Question
Sports Management, Inc. (SMI) is a sports management company based in Chicago, IL. SMI is a privately held corporation with a December 31 st fiscal
Sports Management, Inc. (SMI) is a sports management company based in Chicago, IL. SMI is a privately held corporation with a December 31st fiscal year end. During the most recent fiscal year the companys business segments were football, basketball and baseball.
SMI carries separate professional liability insurance contracts for each of the segments. Each of the annual insurance policies is from March 1 February 28. SMI is permitted to make monthly payments for the insurance policies however the annual policy is non cancellable during the year. SMI makes the monthly payments on the first day of each month and recognizes the expense for the policies evenly throughout the year.
On September 29, 2023, SMIs board of directors and senior management made the decision restructure the business and to exit the football sports management business effective December 31, 2023, to focus exclusively on basketball and baseball. SMI notified the insurance company of this decision on October 5, 2023, to cancel the professional liability insurance contract for the football segment. The annual cost for the professional liability insurance for the football segment is $900,000 (i.e., $75,000 per month). According to the terms of the contract SMI is liable to continue to make the payment for the annual insurance contract until the policy expires on February 28, 2024.
Accounting Issue: When should SMI recognize a liability for the unused portion of the professional liability insurance?
Interpretation/Application of the Guidance: SMI will recognize the unused portion of the professional liability insurance as of
a. September 29, 2023
b. October 5, 2023
c. December 31, 2023
d. January 1, 2024.
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