Arsenal PLC: Financial Statements 2009/10 - Coursework Example

Arsenal PLC: Financial Statements 2009-2010 “The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to wide [sic] range of users in making economic decisions”. This is a fair assessment of the requirement for financial statements: They need to accurately represent the real assets of a company, firm or institution, as well as the real costs. Arsenal Holding PLC's 2009-2010 financial statement is a good place to analyze what this actually means. The most important matter is the treatment of players as assets in the financial statement of Arsenal. As a soccer club, Arsenal's most important assets are non-tangible, hard to estimate and of somewhat subjective value: Their reputation and their players. How does Arsenal account for the costs of their players? The costs associated with acquiring players’ registrations or extending their contracts, including agents’ fees, are capitalised and amortised, in equal instalments, over the period of the respective players’ contracts. Where a contract life is renegotiated the unamortised costs, together with the new costs relating to the contract extension, are amortised over the term of the new contract. Where the acquisition of a player registration involves a non-cash consideration, such as an exchange for another player registration, the transaction is accounted for using an estimate of the market value for the non-cash consideration. Provision is made for any impairment and player registrations are written down for impairment when the carrying amount exceeds the amount recoverable through use or sale (Arsenal, 2010). What a strange policy! It gets even weirder. “The figures for cost of player registrations are historic cost figures for purchased players only. Accordingly, the net book amount of player registrations will not reflect, nor is it intended to, the current market value of these players nor does it take any account of players developed through the Group’s youth system. The directors consider the net realisable value of intangible fixed assets to be significantly greater than their book value” (Arsenal, 2010). Aren't these new players valuable? Isn't the Group's “youth system” a valuable asset? Potentially. There are arguments both for and against including the value of players, and these arguments underline the difficulties of financial reporting and auditing. It is clear that a player with a lot of potential, say immense endurance or a wonderful and precise pass, will appreciate in value. This would seem to be a reason to note it on the balance sheet. One standard for an asset to be listed should be that it is possibly liquid. Land might be hard to sell, but it is possible. Contracts and futures also have concrete value. But player contracts have rules about sale, and represent the bidding value of the player, not the market value. This would be a reason not to include anything but the historic value of players. It is true that a talented player may never blossom, or that the soccer metagame might change in the interim period to emphasize different skills, or any of a number of dozens of factors might cause a player's eventual expected market value to increase or decline. That having been said, that is true of anything that will appreciate over time. Real estate values can fluctuate wildly; so can any other inventories or assets. That is no reason not to expect and account for their appreciation or depreciation. These factors have contributed to a healthy debate in the financial reporting community as regards the way to value players. “Before the 1976 adoption of current IRC 1056, player contracts were allocated among the purchase assets to fair market value” (Rosner and Shropshire, 2004). One issue is that “like-kind” financial transactions, e.g. player trades, are legally and financially different and have different tax implications (Rosner and Shropshire, 2004, p. 82). Player contracts are amortizable under some tax codes but not under others (Rosner and Shropshire, 2004, p. 81). One school of thought goes, “Aren't those professional athletes grossly overpaid? How can player contracts have any value?” (Rosner and Shropshire, 2004, p. 81). Suffice it to say that, whether it regards tax implications, assets, costs, or any other element, interpretations vary (Rosner and Shropshire, 2004, p. 84). As regards the liquidation of player contracts, that matter is quite difficult, and varies depending whether or not the manner of liquidation is a trade, a sale, a firing or a transfer of the entire franchise. As with all franchise agreements, sports franchises provide some elements of limited monopolistic economic benefits to the franchise holder. In numerous instances, buyers have paid substantial amounts for “naked” franchises, as in the case of expansion teams; however, a buyer is unlikely to pay a substantial amount for player contracts and stadium rights without the expectation that the franchise will be transferred as well. Several sports franchise intangibles are related to employees. First, there is a trained and assembled administrative workforce, which includes management, marketing, public relations, customer relations, accounting, and other personnel. Other than a few senior executives, these employees are unlikely to be under contract. Second, there are the coaching and player development staffs, which include scouts, recruiting agents, assistant coaches, physical therapy and medical personnel, and senior coaches. Many but not all of these employees are likely to be under contract. Third are the team players, all of whom are typically under some type of contract (Reilly, 2003). What happens when players are actually sold? Even then, the amortization of their value is not simple. “Player amortization assumes