Gt Aged Care Prudential Seminar 2012

© 2012 Grant Thornton Australia Ltd. All rights reserved.

New arrangements for accommodation bonds and

other prudential requirements

Are you ready?


Introduction and Welcome

• The Reform process

• The use of accommodation bonds and scale in Australia

• Regulatory arrangements and risk management

• The Aged Care Financing Authority

– Objectives

– Regulation of fees

– Regulation of Accommodation Bonds

• Grant Thornton's role in the reform process


Session Overview

• Introduction and Background

– Cam Ansell: Partner, National Head of Aged Care and Retirement

Living, Grant Thornton

• Background and Policy Perspective

– Anne-Louise Dawes: –Director, Prudential and Approved Provider

Compliance Section - Department of Health and Ageing

• Overview of Requirements (Existing and New)

– Jeff Vibert: Partner, Head of Audit (Perth), Grant Thornton

• Record Keeping – Practical Issues

– Craig Simon: Partner, Privately Held Business, Grant Thornton

• Case Studies/Questions

• Refreshments and networking


• Overview of audited annual prudential compliance

statement (APCS)

• Preparation and audit of APCS "permitted uses statement"

• Approach to determining sources and applications of bond

monies

• Issues re "permitted uses":

– Capital expenditure

– Investment in financial products

– Debt repayments

– Operating losses for first twelve months

• Transitional arrangements

• What auditors will want to see

New APCS


New APCS

• The annual audited APCS form has been required for many

years - due within 4 months

• Historically has concentrated on bond refund compliance

and bond refund capacity

• Requires providers and auditors to assess

going concern / solvency issues for next

twelve months


New APCS

• APCS form and instructions have been completely

re-written along with Auditors' Guidelines.

• Sent to providers in July 2012

• Two major areas in form covering:

– Accommodation bonds and entry contributions

including refund practices and interest

– Prudential standards (liquidity, records standard,

disclosure, permitted uses, governance/IMS)

• Major change from prior years is around "permitted uses"

and "governance"


Accommodation Bond Records and Refunds

• No real changes to requirements

• Still required to disclose full details of any non-compliance

with refund timeframes and interest calculations

• Auditor needs to sign off on these exceptions

• Providers' policies re obtaining probate prior to bond refund

vary – need to follow own policy

• Important that bond registers contain all

required information and are kept fully up

to date and reconciled to accounting

records


Prudential Standards

Four broad categories:

• Liquidity and liquidity management strategy

• Records standard

• Disclosure obligations

• Governance

Permitted uses of accommodation bonds is a

separate set of legislative requirements


Liquidity

• No changes to basic liquidity requirements

• Written liquidity management strategy

• All providers still required to have sufficiently liquidity to

refunds bonds and entry contributions as they fall due in the

following 12 months

• Need to establish minimum level and

form of liquidity


Records Standard

• Again no changes from previous rules

• Requires accommodation bond register

• Data in register must comply with section 23.38 of User

Rights Principles

• We often find registers are deficient or do not

reconcile with accounting records

• An integrated solution is best


Disclosures to Residents

• Basic requirements unchanged although some relief from

1 October 2011 re certain detailed information (now on

request only)

• Basic requirements include:

– entering into an accommodation bond

agreement within 21 days

– minimum contents of agreement and copy

to resident or representative within 7 days

– written guarantee of refund


Disclosures to Residents

• Prior to 1 October 2011, provider required to give

residents/representatives certain information within four

months of year end regarding prudential compliance

including bond register entry and prudential audit opinion

• As from 1 October 2011this information is on request only


Governance Standard

• New standard applying from February 2012

• Requires accommodation bonds holders to implement and

maintain a written governance system

• System is to ensure bonds are only used for "permitted uses"

and bonds are refunded in

accordance with the Act

• Key requirements include allocation of

responsibilities, monitoring and controlling

delegations, reporting mechanisms and

training key personnel responsible for bonds


Governance Standard

• Governance standard also covers situation where bonds

are invested in financial products other than deposits with

an authorised deposit-taking institution

• If this is the case there must be a written investment

management strategy in place (IMS)

• IMS must be approved by those charged with

governance (i.e. board)

• Provider must ensure compliance with the IMS

and update or modify if necessary


Permitted Uses of Accommodation Bonds:

Overview

• The most significant area of reform in prudential

requirements

• Took effect from 1 October 2011with a two year transition

period to become fully compliant

• During transition, providers may still use post-Oct 2011

bond funds for a purpose related to providing residential

aged care – still need to have sufficient liquidity



Capital Expenditure

• Acquire land for, building or significantly

alteration of residential care / flexible care

facilities

• Acquire or install furniture, fittings or

equipment for residential care/flexible care facilities

• Must be initial erection or "significant alteration or significant

refurbishment"

• A number of practical issues around interpretation of these

requirements and effects on records

• Bond funds therefore unavailable for development of

independent living facilities etc.



