From 1 July 2024, the Australian government will abolish bed licenses and the Aged Care Approvals Round (ACAR) process in response to the recommendations of the Final Report of the Royal Commission into Aged Care Quality and Safety (Royal Commission).
The reform of the residential aged care sector aims to improve the choice and quality in residential aged care, and provide people who require residential aged care with more choice and control in managing their arrangements.
What is the impact of the recent reform in the Aged Care sector?
The bed licenses reform aims to remove significant barriers which prevent new aged care providers from entering into the market, in order to drive increased competition and provide greater choice for senior Australians in selecting the aged care providers that would best meet their needs.
Under the proposed new regime, government support funding will be allocated based on the number of places that can be provided by aged care providers, depending on the market demand in an assigned place.
The Department of Health recently released a discussion paper- Improving Choice in Residential Aged Care – ACAR Discontinuation in September 2021 for the consultation about Improving Choice in Residential Aged Care.
The discussion paper includes the considerations of potential accounting impacts for the removal of bed licences.
ASIC has also released an FAQ for the accounting treatment of bed licences resulting in the decision from the Federal Budget of the Government to discontinue aged care bed licences effective from 1 July 2024.
What are the accounting implications for the discontinuing of bed licences?
Discontinuing the bed licences is likely to have significant accounting impacts for aged care providers.
They will need to consider impairing or amortising bed licences if they have not already done so. Aged care providers should consider the accounting implications of how the discontinuation of bed licences will impact their financial statements before the effective date 1 July 2024.
The changes include:
Change in the useful life of the bed licences
When the aged care providers who previously acquired the bed licences through either ACAR or obtained through an arms-length transaction with a cost or fair value attributed to the licences, the licences were usually recognised as intangible assets with indefinite useful life and therefore are not amortised.
The amortisation period and useful life of the recognised intangible assets must be reviewed at least at the end of each reporting period annual under AASB 138 Intangible Assets. Since bed licences will be discontinued after 1 July 2024, the useful economic life would not extend beyond this date, meaning that the licenses should be amortised over this period.
For the not-for-profit aged care providers whose bed licences were gained from ACAR or through other government allocation, the bed licences may have been initially recognised as an intangible asset at their fair value at the time of allocation.
Aged care providers are required to perform regular assessments to ensure the carrying value of the tangible and intangible assets are fairly stated.
Under the reform, it is likely that the carrying value of the bed licences will be required to be written back.
The bed licences will be impaired if the carrying amount exceeds the higher fair value less costs of the disposal (“FVLCD”) and the value in use (“VIU”), in accordance with AASB 136 Impairment of Assets.
The discontinuation of the bed licences will directly impact the fair value of the licences due to the diminished value of bed licences and their limited lifespan of three years.
Relevantly, aged care providers can now apply for an allocation of places to the Department of Health directly under the new arrangement as noted in the discussion paper as below:
“The Department will also implement transitional arrangements that will allow providers to apply for places outside of a traditional ACAR round. Providers that bring developments online and can offer care immediately, but do not have bed licences, will be able to apply to the Department for the allocation of operational places.”
The above transitional arrangements will significantly impact the fair value of existing bed licences, as allocated places are no longer limited in the aged care sector, and may be obtained from the Department at no cost.
It is therefore likely that the fair market value of bed licenses will be minimal in future.
Entities may still be able to support the carrying value of their bed licenses under a value in use model, subject to the amortisation requirements described above.
Required disclosure on the financial statements
The disclosures relating to bed licences as an intangible asset will require specific assessment, particularly in respect of the change in the useful economic life and the value of the bed licences as a result of the reforms.
Changes in the useful life of the bed licences would be accounted for as a change in accounting estimate under AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors meaning that changes are required to be recognised prospectively. In practice, this means that the period over which amortisation would occur would be between the announcement of these changes and the abolition of bed licenses on 1 July 2024.
Aged care providers are required to disclose at least the following information on the financial statements:
- The nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in a future period.
- If the amount of the effect in the future period is not disclosed because estimating it is impracticable, aged care providers should disclose that fact.
Get in touch
For further information about the accounting impact on the residential aged care sector reform, please contact your local RSM adviser.