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Revenue from preneed sales of funeral services and funeral merchandise is deferred until the period in which the funeral is performed and the merchandise is delivered. On the balance sheet, the full contract amount is included in prearranged deferred revenue (liability). The corresponding receivable due from the customer is reflected in prearranged receivables (asset), and the corresponding cash received from the customer is reflected part in prearranged receivables (for the portion placed in trust) and part in cash (for the portion the Company is allowed to retain). The costs to acquire the sales, primarily commissions and other direct costs, are reflected on the balance sheet as deferred charges (asset) and are charged to expense as the funeral services are performed and products delivered. Indirect costs of marketing preneed funeral services and merchandise are expensed in the period in which they are incurred.
As the customer makes payments on the preneed contract, the portion of prearranged receivables representing the receivable due from the customer declines, and the portion representing the receivable from the trust increases. The Company records cash for the amount of cash received that is not required to be placed in trust. Realized earnings on the amounts held in trust represent a debit to prearranged receivables (asset) and a credit to prearranged deferred revenue (liability) and are not recognized as revenue until delivery of the service or merchandise.
When the funeral service or merchandise is delivered, the Company recognizes as revenue the full contract amount plus all trust earnings associated with that contract, with a corresponding reduction recorded to prearranged deferred revenue (liability). The Company debits cash with the amount removed from trust that is attributable to the contract (consisting of the customer’s payments and related realized earnings, all of which is withdrawn at that time) and records a corresponding reduction in prearranged receivables (asset). Associated deferred charges (asset) are expensed, and the actual expenses incurred in delivering the services and merchandise are recognized.
Preneed sales of cemetery merchandise, primarily vaults and markers, and preneed sales of cemetery services, primarily openings and closings of burial sites and installations of markers, are accounted for in essentially the same manner as preneed sales of funeral services and merchandise. Additional information about the Company’s prearranged receivables and prearranged deferred revenue is contained in Note 5 to the Company’s consolidated financial statements.
For preneed sales of interment rights (cemetery property), the associated revenue and all costs to acquire the sale are recognized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate.” Under SFAS No. 66, recognition of revenue and costs must be deferred until 10 percent of the property sales price has been collected. A portion, generally 10 percent, of the sale proceeds are placed into perpetual care trust funds. The Company withdraws and recognizes realized earnings from these funds on a monthly basis to offset the cost of maintaining its cemetery grounds. The perpetual care trust funds are not reflected on the financial statements because principal must remain in the trust in perpetuity.
The Company has three types of trust funds and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) perpetual care. As described below, earnings on preneed funeral and cemetery merchandise and services trust funds and escrow accounts are now accounted for in the same manner. The accounting for earnings on perpetual care trust funds differs from the other two types of trust funds due to the nature of the trusts, as described below.
Preneed funeral merchandise and services trust funds and escrow accounts. Effective November 1, 1998, the Company changed its method of accounting for earnings realized by those preneed funeral merchandise and services trust funds and escrow accounts where it is allowed to retain earnings on the funds if the contract is cancelled. The Company now defers recognition of all earnings realized by these trust funds and escrow accounts until the underlying funeral service or merchandise is delivered. For those trust funds and escrow accounts where it must return earnings on the funds if the contract is cancelled, it has always deferred recognition of realized earnings until the underlying funeral service or merchandise is delivered. These accounting methods were not affected by the implementation of SAB No. 101. The Company generally does not withdraw cash (principal and earnings) from these trust funds and escrow accounts until the merchandise or service is delivered. Principal and realized earnings in these funds and escrow accounts are reflected as prearranged receivables (asset) on the balance sheet. The full contract amount and realized earnings in these funds and escrow accounts are reflected as prearranged deferred revenue (liability) on the balance sheet. Unrealized gains and losses are not reflected on the balance sheet or income statement but are included in Note 5 to the consolidated financial statements.
Preneed cemetery merchandise and services trust funds and escrow accounts. As discussed above, effective November 1, 2000, the Company implemented SAB No. 101 and changed its method of accounting for earnings realized by preneed cemetery merchandise and services trust funds and escrow accounts. The Company now defers all earnings from these funds until the underlying merchandise or service is delivered. The Company generally does not withdraw cash (principal and earnings) from these trust funds and escrow accounts until the merchandise or service is delivered. Principal and realized earnings in these funds and escrow accounts are reflected as prearranged receivables (asset) on the balance sheet. The full contract amount and realized earnings in these funds and escrow accounts are reflected as prearranged deferred revenue (liability) on the balance sheet. Unrealized gains and losses are not reflected on the balance sheet or income statement but are included in Note 5 to the consolidated financial statements.
Perpetual care trust funds. The Company recognizes the earnings on its perpetual care trust funds as they are realized in the trust. This accounting method was not affected by the implementation of SAB No. 101. The Company generally withdraws the earnings on a monthly basis to offset the cost of maintaining its cemeteries. Principal in these funds is not reflected on the balance sheet because the principal must remain in the trust in perpetuity.
Income from funds, especially those invested partially in common stock, can be materially affected by prevailing interest rates and the performance of the stock market. In managing its North American funds (including those in Puerto Rico) that have investments in common stock, the Company seeks an overall annual yield of approximately 8.0 percent to 9.0 percent, which is well in excess of the Company’s expectation for inflation over the short term. However, no assurance can be given that the Company will be successful in achieving any particular yield. The Company does not expect to achieve this goal in fiscal year 2002 in its perpetual care trust funds.
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