While digging through the financial statements of Manchester United out of interest, I came across a pretty novel accounting concept that changed the way in which I look at sports teams as a business model. Between the way in which the company recorded a solid half of its entire balance sheet as being composed of intangible assets with no real value, and the sheer amount of debt that financed these intangibles, it was the accounting treatment of the players’ contracts that struck me as most peculiar, and left me to the realization that a soccer team’s balance sheet is strikingly similar to that of a highly-leveraged investment bank.
Specifically, the way in which the company lists players’ contracts is very similar to how it is that a hedge fund would report its investment positions, along with losses and gains being recognized as a result of trades or injuries. By then digging into this concept a little bit further, I was able to come up with an interesting insight into the industry that I would have never before thought of.
The first thing I noticed about the ManU financial statements is the way in which the company recorded the value of players contracts as being capitalized financial instruments. In plain-speak, this means that the company essentially records the expenses associated with paying out a players monstrous wages upfront as being an asset called the “Players’ Registration”, and then amortize it over time as the wages are paid out.
As the contract ages, the contract is effectively worth less to buy out, and the player can be more easily traded. From there, the event of a trade can actually create either a profit or loss for the team itself, or the injury of a player could result in a situation where the value of their contract needs to be written down, as it suggests as though the player will never again be worth the same amount as they were before.
With all that in mind, let’s jump back just a second to the part where we capitalized the player’s registration over time, and decided to simply write it down over time against depreciation. What this strategy illustrates is a situation where the company has effectively claimed a long-term liability as being an asset, because they own the right to put Ronaldo on the field, which is expected to sell more t-shirts and TV-subscriptions over the long term.
From there, the assumption is that the values of the individual registrations directly create incomes, even though they themselves cost money to incur over time. So what happens if Manchester United goes bankrupt and needs to liquidate its roster? It is very likely that the shareholders wind up taking a huge loss as a result of the huge write-down associated with