangements based on a retiree's (patient's) needs. The three levels of living arrangements currently offered are retirement housing, assisted living, and nursing home. SHI plans to add another level for Alzheimer's patients.
Retirement housing is appropriate for individuals who need little or no assistance with daily life. Such an individual's monthly rent is primarily based on apartment size and style. Assisted living exists for individuals who require some assistance (medical or other) with daily living. Monthly rent is still based in part on the size and style of the apartment but also includes an increased cost of care. Finally, nursing home care is provided for individuals that require extensive amounts of daily assistance. This level is very akin to a hospital environment with a nicer living area; it also has the highest monthly rent to offset the increased level of care required.
Individuals can enter the CCRC at any level. Those entering at the retirement housing or assisted living levels will typically progress through the upper levels over the remaining course of their lives. This progression results in the patient's monthly fees increasing as they move up to the next level of care. SHI provides a means by which patients can pay a deposit upon entering the CCRC to lock in a fairly stable monthly rent for their remaining life or stay at the facility. This deposit eliminates the increases in monthly rent due to the progression through the levels of the living arrangements. Individuals entering at the nursing home level would obviously pay no deposit since there is no higher level in which to progress. Rent at all levels may still be increased due to cost of living adjustments or changes in the cost of care.
SHI has set up two types of deposits that individuals may pay upon entering the CCRC. The basics of each of these deposits are as follows:
1) Option 1 - 15% of the deposit is non-refundable; 85% is refundable on a pro rata basis if the individual moves out of the CCRC in the first 60 months.
2) Option 2 - 10% of the deposit is non-refundable; 90% is refundable when the individual moves out or dies.
The amounts of each of these deposits are based on many factors, including level of living arrangement upon entrance to the CCRC, size and style of apartment, and age of person or persons. Option 2 deposits are significantly higher than Option 1 because of the large percentage that will eventually be refunded to the individual or his/her heirs. Option 1 deposits generally range between $350,000 and $550,000 while Option 2 deposits range between $1 million and $1.5 million. Many individuals entering at the retirement housing level pay one of the deposits, and a significant percentage of those entering at the assisted living level also pay a deposit.
Jean Valjean, Controller for SHI, and Marius Pontmercy, Controller for the CCRC subsidiary, have been discussing the proper revenue recognition procedure for these deposits. This is the first year of operations for the CCRCs, so neither has dealt with this issue before. They have requested your assistance in providing guidance on the proper accounting methods related to these deposits. Your answer should address all financial statement effects (income statement and balance sheet) of these deposits and give your authoritative support for your answer.