that the team was sold within the past few years for between $20 and $40 million, that half of this amount was allocated to player contracts, and that these contracts were amortised over five years. In fact, some teams are sold for much more more” (Staudohar and Mangan, 1991). With this background, it is now possible to understand Arsenal's financial policy. First: The club amortises over the contract life of the player. This makes sense because contracts have very low average durations (Rosner and Shropshire, 2004; Reilly, 2003). They are holding onto the asset for a pre-planned period. Second: The club does not anticipate for the future value of players. As we have seen, even when a players' value is known, it is very difficult to determine the tax and financial implications of the sale or purchase of the contract. Third: The club capitalises the cost of player registration fees. Since players are their most important asset or capital, this capitalisation makes sense. Fourth: They do not include the current value of their players. Player value is very mercurial, so this decision is justifiable. Further, their players are not a disposable asset, they are represented by contracts and registration fees. Fifth: “Home grown” players are not included. These players are usually from the Youth program, which means their value is likely to skyrocket. Costs have already been noted for the Youth programs and training, and, again, the value of a player is expressed in the contract. How does this tie in with the need to make informed decision that a financial statement requires? Investors and others monitoring a financial entity need to have some idea of the future, but a financial statement cannot account for everything. Arsenal PLC is not responsible if a player's value declines due to an injury, increases due to a change in the soccer meta-game, or matures as experience goes up. Describing the current market value of a player would be virtually impossible, since it's based on a bidding process that can take months, is based on the subjective interpretation, and changes depending on the present market and time. A mere few days between player trades could substantially alter the value of a player. And including the value of a player in a direct fashion would actually be financially irresponsible. Since a player's value depends on whether they are like-traded, sold individually, fired or sold as part of a franchise, investors should not be told the value of an asset that could vary so drastically depending on how it is liquidated. Arsenal does include the disposals of getting rid of players (Arsenal, 2009, p. 43). This distinction is important. Arsenal is including the value of players as a positive on the “Cost of player registrations” section because, while before a player is eliminated or sold it is difficult to value a player, afterwards the contract has concrete value and has to be accounted for. Arsenal's policies as regards the financial accounting of player values is certainly not the only position one could take. They could attempt to account for the growth of the value of a player contract within one to six years, or include tax liability information, or amortize or depreciate according to any number of different formulae. But Arsenal's practices are well-justified by the sports accounting literature. The value of a player is nebulous, their value is not easily fungible for other assets, and training and improving them is based on factors out of the control of the club. It is financially irresponsible to note the value of these contracts without many caveats, and Arsenal did its due diligence in simply avoiding the issue and telling investors and relevant entities what information they were missing. Skills and Deficits: An Action Plan As I studied Financial Reporting, I realized that some of my expectations and estimations about myself as a student were inaccurate. I thought before I began the class that my skill for numbers was less than adequate but my skill at understanding concepts was fine. But as I engaged with the class, I realized that the opposite was true. I have a good head for numbers, but understanding theories, abstract concepts, things holistically...? That I am weaker at. I struggle to formulate thoughts and connect concepts. It is important to be able to understand, say, the connection between Marxist ideas of alienated labor and industrial psychology about worker satisfaction, or the connection between comparative politics and institutions and market outcomes. In my future employment, I want to be able to understand abstract concepts and improve my writing skills. I have devised an action plan for this objective. 1. Review and understand the basic theories, practices and opinions of my field of study 2. Read philosophy books and learn critical understandings 3. Understand charts and correlations as real-world facts and connections, leading one to the other 4. I will take classes and do study of economic and financial theory, not just the mathematics but the reasoning behind it (homo economicus, etc). I will measure my achievement based on my ability to write essays and reports. Bibliography Arsenal. 2010,Arsenal Holdings PLC: Statement of Accounts and Financial Report. Arsenal, London. Retrieved from http://www.arsenal.com/assets/_files/documents/sep_10/gun__ 1285660177_Arsenal_Holdings_plc_Annual_Re.pdf Deegan, C. & Unerman, J. 2006, Financial Accounting Theory (European Edition). Reilly, R.F. October 2003, “Sports Franchise Acquisitions: Purchase Price Allocation Procedures. PART 1 OF 2”, The CPA Journal. Rosner, S. and Shropshire, K. L. 2004, The Business of Sports, Jones and Bartlett Learning. Staudohar, P. D. and Mangan, J.A. 1991, The Business of professional sports, University of Illinois Press. Read More