Question

Consider the following companies. Juventus F.C. S.p.A. is an Italian publicly listed football club. The club’s primary sources of revenue are: a Season and single ticket sales. b Television, radio, and media rights. c Sponsorship and advertising contracts. d The disposal of players’ registration rights. Players’ registration rights are recognized on the balance sheet at cost and amortized over the players’ contract terms. The club owns its stadium (“Juventus Stadium”), which opened in 2011, but leases the land adjacent to its stadium from the City of Turin under an operating lease arrangement. The operating lease has a term of 99 years and involves a lease payment, made in advance, of close to €12.8 million. To help finance the €105 million construction cost of the stadium, Juventus entered into an agreement with a large sports marketing agency, selling the exclusive naming rights for the new stadium for a period of 12 years. In exchange for the naming rights, Juventus received an advance payment of €38.5 million. Spyker Cars N.V. is a small Netherlands-based designer and manufacturer of exclusive sports cars, which had its initial public offering (IPO) in 2004 but delisted from the Amsterdam Stock Exchange in 2013. During the first five years as a publicly listed company, Spyker’s annual reve- nues ranged from €6.6 million (in 2009) to €19.7 million (in 2006). In these years, Spyker produced 242 new cars (including demonstration cars) and sold 194 cars. At the end of 2009, it held 28 cars in stock. Further, in 2009 the company spent close to €9.8 million on development, which it added to its development asset of €27.3 million, and €14,000 on research. Because Spyker had been loss-making since its IPO, the car manufacturer had €97 million in tax-deductible carry forward losses at the end of 2009. J. Sainsbury plc is a UK-based publicly listed retailer that operates 597 supermarkets and 707 convenience stores and has an estimated 16.7 percent market share in the UK. During the period 2010–2013, the company’s operating profit margin remained steady around 3.2 percent; in 2014 the operating profit margin dropped to 2.8 percent. At the end of March 2015, the net book value of Sainsbury’s land and buildings was £6.9 billion. A part of the company’s supermarket properties was pledged as security for long-term borrowings. In 2014 Sainsbury had 161,000 employees (107,000 full-time equivalents); many of them participated in one of the retailer’s defined-benefit pension plans.

1 Identify the key accounting policies for each of these companies.

2 What are these companies’ primary areas of accounting flexibility? (Focus on the key accounting policies.)

Answer 1

Juventus F.C. S.p.A

Revenue recognition

• Primary sources of revenues are ticket sales, media rights, and sponsorship contracts.
• In exchange: Long-term commitment to provide services (i.e., play games)

• When to consider which revenues as realized?

Expense recognition/accounting for players’ long-term contracts

• Juventus pays substantial amounts to a player’s previous club when it hires a new player
• These outlays are initially capitalized and must be recognized as an expense sometime during the contract period of the player.
• Another issue is the recognition of write-offs once a player gets, e.g., injured

Operating lease agreement

• Assets leased under operating lease agreements can be kept off-balance or recognized as economically owned by the club.

Spyker Cars N.V

Accounting for inventories

• Large inventories, significant problems selling products
• Recognize write-offs for the impairment of inventories.

Accounting for R&D

• Whether and to what extent development expenditures will result in future revenues is very uncertain
• Based on assessment of the expenditures’ future benefits: Management has to decide whether expenditures can be capitalized.

Carry forward losses

• Only if it is probable that management will realize the tax deductible carry forward losses in future years they constitute a true asset
• If a proportion of the carry forward losses is unlikely to be realized, the recognition of an allowance is warranted.