Future of Aged Care: What are the implications for the discontinuing of bed licences?

Since the May 2021 Federal Budget announcement scrapping bed licences for aged care from 1 July 2024, there has been much debate about whether bed licences recognised as intangible assets with indefinite useful lives in the financial statements of aged care providers should be:

• tested for impairment as at 30 June 2021, given they are unlikely to have much resale value in future;

• amortised over their remaining useful lives to 30 June 2024 (i.e. they are no longer an indefinite-life intangible asset), but also tested for impairment if there are impairment indicators; or

• left ‘as is’.

Under the proposed new arrangements, the number of places provided by an aged care provider will be driven by demand from senior Australians with an assigned place, rather than an assigned bed licence.

Whilst most larger providers have recognised the impairment, there are some, particularly smaller and financially insecure providers who have not yet recognised the impairment. This may be because the impairment should be recognised as an expense in the statement of financial position and may have been the cause of reported losses for many providers in FY21 and FY22.

The removal of the bed license assets impacts provider’s balance sheets by decreasing net assets. This may impact providers who have finance loans with banking covenants.

It is possible providers are delaying recording the impairment adjustment as it may cause a breach of loan covenants, which could allow a financier to call on the loan or, at the very least, cause an auditor to question the going concern of the provider.

It is also possible private providers are delaying recording the impairment because of the impact on shareholder dividend payments; as these would likely not be able to be distributed if the provider records a loss.

Providers who have not yet recorded the impairment of bed licenses are encouraged to do so. Where recording that adjustment causes any of the concerns listed above, it will be important for providers to engage with stakeholders to explain the accounting treatment in response to the regulatory changes and what the provider will do to rectify any resulting financial challenges.