A professional sports team and its related items (including a stadium) were bought by an exceedingly wealthy investor and sports fan. The negotiated price was $175,000,000. Details of what was purchased and the agreed fair values are as follows:
Item Fair value (in millions)
Stadium ………………………………………………………… $ 45
Land …………………………………………………………… 25
Cablevision broadcasting contract …………………………….. 15
Player contracts ……………………………………………….. 20
Spectators’ leases on luxury viewing boxes …………………... 5
Product licensing agreements …………………………………. 14
Season ticket subscriber list …………………………………… 9
Contracts and commitments for use of stadium ………………. 10
The “team,” imputed or residual value …………………………. 32
Total ……………………………………………………………. $175
The team has been less than successful in its professional sports league and has been recording losses of $5,000,000 to $ 10,000,000 per year on its audited financial statements for the past five years. It was these losses that prompted the last owner to sell the team and related assets.
Required:
a. Of the $175 million purchase price, how much of it relates to tangible assets? What percentage of the purchase price relates to tangible assets?
b. Describe the nature of the future economic benefits associated with each of the intangible assets acquired. For example, for the cablevision broadcasting contract this would be the present value of the future payments expected from contracts for the broadcast of games on cablevision channels plus potential renewal contracts thereafter.
c. There are seven identified intangible assets noted on the list. Group these assets into three classes, being those that are (i) easily measurable and identifiable; (ii) reasonably measurable and identifiable; and (iii) very' difficult to measure and identify. For each group, what common quality or feature of these items distinguished their classification?
d. While all the items can be assigned a value, would you capitalize all these amounts? Explain your conclusion.