Question

Marcy Anover owns 50 percent of the Seneca Hockey Club Limited (SHCL). The other 50 percent is owned by a major league hockey team. The major league team supplies many of the players for the team, which plays in the Class A Central College League. Some of the players are owned by SHCL, which signed them to contracts.

Most of the players that are signed to contracts by SHCL are paid a small signing bonus plus an annual wage. The wage is negotiated on the basis of the player’s skills and promise for rising to the major league level. Some of the players are not successful and are eventually released from their contracts. Players showing promise are promoted to AA and AAA leagues. Their contracts are purchased by the teams in the higher leagues. As a result, SHCL can sometimes make sizeable profit gains on sales of players’ contracts.

Until recently, SHCL has expensed all payments to players. However, this year they have spent close to $2,000,000 signing several promising players. Management believes that it should be able to develop several of these players and sell their contracts to teams at higher levels. The president of SHCL has asked you whether he can record the signing bonuses as assets, and only expense the players’ monthly wages. He believes that the players represent the major assets of a hockey team.

The president is willing to expense the capitalized signing bonuses whenever a player is released from the team. However, whenever a player’s contract is sold, the proceeds of sale would be recorded as revenue. The capitalized cost would then be expensed.

Required:

1. Select some key accounting concepts from the conceptual framework that you could use to defend your opinion that the signing bonuses:
   1. Should not be capitalized as assets.
   2. Should be capitalized, and expensed only when the player is released, or his contract is sold. Explain your reasoning.
2. If the signing bonuses are capitalized, and a player’s contract is later sold, should revenue be credited? Explain using the conceptual framework.

Answer 1

Since SHCL has spend close to $2,000,000 as the signing bonus amount to promising players, as per IRS ruling with effect from August 2013 states that signing bonuses paid to the players should be capitalized as intangible assets and amortized over the useful life i.e. the contract period of the players who has received signing bonus amount from SHCL.

IRC ( Internal Revenue Code) Section 167 state amortization of assets including any intangible property. The contract of the hockey team will be considered as intangible property and hence all key accounting concepts applicable for intangible property will be applicable while computing singing bonus into the accounting records and financial statements.

(i) Since signing bonus amount paid to the player is the one-time expenditure hence it should not be capitalized as assets instead it should be recorded as Expenses incurred along with the payment of players wages in the profit and loss statement of SHCL. Signing bonus is the expense incurred to hire the hockey players to the team hence should be considered as Expense rather than assets.

(ii) According to IRS, signing bonuses paid to the players should be amortized over the term of player's contract period rather than deducted when it is actually paid to the player. As hockey player will serve the team for several years as per his contract agreements, the amount paid as signing bonus should be capitalized and amortized as intangible assets over the term of player's contract with SHCL and treated as expense when player is released from his duties or in case his contract is sold. For example SHCL paid $150000 to a player whose contract term is for 6 years period therefore $ 25000 should be amortized every year till the players contract period of 6 years and treated as expense when player is released.

Yes revenue should be credited over the useful life i.e player's contract agreement if the signing bonus are capitalized. For example in a contract, player is entitled to get $100000 as wages every year which include $30000 as signing bonus amount for 6 year term. Therefore SHCL will record $95000 as expense for that player wages in their financial statements. In the case player's contract is sold later then revenue should not be credited. Revenue Recognition framework should be used while computing doing accounting treatment of signing bonuses in financial statements. President of SHCL should amortize the signing bonus amount paid to player over the player's contract period.