Question;For the exclusive use of C. Plante, 2014.9-105-046DECEMBER 10, 2004F. ASS MARTNEZ-JEREZCicln de AlicanteIntroductionCicln de Alicante (Cicln) was a mediocre soccer team in the Spanish Championship League.Located in the small provincial town of Alicante (Spain), the teams budget could not compete withthat of the major city clubs. Recently, Cicln entered into a number of transactions (detailed below)that could alter forever the visibility of the team and its competitiveness within the league. Ciclnsmanagers were concerned about how they should communicate the recent events to the capitalmarkets. Cicln was traded on the Spanish Stock Exchange, but it was planning to tap into the U.S.capital markets, so the firm favored accounting treatments that were consistent with U.S. GAAP.However, Ciclns accountants thought they had enough flexibility to choose the accounting methodthat best described the nature of the business.The Sale of the StadiumContinuing regional development, especially within Alicantes tourism industry, had transformedCiclns stadium grounds into prime real estate. Thus, on January 1, 2003 Cicln sold their oldstadium and its associated real estate to Miguel S.A., a real estate development company, in exchangefor a new stadium that Miguel S.A. had already built (construction ended on December 31, 2002) anda cash payment of $100 million.Miguel S.A. had acquired the land for the new stadium earlier for $7 million, the cost ofconstructing the stadium was an additional $20 million. The $20 million approximates the fair valueof the stadium structure. Both the $100 million cash and the stadium were transferred to Cicln onJanuary 1, 2003. At the time the new stadium was transferred to Cicln, the estimated market valueof the associated land was $12 million. The book value of Ciclns old stadium and its associated real1estate was $1 million. As of January 1, 2003, the expected useful life of the new stadium was 401 $5 million gross book value of the stadium less $4 million accumulated depreciation. The teams original purchase price ofthe stadiums real estate was $1 million. It was included in the $5 million of gross book value.________________________________________________________________________________________________________________Professor F. Ass Martnez-Jerez prepared this case. HBS cases are developed solely as the basis for class discussion. The company mentioned inthe case is fictional. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffectivemanagement.Copyright 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may bereproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical,photocopying, recording, or otherwisewithout the permission of Harvard Business School.This document is authorized for use only by Cody Plante in Intermediate I - Fall 2014 taught by Beth Vermeer, at University of Delaware from August 2014 to December 2014.For the exclusive use of C. Plante, 2014.105-046Cicln de Alicanteyears. Under Spanish law the club would be responsible for demolishing the stadium at the end of itsuseful life. The estimated demolition cost was $5 million.The Acquisition of New PlayersCiclns general manager decided to invest part of the proceeds of the sale in transforming theteam into one of the top teams in the Spanish Championship League. This would include not onlyacquiring new players, including one with high media visibility, but also changing the managementstyle of the team.Essentially all European soccer league teams could buy or sell players to other teams inexchange for a transfer payment to the acquired players club, provided the player agreed to thetransaction. A transfer payment was the sole compensation that the selling team received from theacquiring team for releasing a player from his existing contract obligations. With the money receivedfrom the sale of the stadium, Ciclns management acquired the star Spanish forward, David Halcn,on January 1, 2003.The details of the Halcn transaction were as follows:!Cicln agreed to pay Halcns previous team a total of $25 million in four payments, the firstfor $10 million at the signing of the contract and three annual payments of $5 million each(payable at the end of 2003, 2004 and 2005).!Halcn would receive $4 million for each of the five years he agreed to play with Cicln.!Cicln had the option to extend its contract with Halcn for one additional year for the sameannual payment of $4 million.Sale of Box SeatsTaking advantage of the media frenzy caused by the acquisition of a star player and the teammanagement changes, Ciclns management decided to market aggressively the 10 corporate boxes inthe stadium. The contracts stipulated an initial payment of $50,000 that gave the acquirer the right tobuy annually season tickets for the box. This initial payment was nonrefundable. Beyond the initialpayment, each year, the box holder needed to make an annual payment of $25,000 in order to actuallyreceive the season tickets. If the box holder decided not to buy the season ticket, the contractestablished that they would lose the right to the box and the right to buy season tickets for their box,the box would be then offered for sale to other parties. The experience of other teams in the leaguesuggested that, on average, box holders bought season tickets for 15 years before waiving their rightto buy them and to use the box. The sale was a huge success, with all boxes sold and season ticketspaid for on December 31, 2002.The T-shirt BusinessAs part of the transformation into a modern, professionally run, sports business organization,Cicln planned to step up its effort to commercialize team souvenirs. One idea was to sell thousandsof team shirts every year. The marketing plan focused on the sale of t-shirts of various makes and2This document is authorized for use only by Cody Plante in Intermediate I - Fall 2014 taught by Beth Vermeer, at University of Delaware from August 2014 to December 2014.For the exclusive use of C. Plante, 2014.Cicln de Alicante105-046styles bearing the team logo. Previously, the team had licensed a local merchant to sell its t-shirts.This merchant had maintained its own inventory of t-shirts.Under Ciclns new plan, t-shirts were sold at the teams store. On an ongoing basis, Ciclnplanned to make scheduled purchases of replacement t-shirt inventory from its supplier for