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Sporting franchise clubs are business entities at the end of the day. Even though some of them may not be running their operations to maximize their profit, they are still considered to be “for-profit” entities. Hence, ideally, their accounting is supposed to be similar to other business entities. However, this is not the case.
There are many aspects of the operations of sporting franchises for which accounting has to be done in a unique manner. The accounting for player contracts is one such unique scenario that is present in the sports industry.
In this article, we will have a closer look at some of the nitty-gritty of how player contracts are accounted for in sporting finance.
The accounting for player contracts is considered to be unique when it comes to sporting franchises because these are the only business entities where players are capitalized in the form of assets.
There are many organizations that claim that their human resources are their assets. However, accounting rules do not permit such organizations to actually recognize the value of their human resources on their balance sheet. This is not the case with sporting franchises.
Sporting franchises consider contracts with players to be an asset since they can derive economic benefits from the same. Hence, the entire consideration value paid in order to obtain the rights for a player is recognized on their balance sheet as an intangible asset.
Since player contracts are considered to be intangible assets, they have to be reported as per the rules laid down for reporting the values of intangible assets.
Amortization is the process of reduction in value for intangible assets just like depreciation is the process of reduction in value for tangible assets. Player contracts which have been recognized as assets in sporting franchises are also amortized in order to show the reduction in their value with the passage of time.
For example, if a sporting league has paid $100 million for a five-year player contract, they will expense out $20 million each year. This will be shown in the expense column in the profit and loss along with any other wages or bonuses which might be payable to the player.
As a result of this constant amortization, there is always a written down value that is available for every player which reflects the current asset value. Hence, if the player is sold off to another sporting franchise, then the consideration received is compared with the current written-down value of the player’s contract.
Any difference in the value is recognized as profit or loss on the income statement of the sporting franchise. Financial gain or loss as a result of buying and selling human resources is unique to the sporting industry!
The sale of player contracts can be quite complex and the event may be spread across a number of years. For instance, it is possible for a sporting franchise to agree to sell a player contract right now but the actual transfer may take place at the end of the season which may be in the next financial year.
In such cases, confusion may arise about when to recognize the sale of the player contract and its financial impact. One point of view is that the sale needs to be reported in the current year since it has taken place in the current year whereas another point of view is that the sale needs to be reported in the next year since it will become effective at that point.
Now, the specific details of revenue recognition may change based on the accounting standards being followed. However, in most cases, the accrual principle is followed. This means that the sale will be recognized when the transfer is complete. Any payment that is received before such a transfer is completed is considered to be an advance and is accounted for accordingly.
In some cases, player contracts include conditional or contingent payments as well. This means that the new club that has acquired the player will make certain payments to the old club only if the player performs as per certain expectations. This could mean that the payments will only be made if a certain number of goals or points are scored.
In such cases, there are a lot of varied approaches which are used for accounting. However, since these payments are not certain, they are not generally not added to the capitalization value of the intangible asset. Instead, such payments are directly considered to be an expense that becomes due when the performance goal has been met.
Prior to the performance goal being met, this liability may be mentioned in the footnotes of accounting as a contingent liability and may have no other impact on the overall income statement as well as the balance sheet.
There is yet another approach in which the contingent payments are recorded as contingent liabilities just like above. However, once these liabilities become payable, they are not immediately expensed out. Instead, they are added to the amortization value of the asset on the balance sheet and are expensed out using yearly amortization.
The fact of the matter is that the buying, selling, capitalization as well and amortization of player contracts is a unique financial phenomenon that takes place in the sporting industry. The accounting for such transactions poses some unique challenges which students of sports finance must be aware of.
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