Amortization of Commissions for CCRCs (ASC 606)

With the new revenue recognition standard (ASC 606) any community (Type A, B or C contract) that has an entry fee will have to amortize sales commissions. The paragraphs below are taken from the most recent AICPA Working Draft ( Issue #8-7)that describes the amortization requirements when obtaining contracts.  The Working Drafts are out for public comment so changes are possible.

Issue #8-7– Accounting for Contract Costs Expected Overall Level of Impact to Industry Accounting: Minimal Wording to be Included in the Revenue Recognition Guide:

1. Health care entities may enter into various contracts in which they incur incremental costs of obtaining a contract or costs to fulfill a contract. Examples of these arrangements are continuing care retirement community (CCRC) contracts, prepaid health plans, risk-sharing contracts, or other contacts in which a health care entity incurs costs to acquire or fulfill a contract that is not in the scope of existing cost guidance (for example, fixed assets).

Incremental Costs to Obtain a Contract

2. Health care service providers incur costs that are related to securing a contract with customers (for example, patients, residents or members). Examples of these costs are marketing, advertising, costs to enroll members, commissions, incentive compensation, salaries and benefits, processing costs, actuarial, and legal expenses. Health care entities should evaluate costs associated with acquiring new contracts to determine if these costs meet the requirements for capitalization as an asset under paragraphs 1–3 of FASB ASC 340-40-25, or should be expensed as incurred. In accordance with FASB ASC 340-40-25-1, “an entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs.” To determine if the costs are recoverable, a health care entity may consider the pricing of the contract and whether the incremental costs could be recovered through direct reimbursement under the contract or recovered through the margin inherent in a contract. If a health care entity determines that its contract acquisition costs are not recoverable, then the health care entity should expense those costs in accordance with FASB ASC 340-40-25-1