deliveryon January 1 and July 1 of each year. Cicln made an initial inventory purchase of 10,000 new designt-shirts costing $15 per shirt on December 31, 2002. The following summarizes the purchasing andselling activity related to the t-shirt inventory during 2003.DateTransactionDecember 31, 2002January 1, 2003Sales for the first half of the yearJuly 31, 2003Sales during the second half of the yearBeginning Inventory10,000 shirts @ $15Purchased and received 1,000 shirts @ $18Sold 8,000 shirts @ $25Purchased and received 7,000 shirts @$20Sold 6,000 shirts @$26In the future, Cicln anticipated t-shirt costs would continue to rise in line with the generalinflation rate in consumer prices.In addition to the other initiatives Cicln engaged in during 2003, Cicln wanted its t-shirt stylesto reflect its revamped marketing plans. Hence, Cicln anticipated more frequently updating itst-shirt designs so that the t-shirts currently sold to the public would coincide with current print andbillboard campaigns. Under this new plan, employees of the team store would be encouraged toreinforce the current marketing campaign by pushing the more recent shipments of t-shirts to storepatrons.The Lease of the Parking GarageTo prevent excessive traffic jams, the Alicante Tourist Board suggested Cicln lease or acquire aparking garage recently built in the proximity of the stadium. The fair market acquisition cost of thegarage was $6.5 million, but Cicln agreed to lease it for 10 years for an annual payment of $1 millionpaid each December 31 (the first payment to be made in December 2003). The expected useful life ofthe building was 20 years, when major renovations would be needed to keep the building in usablecondition. Ciclns marginal borrowing rate was 10%. They signed the lease contract on January 1,2003.ConclusionAll these events represented a significant change for Cicln. The challenge for Ciclnsaccountants was to choose the accounting methods that best communicated the new nature of thebusiness.3This document is authorized for use only by Cody Plante in Intermediate I - Fall 2014 taught by Beth Vermeer, at University of Delaware from August 2014 to December 2014.For the exclusive use of C. Plante, 2014.105-046Cicln de AlicantePlease Answer Questions (1)(5):Your answers should clearly indicate your recommendations and support for them. If alternativeaccounting treatments exist, briefly describe them and your reasons for rejecting them. In your writeup, discuss the accounting concepts that seem to be relevant to your responses. Cicln has aDecember 31 fiscal year end. Assume throughout your responses that all soccer games for a givenseason, including championship games, are played within the calendar year. Ignore any potential taximplications. Present value factors are provided in Exhibit 1.1. (12 points)What is the impact of the sale of the stadium transaction on Ciclns 2003Income Statement and Statement of Cash Flows (under the Indirect Method),stand on its Balance Sheet for the year ended on December 31, 2003? Be specific.2. (16 points)2a. What would be the impact of the Halcn transaction on Ciclns 2003Income Statement and Statement of Cash Flows (under the IndirectstMethod), and on its Balance Sheet for the year ended on December 31,2003, assuming the transfer payments are recorded as an asset?2b. What would be the impact of the Halcn transaction on Ciclns 2003Income Statement and Statement of Cash Flows (under the IndirectstMethod), and on its Balance Sheet for the year ended on December 31,2003, assuming the transfer payments are recorded as an expense?2c. What accounting treatment should Cicln give to the transfer payments?Justify your answer.2d. Assume the contract for Halcn includes a clause specifying an additionalpayment of $1.5 million to Halcns previous team each time Ciclnqualifies for the European championship in the next 3 years. How wouldyou account for this clause in the 2003 financial statements? Note thatCicln has never qualified for this championship, however, management isoptimistic of Ciclns chances of doing so in the future given the teamsrecent player acquisitions.stst3. (9 points)How would you account on December 31, 2002 and December 31, 2003 for the stamounts Cicln received from the sale of box seats on December 31, 2002? Be explicit about the timing and amounts for the $50,000 initial payment and the $25,000 payment for the season tickets.4. (9 points)For all the inventory questions please ignore potential tax effects4a. Using the periodic LIFO method, calculate Ciclns t-shirt inventory onDecember 31, 2003 and the cost of goods sold during 2003.4b. Using the periodic FIFO method, calculate Ciclns t-shirt inventory onDecember 31, 2003 and the cost of goods sold during 2003.4c. Which inventory valuation method would you recommend to Cicln?Why? What impact does the proposed plan of t-shirt design renewal haveon the appropriate accounting for Ciclns inventory?5. (9 points)If Cicln were to follow U.S. accounting rules to account for the lease of theparking garage, what would be the impact of the lease on Ciclns 2003 IncomeStatement and Statement of Cash Flows (under the Indirect Method), and on itsBalance Sheet for the year ended on December 31, 2003?4This document is authorized for use only by Cody Plante in Intermediate I - Fall 2014 taught by Beth Vermeer, at University of Delaware from August 2014 to December 2014.For the exclusive use of C. Plante, 2014.Cicln de AlicanteExhibit 1105-046Present Value TablesPresent Value of $1Periods12345678910203040508%10%12%0.92590.85730.79380.73500.68060.63020.58350.54030.50020.46320.21460.09940.04600.02130.90910.82640.75130.68300.62090.56450.51320.46650.42410.38550.14860.05730.02210.00850.89290.79720.71180.63550.56740.50660.45240.40390.36060.32200.10370.03340.01080.0035Present Value of an Ordinary Annuity of $1Periods12345678910203040508%0.92591.78332.57713.31213.99274.62295.20645.74666.24696.71019.818211.257811.924612.233510%12%0.90911.73552.48693.16993.79084.35534.86845.33495.75906.14468.51369.42699.77919.91480.89291.69012.40183.03733.60484.11144.56384.96765.32825.65027.46948.05528.24388.30455This document is authorized for use only by Cody Plante in Intermediate I - Fall 2014 taught by Beth Vermeer, at University of Delaware from August 2014 to December 2014.
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