Investments in Financial Products

• Deposits with banks, other ADI's

• State and Federal Government bonds, debentures, stocks

• Securities

• Registered managed investment schemes

• Unregistered managed investment schemes

established for the purpose of investment

in residential aged care/flexible care

• Definitions are referenced back to the

Corporations Act 2001 (S 764A)



Other Permitted Uses

• "Conditional loans" for capital works or other permitted

purposes (normally to related entities)

• Refunds of bond balances

• Repayment of debt accrued for:

– Capital expenditure or refund of bonds

– Pre-October 2011 aged care operations

• To meet reasonable business losses during

the first 12 months of operating a service



Practical Issues

• Record keeping/tracking issues and effects

on accounting systems

• No need for separate "buckets" to track but

still a challenge to ensure compliance

• Assessing capital expenditure as "significant"

• Practical issues where mixed development occurs

• Ensuring banks understand effects on project financing

• Still doesn't appear to restrict related entity loans and

investments as long as rules are observed


Reporting of Permitted Uses

• APCS form now includes a "permitted uses statement"

• Department allows same information to be included in the notes

to the GPFR (approved provider level)

• Need to tick correct box on the APCS

otherwise need to submit by 31 October

with APCS form

• No time extension for permitted uses

statement

• Can choose to report bonds received for full

financial year or just for period since 1 October 2011


Reporting of Permitted Uses:

Basic Approach in Reporting

"Source of Funds"

• Bonds received for the period (either 9 months or 12

months this year);

• Less allowable reductions from bonds (interest, extra

service charges, retentions);

• Plus gross funds "returned from sale or redemption of

financial products" invested in after 1 October

2011(regardless of original

source of funds)


Reporting of Permitted Uses:

Basic Approach in Reporting

"Application of Funds"

• By category of permitted uses (including refunds of bonds)

• Includes gross investments in permitted investments

In effect, if sources less than applications for the period, the

provider has complied without reliance on transitional

provisions

Extent to which transitional provisions relied upon to be

disclosed


What will your auditors be looking at?

Legacy Requirements

• Ensure accommodation bond register has required details and

properly maintained/reconciled

• Bond agreements in place with proper disclosures

• Whether bonds have been refunded in accordance with the Act,

deduction from bonds proper

• Compliance with LMS, solvency issues, capacity

to repay bonds – forward looking focus

• Ensure non-compliance with any prudential

requirements are reported on the APCS form


What will your auditors be looking at?

New Requirements

• Systems and procedures around managing compliance with

rules as to bond usage including review of compliance with

governance requirements

• How permitted uses statement has been compiled

including support for all sources and applications

• Assessing capital expenditure, nature of financial

products invested in, debt repayments, loan

advances and calculation of "reasonable business

losses"


Summary and Conclusions

Questions for providers and their boards to ask:

• Do we understand all of the new requirements?

• Do we have the appropriate paperwork and record

keeping processes in place?

• Do our accounting systems support the required

data

collection?

• Are we relying upon transitional arrangements and

can we

become fully compliant within two years?


Managing your accounting records to maximise

compliance


Practical Considerations

• Money is fungible – it is interchangeable and capable of

mutual substitution (i.e. no difference between $1 and

another $1 regardless of its origins or intended use).

• Providers not required to track $1 for $1 on a first in first out

basis or operate separate "buckets".

• Providers responsibility to ensure systems in place to

enable reporting and compliance (note transition period ends

September 2013).

• Challenges will be around extracting the required information

in the most efficient way and to ensure compliance.


Accounting Records and Systems

• Approved providers may need to consider making

adjustments to their operating and financial management

• Ensure staff are appropriately trained in relation to the

new requirements (i.e. what constitutes a "permitted use")

and any updated accounting procedures.

• Preference is to operate a detailed integrated bond register

with the accounting system (to ensures balances are

reconciled).


