Case $22-5$c Reacquired Rights

Company B $($B$),$ a privately held entity, owns and operates a professional baseball franchise. Company B has been operating under a television broadcasting agreement, entered into in $2015($the $"2015$ Agreement"$),$ under which Company F $($F$),$ a wholly owned subsidiary of Company D $($D$),$ was granted broadcasting rights to B$\text{'}$s baseball team.

The terms of the $2015$ Agreement are as follows:

$$ Parties $-$ Company B and F$.$

$$ Broadcast rights $-$ Provides F with TV broadcasting rights to B$\text{'}$s baseball team.

$$ Term $-$Through $2025.$

$$ Compensation to B $-$

o Signing bonus of $$50$ million.

o Increasing annual fixed fee amounts.

$$ Renegotiation rights $-$ Company F has right of first negotiation for periods beyond original term of the contract.

$$ Reopening rights $-$

o Company B has "reopening rights" from January $2020$ through May $2020,$ which effectively provide B with an option to terminate the agreement.

o Company B may also exercise reopening rights if there is a change in control of F$.$

o If B terminates the agreement, it must repay the portion of the signing bonus received from F$.$ The amount of the repayable bonus decreases by $$5$ million annually beginning in $2017.$

In late $2018,$ B and D $($parent of F$)$ began negotiations of a possible amendment of the $2015$ Agreement. With B holding a reopening right and D risking losing broadcasting rights entirely, B and D amended the $2015$ Agreement and B effectively acquired a controlling interest in F$\text{'}$s business. The following transactions took place in January $2019$:

Restructuring and acquisition of F$\text{'}$s business:

$$ Company B established Legal Entity R $($R$)$ and made a $$30$ million investment in R in exchange for $75$ percent ownership interest.

$$ Company D contributed the net assets of F$\text{'}$s business and approximately $$10$ million in working capital to R in exchange for $25$ percent ownership interest in R$.$

Case $22-5$c: Reacquired Rights Page$2$

$$ Legal Entity R made payment to D of $$20$ million.

The $2015$ Agreement was amended $($the amended $2015$ agreement herein referred to as the $"2019$ Agreement"$)$ as follows:

$$ Parties $-$ Company B and R$.$

$$ Extended term $-$Through $2035(10-$year extension$).$

$$ Signing bonus repayment $-$ Company B will repay $$20$ million of the $2015$ Agreement signing bonus to D$.$ This is the same monetary consideration that was paid by R to D as outlined above for the acquisition of F$\text{'}$s business.

$$ Annual fee $-$ Retains same increasing annual fixed amounts from $2015$ Agreement, but increases annual fixed fee by $5$ percent per year beginning in $2026.$

$$ Rights $-$ Company F$\text{'}$s $($now R$)$ right of first negotiation and B$\text{'}$s reopening right were removed.

Other relevant facts as of the of January $2019$ transaction date are as follows:

$$ Company B$,$ through its subsidiary R$,$ obtained control of a business $($F$\text{'}$s business$)$; therefore, B should account for the business combination pursuant to ASC $805,$ Business Combinations. Company B is the accounting acquirer of F through its consolidated subsidiary, R$.$

$$ Immediately before the business combination, there was a contract liability of

$$40$ million remaining on B$\text{'}$s balance sheet related to the $2015$ Agreement $($related to the up$-$front $$50$ million bonus$).$

$$ The $2015$ Agreement was unfavorable to B by $$35$ million in terms of current market terms as of the date of the business combination.

$$ Pursuant to the terms of the $2015$ Agreement, $$40$ million represents the stated settlement amount payable by B to F if it were to terminate the $2015$ Agreement on the date of the business combination.

Required:

Under both US GAAP and IFRS$/$IAS$,$ answer the following questions:

$1.$ Does the $2015$ Agreement represent a reacquired right?

$2.$ In measuring the fair value of the $2015$ Agreement, over what term should B calculate fair value? In addition, what impact does the unfavorable element of the agreement have on the valuation, if at all?

$3.$ What amount should be recognized as a gain or loss on settlement as of the date of the combination?