TD Bank Renting That Boston Garden Sign, New Accounting Rules Say

Companies paying to splash their brand names on concert and professional-sports venues may be surprised to find new accounting rules require them to report a portion of that money as rent.

“That naming rights negotiated as advertising will in some way be considered a lease is interesting, to say the least,” Leo D’Angelo, a retired senior attorney who worked for the Boston Celtics basketball team and worked on the $119 million naming-rights deal for Boston’s TD Garden, told Bloomberg Tax in an email. “The contract isn’t one that you’d consider a lease.”

That could change under new leasing rules, accountants told Bloomberg Tax. The rules, which take effect Jan. 1, will require companies to look for such unexpected, embedded leases in a wide variety of contracts and record them on balance sheets, accountants say.

The change in the way such leases are recorded probably won’t affect earnings, but it creates major headaches for banks, retailers, and airlines, whose names appear on ballparks, stadiums, and basketball arenas around the country, accountants told Bloomberg Tax.

Under the new rules, leases now may be found in wide range of agreements, not merely those labeled “leases,” they say. Companies will likely review a host of contracts to be sure information is not left off balance sheets.

Leasing Costs

The rules, issued by the Financial Accounting Standards Board, are designed to enable investors and analysts to gauge for the first time the full magnitude of leases that companies carry and the effects of these leases on their financial operations. For some companies, thousands of leases—worth billions of dollars—may begin appearing on balance sheets for the first time.

Identifying contracts that contain embedded leases adds another level of difficulty, according to Brandon Coleman, a senior consultation partner and consolidation leader with Deloitte & Touche LLP.

“The naming-rights contract itself is not a lease,” he told Bloomberg Tax. However, provisions within the contract might, in fact, grant the rights holder the economic benefits and control over use that constitute a lease under the new rules.

Attributing Percentage of Cost

One of the tasks confronting companies is figuring out how to allocate a portion of the naming-rights cost to the embedded lease, though use of billboards and other signs may be valued in the contract, Coleman said.

TDBank, for example, agreed to pay about $119 million over 20 years for naming rights at the Boston Garden, now known as TD Garden, home to the Celtics and Bruins. Of that $119 million, maybe 20 percent can be allocated for what amounts to a lease of signage and billboard use, D’Angelo said.

The rest falls into more of an advertising contract, he said. “I saw it as a lease in certain ways, and a way to raise needed financing” for extensive upgrades to the facility itself, he said.

No Earnings Impact

Still, this is an accounting issue that shouldn’t have much impact on earnings, Jack Rybicki, an accountant and managing principal at CliftonLarsonAllen LLP, told Bloomberg Tax.

The total expense for a naming-rights deal—whether or not that agreement is determined to have an embedded lease—will be fixed in the contract, he said.

“I don’t see a mechanism to create an expense above the total of the future payment stream associated with the deal,” Rybicki said.

If the sponsorship called for payment over time, an embedded lease could recharacterize a portion of the future payment liability from a “sponsorship liability” to a “lease liability,” but the total liability would not change and any actual or imputed interest would be the same, he said.

Maintaining Value

Another situation could give rise to lease liability, John D. Rossi III, accounting associate professor at Moravian College, told Bloomberg Tax.

For example, if a company pays for the right to use a sports team’s logo, an obligation exists to maintain the value of the logo, he said. In such a case, “a lease likely exists,” he said.

No liability would appear on either party’s books for maintaining the logo’s value, however, “if the value drops, there may be an impairment charge against the asset,” Rossi said.