Calling the build of a professional sports stadium complicated vastly understates the complexities involved. The cost of building the stadium is often split between the local government and the sports franchise requesting the stadium. Teams like the National Football League’s Rams and Raiders have moved states when those arrangements have been soured.
Financing for the build aside, there will soon be other reasons why the build of professional sports stadiums will be a monumental task for both sports teams and their cities. Notably, the accounting changes coming to leasing. The Financial Accounting Standards Board (FASB)’s updates to ASC Topic 842, Leases, which goes into effect for private entities and not-for-profit organizations in 2020 (though it could be delayed to 2021), could have a dramatic impact on accounting for stadiums.
The newer the lease, the more the team and its city government could be affected. And there are a host of franchises looking to build new facilities in the coming years, including:
All the parties involved will want to be prepared for these changes to lease accounting well in advance so they implement their new accounting procedures as efficiently as possible.
How Does the Leasing Standard Affect All the Parties Involved with the Building of New Professional Sports Stadiums?
Sports franchises often lease their stadium from the city or local government. In most arrangements, the sports franchise will be the lessee and the city or local government will be the lessor. Changes in the lease accounting standard will affect accounting for lessees and lessors, and in some situations, the lessee sport franchise may find itself the lessor of certain arrangements.
What are the Biggest Impacts on Sports Teams?
Changes to the leasing standard move accounting from a risks-and-rewards-based model to a control-based model, which aligns with some of the changes to revenue recognition. Under the new standard, the analysis of whether the sports team is caught up in the build-to-suit guidance may change. In other words, if the sports team is determined to control the stadium while it is being constructed, the entire stadium may wind up on the sports team’s financial statements, even if the team is not paying for it.
But the biggest change is that the lease accounting standard records a new right-of-use asset and lease liability for operating leases for lessees. If sports teams currently have an operating lease, then a new right-of-use asset and lease liability will be recorded on their books when they transition to the new leasing standard. The longer the remaining lease term, the greater those transition adjustments would be, which means the franchises with the new stadium builds should be particularly mindful of the accounting updates. The new accounts on the balance sheet may cause changes to existing covenant calculations (used for lending, among other things) if they are based on leverage ratios.
In addition, if the sports team sells access to suites during games, those contracts will need to be evaluated to determine whether they qualify as subleases. If they do, the team will need to follow the accounting and disclosure requirements for lessors.
How are Local Governments Impacted by the New Leasing Standard?
If the lessor is the city, which follows governmental accounting standards (GASB guidance), there is a new leasing standard that creates a single lease model. Under the new standard, if the lease does not meet the definition of a regulated lease, then lessors will record a deferred inflow of resources and a lease receivable equal to the present value of the lease payments expected to be received during the lease term (similar to the lease liability for lessees).
Regulated leases, on the other hand, do not record the deferred inflow of resources or lease receivable, but rather recognize the inflow of resources based on the payment provisions of the lease contract.
If the stadium leases involve facilities owned by a government unit or authority, it may be impracticable to determine the fair value of the underlying asset (the stadium). Furthermore, if there is no transfer of ownership or purchase option that the sports team is reasonably certain to exercise at the end of the lease, then the stadium lease should be classified as an operating lease.
What Are the Biggest Challenges the Professional Sports Industry Faces as a Result of the New Leasing Standard?
For every entity that owns or manages leases, the first obstacle to the new standard will be evaluating all of the entity’s respective leases. It’s crucial that the team be able to identify all leases, including potential subleases of suites or to food vendors to ensure its financial statements are accurate. Furthermore, the stadium leases tend to be complex and long-term in nature. Sports teams will need to have processes in place to properly account for each of the provisions in their leases, as well as any modifications.
Sports teams should start inventorying their leases and calculating the expected impact now in order to understand how loan covenants may need to change as a result of having to record lease liabilities on their balance sheet. In addition, teams will need to evaluate whether a leasing software will be necessary to track all of the agreements, including potential subleases.
If you have any questions on how the new leasing standard will impact your business, please feel free to contact Hal Hunt directly at firstname.lastname@example.org.
Published on September 09, 2019