In the previous article, we have already seen that accounting for sporting franchises involves certain scenarios that are specific only to the sporting industry. We saw how the accounting for player contracts was unique and why it was important to understand the accounting implications.
In this article, we will continue to have a look at how sporting franchises account for player contracts. We will have a look at some of the advanced scenarios in this contract.
- Transfers: The transfer of one player to another club creates a complex accounting scenario. This is because players are recognized as intangible assets. Hence, the transfer of players is like the sale of an intangible asset.
The appropriate depreciation or amortization needs to be applied in order to find the current value of the asset and this current value needs to be reduced from the overall consideration received in order to determine the loss or gain. This loss or gain needs to be recognized as an extraordinary expense.
- Loans: It is common for sporting franchises to loan players from each other for a short span of time. A loan is different from a transfer in the sense that it is not permanent. This means that the player will continue to have contractual rights with the original club with which they have signed the agreement. However, they will play for a different club with the consent of the original club.
As far as financials are concerned, loaning out of players is generally considered to be a lease transaction. As a result, the original club i.e. the lessor can recognize the value of the loan contract as an intangible asset on their balance sheet.
The value of the asset can be written down as and when lease payments are received and recognized as revenue. The accounting entries for the lessee are the exact opposite. They first need to recognize the lease as a liability. Later on, the liability can be reduced as and when payments are made.
The sporting franchises need to make sure that they only capitalize and amortize any payments that are fixed and irrevocable as per the contract. Any conditional payments should not be recognized as an asset as discussed in the previous article.
In all of these cases, the original player contract which was recognized as an intangible asset and was being amortized over the course of time continues to be reported in the same manner.
- Options: It needs to be understood that a lot of times, transfers and loans are not clearly demarcated. This means that it is possible for a sporting franchise to initially loan out a particular player to another club.
However, at the end of the lease period, the original sporting franchise may have a callback option. This means that the player will be legally obligated to return to the club if the option is exercised. However, it is also possible that such an option is never exercised and that the player continues to play with the other sporting franchise or even moves on to a third franchise.
Accounting for such complex contracts with uncertain clauses can be quite challenging. However, the basic accounting principle is that only events which are certain should be accounted for. Hence, in such cases, accountants generally only recognize the value of the non-cancellable period of the contract as an intangible asset.
It is also common for sporting franchises to mention this callback option in the footnotes of their accounts since it is a material event that impacts the financial performance of the sporting franchise.
Termination Incentives
It is common for clubs to terminate the services of various staff such as players as well as coaches in case there is a consistent lapse in performance over a long period of time. It needs to be understood that in such cases, it may be mandatory for the sporting franchise to make a termination payment. It is common for player contracts to have such clauses.
Now, the accounting for this payment can be a bit complex. This is because the termination payment is in essence a one-off payment. Hence, such a payment needs to be shown as an expense. However, it would be incorrect to include these payments as a part of the usual operating expenses.
Since this is a one-off event, such expenses need to be reported by the management as extraordinary expenses. Also, it is common to include a footnote about the nature of these expenses in the overall accounting statement.
It is also important to note that the accountant can only recognize the terminating agreement once it has been finalized i.e. it has been countersigned by the player. Also, it needs to be understood that the expense needs to be recognized in the period when the termination has actually happened regardless of whether the payment was made before or after that date.
The fact of the matter is that the management of a sporting franchise is a complicated business. Hence, a wide variety of arrangements are made between franchises as far as player contracts are concerned. These varied arrangements lead to situations that involve a lot of accounting complexity.
