How the New Leasing Standards Could Impact the Build of Professional Sports Stadiums
The Financial Accounting Standards Board (FASB) issued a new leasing standard in February 2016 that significantly impacts the way leases are accounted for on businesses’ financial statements. This standard has far-reaching implications for all entities that lease any kind of assets.
The FASB recently voted to delay the effective date for the implementation of these standards to the 2021 calendar year for private companies, not-for-profit organizations and smaller reporting companies. This delay also impacts accounting for the leases of professional sports stadiums and the resources/services associated with them.
In light of this, we conducted an in-depth Q&A with our dedicated lease accounting expert Hal Hunt, Shareholder at Mayer Hoffman McCann P.C., to discuss the impact of the new standard on the build of professional sports stadiums and how parties involved can prepare ahead to implement these new accounting procedures as efficiently as possible.
1. Can you provide a brief explanation of what the new lease accounting standard entails?
The biggest change is that the new lease accounting standard records a new right-of-use asset and lease liability for operating leases for lessees. In addition, the standard changes from a rules-based approach to a principles-based approach, so there is more judgment involved by management. The standard also aligns lessor accounting with the new revenue recognition guidance, so lessors face some changes as well.
2. Why is this standard particularly relevant for the parties involved with the building of new professional sports stadiums?
The standard is moving from a risks and rewards-based model to a control-based model, which aligns with some of the changes to revenue recognition. So, when a new stadium is built, 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.
3. What are the biggest impacts on sports teams (i.e., “lessees”)?
If a sports team currently has 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. The new accounts on the balance sheet may cause changes to existing covenant calculations 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.
4. How are cities/local governments (i.e., “lessors”) impacted by the new standard?
If the lessor is the city, which follows governmental accounting standards, 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.
5. What other governmental nuances are there to consider?
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.
6. What are the biggest challenges you have seen entities in this industry face as a result of the new standard?
The completeness of the population is a challenge for sports teams, just like other organizations. The ability to identify all leases, including potential subleases of suites or to food vendors, will be important to ensure the sports team’s 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.
7. What tips do you have to help businesses in this sector successfully implement the new standard?
Sports teams should start inventorying their leases and calculating the expected impact now in order to understand how covenants may change. 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
Hal Hunt is a Shareholder at Mayer Hoffman McCann P.C. and is based in the Kansas City office.
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