In the previous two articles, we have already established that the sporting industry has this unique practice of recognizing human players as intangible assets on their balance sheet. We also know that the value of these intangible assets is also routinely amortized just like other intangible assets.
In short, the player contracts are treated exactly the way intangible assets are supposed to be treated.
Hence, just like other intangible assets are impaired, player contracts can also be impaired. In this article, we will understand what impairment is as well as how it is accounted for in the sports industry.
What is Impairment?
Impairment refers to a situation wherein the financial value of an asset has been drastically reduced because of exceptional wear and tear. Hence, impairment is a significant drop in the value of an asset that is not caused by regular depreciation. Now, there are certain situations in which impairment becomes relevant to sporting franchises. The details of these scenarios have been listed below:
- Injury: The first scenario that comes to mind while thinking about impairment in the context of sporting franchises is injury. Competitive sports require a high degree of physical effort on behalf of the players.
It is possible that some players might end up over-exerting themselves while performing on the field. The end result could be that some players end up being injured while playing the sport.
Now, when it comes to injury, the sporting franchise has to make a judgment call regarding whether this injury is temporary or whether the injury is permanent. If the injury is temporary, then there might not be any need for impairment. This is because, as per the accounting definition, impairment is only applicable to assets that have lost their value permanently.
On the other hand, if the sporting franchise believes that the injury would lead to a permanent reduction in the ability of the player, then they would have to impair the intangible asset that has been created in their name on the balance sheet of the sporting franchise.
Impairment in such cases is done when the sporting franchise comes up with a possible fair value and costs of disposal related to these intangible assets. Coming up with a fair value for an injured player can be complicated. This is because an injured player can still be used by the club in marketing events and may still be in a position to confer economic benefits to the club. However, there are guidelines that have been prescribed by different accounting principles in order to help determine the fair value of such players.
The accounting entries can be further complicated by the involvement of insurance companies. It needs to be understood that it is common for sporting franchises across the world to have player insurance. Hence, when an injury occurs, the franchise may end up receiving the value of the intangible asset from the insurance company.
However, they may also be simultaneously obligated to pay wages to the injured player till the end of the contract. Hence, in such scenarios, it is common for the sporting franchise to recognize these assets and liabilities separately on the balance sheet.
- Held for Sale: There are some situations in which players are classified as being held for sale. There are certain rules which determine whether or not a player can be considered to be held for sale.
For instance, it is mandatory that the player being held for sale is not training with the team. There must be a high degree of probability that the player will be excluded from the squad for the forthcoming matches. Also, there must be active discussions going on with regard to the transfer of such a player to a different club.
Now, when a club attempts to transfer a certain player to a different franchise, they have to quote an asking price. If such quoted asking price is below the value at which the intangible asset is held on the balance sheet, then an impairment must be made in order to recognize the fall in the value of the intangible asset.
- Poor Performance: Last but not least, some people feel that when a player starts consistently underperforming, then there is a fall in the value of such a player. This fall in value must be recorded by the franchise using impairment. However, this is not the case. Issues such as form are temporary and hence do not qualify for an impairment. Also, it must be understood that the performance of a single player ideally should impact the cash-generating ability of the entire team.
Whether it is performance on the field or sales of merchandise, the role played by one player cannot really be singled out. Hence, accounting rules do not allow for the impairment of intangible assets that have been created on the balance sheet of the franchise because of temporary issues such as one player being out of form and consistently underperforming.
The bottom line is that the impairment of intangible assets such as player contracts can be a pretty complex scenario. There are several possible situations that can exist. However, the accounting team needs to follow certain pre-established accounting principles in order to ensure that they report such events accurately on their financial statements.
