MSG Team's other articles

12229 The World without Bankruptcy Laws

Bankruptcy is one of the natural states which a company may find itself in. Entrepreneurship is primarily about taking risks. When companies take risks, some of them succeed, whereas others fail. Hence failure is a natural part of the business. However, many critics of bankruptcy laws believe that there isn’t a need for an elaborate […]

9968 Intermediaries to a Credit Card Transaction

In the past couple of decades, banks have started providing a new type of product called the credit card. The credit card is a revolving line of credit which is offered to customers. Customers can use the card to borrow money to make purchases. They are then offered a credit free period. If they are […]

11627 Treasury Inflation-Protected Securities (TIPS)

Investors who hold bonds generally earn a fixed nominal rate of return. However, the nominal return that they earn is in turn composed of two parts. One part compensates the investors for the inflation which has increased in the external world while their money has been locked in the security. The second part is the […]

11729 United States and the Curse of Predatory Lending

Predatory Lending, also colloquially known as loan sharking is a bad business model. This business has always been run by anti-social elements and even mafia syndicates right from the age of the Renaissance. The loans were granted without any formal process. The recoveries were done in the dark alleys, and the entire operation was far […]

10937 Relationship Banking in Commercial Banking

Commercial banking is fundamentally different from retail banking in several ways. One of the main differences between the two types of banking is the relationship management approach. The commercial banking system relies heavily on relationship management. Each and every corporate customer of a commercial bank has a dedicated relationship manager. This is possible because of […]

Search with tags

  • No tags available.

In the previous article, we have already established that there are many sporting franchises across the world that prefer to rent out stadiums instead of building them outright.

We also know that a significant number of sports franchises are indeed using the leasing route. Hence, there are a lot of leasing transactions present in the sporting industry which need to be accounted for. The accounting for such leasing transactions can turn out to be quite complex.

In this article, we will have a look at some of the complexities that arise while accounting for stadium leases.

  1. Accounting Standards: It is important to note that when sporting franchises sign lease agreements, they generally do not sign them with private parties. This is because private parties are not the ones who own stadiums.

    Since stadiums require large investments and long gestation periods, they are owned by local government bodies such as municipalities. Hence, the contract is between a private entity and a government entity.

    Now, as far as the government entity is concerned, they do not follow accounting standards laid down for private companies such as IFRS and GAAP. Instead, in most parts of the world, such bodies have their own accounting standards.

    For instance, in the United States, government agencies follow the rules laid down by the GASB i.e. the Government Accounting Standards Board. Hence, it is important for sports analysts to be aware of the accounting rules laid out by GASB.

  2. Regulated vs Unregulated Lease: When two private parties enter into a contract, both are free to negotiate. Hence, the lessor can choose the maximum price based on the market conditions. At the same time, the lessee can also choose whether or not to enter into a contract. However, this may not necessarily happen when a government entity decides to enter into a contract.

    Government bodies cannot make decisions of their own free will when it comes to the lease. Instead, there may be rules and guidelines regulating the amount of money that can be charged. Even if one party is required to follow certain guidelines, the end result is that the nature of the contract changes for both parties.

    Such a lease, where at least one party is legally bound to follow the rules and regulations set by the government is called a regulated lease. Any lease which is not regulated is called an unregulated lease. The accounting process for a regulated lease is quite different as compared to an unregulated lease.

  3. Financial Lease Vs Operating Lease: The accounting treatment of a lease can also differ based on whether the lease is an operating lease or a financial lease.

    A financial lease is actually a sale disguised as a lease. Hence, in such leases, at the end of the contract term, the lessee will have the option to take over the asset by paying a nominal sum. Such an option is not present in the operating lease. The manner in which these leases are recognized on the balance sheet of both the lessor and the lessee differs based on whether the lease is operational or financial.

Accounting for the Lessor

  1. Deferred Revenue Asset: As far as the lessor is concerned, the lease represents a commitment to future cash flows. If the lease is not regulated, then these future cash flows need to be discounted at an appropriate rate and recognized as an asset on the balance sheet of the lessor.

    As and when the lease rentals are actually paid, the value of the asset is reduced and is recognized as an income on the balance sheet of the lessor.

  2. Regulated Lease: In case, the lease is a regulated lease, then the accounting regulations do not permit the lease to be capitalized on the balance sheet. Instead, a schedule of possible future payments is attached in the accounting footnotes.

Accounting for the Lessee

  1. Lease Liability: As far as the lessee is concerned, the first impact of a stadium lease is that they are now obligated to pay rent to a third party for a long period of time. As a result, the accounting convention requires them to find the present value of the future payables commitment and recognize the present value as a liability on their balance sheet. They can then reduce the liability amounts as and when they make payments towards rent.

  2. Lease Asset: Accounting standards around the world make it necessary for lessees to recognize a lease asset on their balance sheet. They are not required to actually recognize the actual asset i.e. the stadium.

    However, they are expected to recognize the intangible asset that has been created in the form of the “right of use” of the original asset. More details about the “right of use” assets have been explained in a different article.

  3. Revaluation of the Lease: The present value of the lease is recognized on the balance sheet of both the lessor as well as the lessee. This is an intangible asset that is held over long periods of time and amortized with time. However, just like other intangible assets, it is possible for this asset to significantly lose value as a result of impairment.

    Even a significant change in the interest rate leads to a change in the discount rate and as a result, causes the value of the asset to change. It is for this reason that the stadium lease needs to be revalued periodically in order to ensure that the value listed on the balance sheet is in sync with reality.

The bottom line is that the accounting treatment of leased stadiums can be quite complex. Also, the rules laid down by multiple accounting standards need to be adhered to while accounting for such leases.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Common Issues with Revenue Generated from Broadcasting Right

MSG Team

Issues in Revenue Sharing in Sports Leagues

MSG Team

Sources of Revenue: Broadcasting Rights

MSG Team