Accounting Records and Systems (continued)

• Where expenditure includes a residential and non-

residential aged care component the provider and auditor

need to agree a "reasonable" means of allocating the

expenditure between the two components.

• Important to maintain high quality accounting records where

the two year transitional provisions are being relied on.

* Please note these issues will be discussed in the case studies.


Issues to consider – managing of records and

information

• Depending on the size and complexity of the provider and

the number of accommodation bonds held, the provider

may need to consider the following to ensure the required

data is captured:

– Separate bank account for accommodation bond

inflows and outflows for "permitted uses" (quarantining).

– Separate accounting (general) ledger records or "sub-

accounts" for permitted and non-permitted uses.

– Use of a "job costing" or cost centre to

allocate inflows and outflows to a

"job cost".


Issues to consider – managing of records and

information

• Auditor will ask how the Permitted Uses Statement has

been compiled and request full information to support all

sources and applications.

• Consider treating all bonds post 1 October 2011 in

accordance with the new provisions to minimise

accounting costs in maintaining separate systems.

• Ability to report on permitted uses from any funding source

– not just from accommodation bonds.

• Note information gathering powers of the Department -

providers can be asked to provide evidence of their

compliance at any time.


Other Considerations

• Ability to report Permitted Uses Statement on either the

APCS (due 31 October) or General Purpose Financial

Statements (due 30 November) at the approved provider

level only.

• Need to tick the correct box on the APCS

– no time extension for Permitted Uses

Statement. • Discuss your options with your software provider.

• Be wary of potential short term cash fluctuations – bonds

may previously been used to manage fluctuations in

operational cash flows (i.e. 3 pay cycles in a month).


Common Scenarios/Issues


Permitted Uses - Capital Expenditure

Question 1 (a)

An approved provider obtained financing to build a multipurpose facility; the

facility will be designed 70% for residential care services and 30% for

independent living units, which represents the relative % cost allocations

between each.

Can the approved provider use existing accommodation bonds or

accommodation bonds received after 1 October 2011 to repay the debt on

financing the above multipurpose facility?



Answer 1 (a)

Yes, however only to the extent that debt is accrued for the purposes of

permitted capital expenditure for residential aged care.



Question 1 (b)

What are the practical implications of this?



Answer 1 (b)

• An approved provider must distinguish capital expenditure between what

was used for permitted uses and what was not.

• An approved provider must ensure appropriate records are kept.

• An approved provider must distinguish their financing between what was

used for permitted uses and what was not.



Question 1 (c)

The approved provider has obtained plans for the multipurpose facility and

noted that facility will be built as a multistorey complex, consisting of the

bottom levels being residential care services and the top levels being used

for independent living units. Can the approved provider use existing

accommodation bonds or accommodation bonds received to repay the debt

specifically associated with the land?



Answer 1 (c)

Where capital expenditure includes non-residential aged care purposes the

provider and their auditor need to agree upon a reasonable means of

allocating costs between the aged care and non-aged care components.

Allocation of the cost of land could, for example, be based on the proportion

of actual building costs spent on residential care buildings on or floor area.



Question 2

An approved provider has a set policy to replace all furniture within one of

their facilities on a rolling basis over the next 24 months.

Can the approved provider use existing accommodation bonds or

accommodation bonds received to fund the refurbishment?



Answer 2

The acquisition of furniture used in providing residential care or flexible care

is a permitted use where the premises are initially erected or following an

extension, a significant alteration or significant refurbishment.

Therefore does this meet the definition of a significant refurbishment?

The example is solely about replacement of furniture without mention of a

refurbishment and therefore the expenditure would not be a permitted use of

bonds.


Permitted Uses Loans for Capital Expenditure

Question 3 (a)

An approved provider has a related party, who has constructed a residential

care facility through obtaining external finance. Can the approved provider

use existing accommodation bonds or accommodation bonds received to

fund the related party development?



Answer 3 (a)

The approved provider may make a loan to the related party which may be

used for direct payment of capital expenditure by the borrower but cannot be

used to repay debt incurred for capital expenditure.

A number of providers have identified difficulties with this, for instance where

a related property company borrows funds from a finance company and then

wishes to repay that debt using borrowed accommodation bonds. The

Department is considering whether legislative amendments may be

appropriate.

Until 30 September 2013 providers may utilise provisions of the two year

transition period.



Question 3 (b)

An approved provider has a related party, who has is going to construct a

residential care facility. The approved provider will use existing

accommodation bonds or accommodation bonds received to fund the related

party development.

