Accounting for Sports Complexes (#390)

The accounting for a sports complex can be surprisingly complicated. First of all, it can be really capital-intensive, especially as it was described by the listener. You have to excavate the swimming pool and then line it with concrete, and add water filtration systems. The ice skating rink requires refrigeration systems and an insulated floor, while you also have to buy weight machines and cardio equipment for the gym. And on top of all that, you have to build locker rooms, parking lots, and office space, and probably install air conditioning for most of the facility.

Asset Capitalization Issues

All of these expenditures have to be capitalized, with a range of different depreciation periods. For example, the building might be depreciated over thirty years, while the fitness equipment might only last a couple of years. The refrigeration system for the skating rink is probably somewhere in between.

Obviously, there’s going to be a lot of depreciation expense. If you wanted to, you could allocate the depreciation to each business area within the sports complex, to figure out profit levels by activity. This would be a nice activity-based costing project, where depreciation is assigned based on how much each asset is used. For example, the depreciation on the skating rink asset is charged straight to that activity, while the depreciation on the entire structure could be allocated to the skating activity based on the number of square feet that it takes up.

A related issue is how to account for expenditures related to these assets. For example, fitness equipment wears out all the time and has to be replaced, so that’s obviously recorded as an asset replacement. But what about draining the pool and resurfacing it? If doing so extends its useful life, then that expenditure is recorded as a fixed asset. If not, it’s an operating expense.

This type of facility experiences a lot of wear and tear, so there are likely to be lots of ongoing maintenance expenditures. In most cases, these are going to be charged to expense right away. And as the facility ages, maintenance expenses are likely to keep on increasing.

Revenue Recognition

Next up is revenue recognition. There can be a lot of revenue streams. You might have daily admission fees, monthly memberships, swim lessons, skating lessons, personal training, league rentals, event hosting, equipment rentals, and concessions. There are differences in how to account for each one.

For example, if someone buys a one-year membership in advance, then you have to spread the revenue recognition over a full year. Or, how about a package of lessons? Maybe someone buys a package of ten skating lessons. If so, you recognize one-tenth of the revenue after each lesson has been completed. And what if you have an Olympic-level team of pairs skaters that rent the ice rink at 5 a.m. every day? Well, the revenue recognition for that is time-based, with revenue being generated in increments every day. Concessions are the easy part – you just recognize the revenue at the point of sale. Those examples cover most of the main areas, but you’ll likely find all types of variations.

Operating Expenses

Let’s move to operating expenses. There will be a lot of fixed expenses. I’ve already mentioned depreciation, but there will also be insurance, property taxes, and salaries. Variable expenses will be substantial – including utilities, water treatment chemicals, maintenance expenditures, and part-time labor. Of those expenses, utilities will be really large. A lot is required for skating rink refrigeration, while the pool will need to be heated. From a management accounting perspective, it can make sense to track utilities by activity, to get a better feel for where the complex is making or losing money.

Labor is another major cost. Lifeguards, trainers, front desk staff, and maintenance crews are all involved. Again, try to assign these expenses to specific activities.

A related item is long-term maintenance contracts, which cover the skating rink refrigeration and HVAC for the entire facility. If this is prepaid, then the accounting is to initially record it as a prepaid expense, and then amortize it over the service period.

Inventory Accounting

Moving along, there’s inventory to account for. This includes merchandise for the concessions area, and might very well include shrinkage accounting if any of that inventory is damaged or stolen.

Control Issues

And then we have controls. A sports complex usually has a lot of foot traffic, with high transaction volumes and – even now – a fair amount of cash payments. Based on this setup, there is a risk of asset loss, which can come from the theft of concession inventory, cash at the front desk, or rental equipment. Or, for that matter, simply the loss of revenue from customers who are getting in without paying.

There are lots of possible controls, including the use of badge access to the building, using electronic payments instead of cash, and segregating duties to keep anyone accepting cash from also accounting for it. I could probably list a hundred possible controls. A key issue here is that the operating margins of a sports complex tend to be on the low side, so investing in expensive controls has to have a clear cost-benefit.

Key Reports

Next, let’s cover some of the key reports. Management will want to understand the profitability of each part of the sports complex, so – as I’ve been mentioning – it makes a lot of sense to figure out profitability by activity. Another report should cover capacity utilization. For example, the ice rink is expensive to operate, so management needs to understand its operating cost, and the percentage of time that it needs to be booked in order reach its breakeven point. Once its fixed costs are covered, any additional bookings are pretty much pure profit.

Another reporting issue is cash forecasting. Revenues could be seasonal. For example, the skating rink’s use will peak in the winter, while the pool’s usage will probably peak in the summer. If you can project their cash flows, you can figure out whether the facility can cover its cash requirements, month by month, throughout the year.

In short, the accounting for a sports complex is surprisingly complicated, because there’s a lot of infrastructure, high transaction volumes, and lots of different activities to be tracked.