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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.
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.
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.
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.
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.
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.
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.
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