On what conditions is this loan allowed to be made and what are the practical

implications of these?



Answer 3 (b) Approved providers may use accommodation bonds to make a loan that meets the

following conditions:

• the loan is not made to an individual

• the loan is made on a commercial basis

• there is a written agreement in relation to the loan

• it is a condition of the written agreement that the money loaned will only be used

for capital expenditure or investment in financial products defined by section 57-

17A of the Act

• the agreement includes any other conditions specified in the User Rights

Principles (as at 1 October 2011 there are no other conditions specified in the

User Rights Principles).



Answer 3 (b) cont A loan agreement on a commercial basis would normally included the following:

• a legal requirement to repay the loan within a specified period;

• a method for working out the interest payable; and

• an appropriate guarantor or other security the loan.

Practical issues:

What is an appropriate way to determine a commercial interest rate to be charged?

In assessing whether an interest rate is reasonable the department would compare the

rate charged by the provider against a number of benchmarks such as:

• Interest rates paid by the provider

• Other interest rates faced by the borrower

• Relevant market rates such as small business lending rates quoted by commercial

financiers over the course of the loan



Answer 3 (b) cont

Practical issues cont:

Should principal repayments be made?

The legislation does not require that loan conditions include principal repayments.

Interest-only loans are commercially available and would be accepted if the interest

rate and terms and conditions reflected the increased risk to the lender of such loans.

What is an appropriate repayment period for the loan?

A repayment period is not an explicit requirement of the legislation and, as noted

above, interest-only loans are acceptable. However, even on an interest-only loan

conditional obligations to repay the loan in circumstances such as sale of the property

or need for funds by the provider would be expected.



Answer 3 (b) cont

Practical issues cont:

What security is required on a related party loan?

If comparable commercial rates to be used are for a secured loan then a

charge would be required.

A guarantor is not an explicit requirement and is not necessarily implied by

the need for the loan to be on a commercial basis.

The existence and nature of a guarantee may be a factor to be considered in

the provider’s Liquidity Management Strategy.



Question 4 (a)

An approved provider notes that they have existing loans receivable and

payable in place that do not meet the conditions of a permitted use loan

(however were incurred for aged care purposes) prior to 1 October 2011, are

these loans required to be recognised separately?



Answer 4 (a) Whether it is for bookkeeping purposes, for the ease of determining an appropriate

interest charge or for statutory reporting purposes, loans that are non-interest bearing

with no fixed term of repayments should be maintained separately.

• There is no requirement or obligation for providers to review loans that existed at

30 September 2011 if bonds received on or after 1 October 2011 will not be

loaned under those terms and conditions.

• Repaying debt accrued for provision of aged care prior to 1 October 2011 is a

permitted use of bonds received on or after that date. This does not require

reliance on the two-year transition period.



Question 5

A group of companies with multiple approved providers has a group treasury

function; the internal policy is to remit all additional funds to a central account

that is held on deposit with an ADI.

What challenges would this approved provider face with the new permitted

uses requirements?



Answer 5 This process would need to be documented as part of each provider’s governance policy

and reflected in their Liquidity Management Strategy.

As detailed above, the approved provider will need to have a written agreement for all new

accommodation bonds loaned that states the following:

• a condition of the loan that the money loaned will only be used for capital expenditure

or investment in financial products defined by section 57-17A of the Act;

• a method for working out the interest payable.

Practically can the above terms be included within a group financing facility?

Would need a system to track surplus accommodation bond balances within the group

treasury.

Inter-entity funds loaned by provider to group treasury would not count as permitted uses.

Would need to be loaned back and reinvested for permitted uses.


Permitted Uses Investment in Financial Products

Question 6

An approved provider currently has all excess funds from the receipt of

accommodation bonds held within a Catholic Development Fund. Is this

appropriate under the new permitted uses requirements?

[The assumption is that the Catholic Development Fund is a Religious

Charitable Development Fund (RCDF) listed in Banking Exemption No. 1 of

2011]



Answer 6 If the approved provider and the RCDF are the same legal entity then bonds may

become part of the RCDF monies without the need for loans or other instruments.

The bonds may be used for the full range of permitted uses and the provider would

need to report on the use of the bonds. It should be noted that use of bonds for non-

aged care purposes has never been allowed under the Aged Care Act 1997.

