Question

Professional athletes regularly sign long-term multimillion-dollar contracts in which they promise to play for a particular team for a specified time period. Owners of these teams often sign long-term leases for the use of playing facilities for a specified time period. GAAP often requires the leases to be booked as liabilities but does not require the obligations associated with pro athletes’ contracts to be recorded.

Discuss the reasons for the differing treatment of these two seemingly similar events. Do you think the accounting treatment currently required by GAAP in these instances satisfies the needs of investors and creditors?

Answer 1

Background of lease contracts:

Lease liablities are required to be recorded in case of a finance lease, i.e. when the entity essentially gains control of or obtains economic benefits from leasing the asset for substantial part of the useful life of the asset. Therefore, a lease liability typically gets tagged along a leased asset, as these are typically considered to be in the nature financing arrangements rather than pure rental transactions. Therefore, there is a leased asset, and a lease liability, to reflect the essence of the transactions, i.e. a financing arrangement

Player contract

In case of player contracts, there is first of all no financing arrangement. Further, there are no assets recorded in case of annual fees paid to players (unless there is a lumpsum payment, accompanied by a lock in period). The players are typically free to cancel their contracts for a nominal amount and move to other clubs. Therefore, considering these subtle differences in leasing arrangements and player contracts, it may not be prudent to record all player related obligations at the time of entering into the contract.

The accounting treatment will meet the needs of investors, subject to sufficient disclosures around the commitments that the company has entered into for player obligations. Leases get recorded in the books of accounts. For player commitments, as they need not necessarily get entered into books of accounts, the entity needs to disclose the commitments entered into for the next 3 or 5 years in its financial statements.

For further discussion, please comment.