For providers that are separate legal entities from their RCDF, bonds can only be

transferred to the RCDF as a loan or through the RCDF issuing securities to the

provider.

The two-year transition period enables affected providers and their RCDFs time to

make necessary changes to documentation and processes while continuing to invest

bonds in RCDFs.

The department is consulting with a number of stakeholders regarding the use by

providers of RCDFs.



Question 7

An existing provider has held an investment in an ASX listed company since

June 2009

The provider has occasionally used new accommodation bonds to cover any

operating losses.

During the June 2014 year, the provider uses new accommodation bonds to

service losses rather than sell their existing investment. Is this treatment

appropriate under the new permitted use arrangements?

Is it practical for a provider to sell an investment and use those funds to

cover operating losses, only to then re-purchase the investment with

additional accommodation bonds received?



Answer 7

The provider needs to demonstrate that it has complied with the permitted

uses and that bonds have not been used for non-permitted purposes such as

operating expenses (other than as allowed for the first 12 months of operating

a service). This may require the provider to fund operating losses from

sources such as redemption of investments or borrowing funds.


Repayment of Debt Accrued for the Purposes of

Capital Expenditure or Refunding Accommodation

Bonds

Question 8

An approved provider had planned to build two facilities, one for residential

care services and the other being independent living units. Both facilities are

anticipated to cost the same amount to construct.

At the end of year one, the residential care services facility was almost

complete, yet construction on the independent living units was yet to

commence. The residential care services facility was funded through cash

reserves.

During the second year the approved provider received accommodation

bonds from the operation of the new facility. Can the approved provider use

these bonds to fund the construction of the independent living units?


Repayment of Debt Accrued for the Purposes of

Capital Expenditure or Refunding Accommodation

Bonds

Answer 8

The approved provider cannot use the bonds for the purposes of constructing

the independent living units. Accommodation bonds may only be used for

permitted uses. Independent living units are not capital expenditure within the

meaning of section 57-17A(2) of the Act as they are not premises for

providing residential care or flexible care.

The provider needs to demonstrate that it has complied with the permitted

uses and that bonds have not been used for non-permitted purposes such as

operating expenses (other than as allowed for the first 12 months of

operating a service).

It should be noted that use of bonds for non-aged care purposes has never

been allowed under the Aged Care Act 1997.


Case Study

Existing aged care provider ABC Pty Ltd ("ABC")

Using the fact pattern below, please complete the APCS Cash flow

statement for ABC Pty Ltd for the year ended June 2013.


Case Study

Background

ABC’s cash and term deposits increased from $300K (June 2012), to 850K (June 2013).

ABC provided a loan to a related party for $500K to build two facilities one for residential care

services and the other being independent living units. Each facility is estimated to cost $250K.

ABC received $2.5M in accommodation bonds during the year.

ABC invested $700K in an unregistered management investment scheme, established for the

purposes of investment in commercial property.

ABC refunded $1M in accommodation bonds during the year.

ABC had net cash outflows from operations of $600K, $100K of which related to new operation

that commenced within the last 12 months.

ABC lends $400,000 to a related party to allow the related party to repay debt owing on aged

care construction loans

ABC repaid $200K of debt accumulated pre 1 October 2011.

ABC sold an ASX listed investment that it has held since 2005 for $1.45M.


Solution

Bond Money Received Total Value Expenditure on Permitted Uses Total Value

Accommodation bonds Total on *Capital expenditure $ -

Accommodation bonds received between the period of 01/07/12 and 30/06/13

$ 2,500,000 Total investments made in financial products post 01/10/11

Allowable deductions from accommodation bonds received between the period of 01/07/11 and 30/06/12 (retention, interest on outstanding bonds, extra service)

$ *Deposits made with authorised deposit-taking institutions $ 550,000

*Returned funds

From (sale/disposal/redemption) of financial products $ *Other financial products $ -

*Loans made for capital works or investments $ 250,000

*Refunds of bonds and Entry Contributions $ 1,000,000

Debt repayments – for incurred debt on:

1. *Capital expenditure $

*Accommodation bond refunds $ -

*Repayment of pre 01/10/11 debt for providing aged acre to care recipients

$ 200,000

*Reasonable business losses between 01/07/12 and 30/06/13 (first 12 months of operating a service)

$ 100,000

Use of transition arrangements (bonds only) $ 400,000

*refers to gross redemption or expenditure from any source not just accommodation bonds.

Gt Aged Care Prudential Seminar 2012

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