MANCHESTER UNITED PLC
"We are one of the most popular and successful sports teams in the world, playing one of the most popular spectator sports on Earth. Through our 135-year heritage we have won 60 trophies, enabling us to develop what we believe is one of the world's leading brands and a global community of 659 million followers. Our large, passionate community provides Manchester United with a worldwide platform to generate significant revenue from multiple sources, including sponsorship, merchandising, product licensing, new media & mobile, broadcasting and matchday. We attract leading companies such as Nike, Aon and DHL that want access and exposure to our community of followers and association with our brand."
From financial tear sheet (www.manutd.com)
PART I (Income Statement and Balance Sheet)
PART I (Statement of Cash Flows)
PART II:
Attached are IFRS financial statements for Manchester United PLC. Assume that, although the format of their financial statements differs, the basic accounting principles are consistent with those we've discussed in class. All amounts are in thousands of pounds (£'000) unless noted otherwise-please round to £'000s. Note that Manchester United's fiscal year ends on June 30, so 2013 refers to the fiscal year ending June 30, 2013. Assume that the 2013 soccer season also runs from July 1, 2012 to June 30, 2013. Assume a 25% tax rate throughout.
Part I: (Only Income Statement and Balance Sheet due with first assignment)
Your goal is to forecast an income statement, balance sheet and statement of cash flows for Manchester United (ManU) for 2013. For the purposes of this part, refer onlyto the attached summary financial statements and the following assumptions. If at all possible, please provide journal entries in the space provided below. If you really hate journal entries, indicate which accounts go up or down in the space below the description of the transaction, but don't leave that space blank if you want partial credit. Do not worry if your accounts temporarily have negative balances (the transactions below are not sequential; they are aggregations over the period).
ManU has three primary lines of revenue - commercial (merchandise sales), broadcasting and matchday revenue (tickets to games). Assume that ManU recognizes revenue from ticket sales and broadcasting rights when the associated matches are played, and recognizes revenues from merchandise sales when the merchandise is sold.
When forecasting the balance sheet, assume that other non-current assets, other current liabilities and non-current liabilities will remain unchanged from 2012 to 2013.
1. Matchday Revenue (Ticket Sales):You forecast that ManU will earn £96,321 from tickets to games that are played during the 2013 season. Assume that ManU will sell some of the 2013 seats through game-day sales (£30,844) and that the remainder (£65,477) will be for season tickets sold in 2012 covering the 2013 season ("deferred revenue" on the balance sheet). Assume further that ManU will sell (for cash) £48,976 of tickets during 2013 for the 2014 season.
2. Broadcasting Revenue:Assume that contracts for media coverage are signed prior to the start of the season (e.g., contracts covering the 2013 season were signed in 2012), but the cash is received both during and after the end of the season (e.g., cash for the 2013 season media rights is received in 2013 and 2014). You forecast that ManU will earn £100,544 from broadcasting games during the 2013 season, of which £59,863 will be paid in cash during 2013 and £40,681 will remain uncollected ("tradereceivables" in the current assets section on the balance sheet) at year end 2013. In addition, ManU will collect any amounts due it as of the beginning of 2013 during 2013. Finally, during 2013, ManU will sign a contract for £102,332 for rights to the 2014 season, payment to be received in 2014 and 2015.
3. Commercial Revenue (Merchandise): Assume that Manu charges royalties on merchandise sold rather than owning the inventory themselves. Assume that ManU will receive £131,136 in cash during 2013 for merchandise sold in 2013.
4. An unusual aspect of ManU's business is that they buy and sell player registrations (contracts) for cash. Basically, the idea is analogous to property, plant and equipment-when they buy a player registration, they depreciate it straightline over its life and record a sale if the player's contract is ultimately sold. Assume that in 2013 they buy additional player registrations of £40,150 and record amortization totaling £37,700 on all player registrations. Assume further, that player registrations have a life of 5 years and that during 2013 they sell player registrations with a historical cost of £20,500 which are three years through their life at the time of sale and receive £10,800 of cash on the sale.
5. During 2013, ManU will buy property, plant and equipment (PP&E) for cash of £18,023 and record depreciation of £8,234. No PP&E will be sold during 2013.
6. Employees (including players) will earn £168,442 for services rendered in 2013. The ending balance in the compensationpayable account will be £124,207.(You need to infer the amount paid to players to end up a balance of £124,207 in compensation payable.)
7. Other operating expenses for 2013 will be £41,287, all paid in cash during 2013.
8. Interest expensefor 2013 will be £41,678, all paid in cash during 2013.
9. Taxes are paid in the first quarter of each year on the previous year's profits. New taxes payable are recorded at year-end at 25% of pre-tax income.
10. The ending cash balance will be £114,066. Any excess cash is paid out as a dividend and any shortfall is made up by issuing stock.
Part II: (NOT TO BE TURNED IN)
This section uses the information provided here as well as the some of the information in financial statements for 2012, but don't use your forecasted numbers for 2013.
1. In June 2003, ManU sold Beckham's registration to Real Madrid. The selling price of 27.5 million Euro had two main components (based on the ManU's Press Release). ManU had the choice between an unconditional 17.5 million Euro divided equally over the next four years or 16.3 million Euro in September 2003, the difference reflecting the time value of money. In addition, ManU is to receive 10 million Euro conditional on Real Madrid's performances in the UEFA Champions League, 1.25 million Euro of it payable in each of the next four seasons if Real Madrid qualifies for the Champions League, and a further 1.25 million Euro each season if Real Madrid reaches the quarter-finals.
a. Should Real Madrid record any liability to ManU in June 2003 related to the purchase of Beckham? Explain (briefly) your reasoning.
b. Assuming a liability is recorded for some portion of the 27.5 million Euro total potential payment, what amount (if any) should Real Madrid record for the unconditional portion of the payment? Explain your reasoning.
c. Assuming a liability is recorded for some portion of the 27.5 million Euro total potential payment, what amount (if any) do you think Real Madrid should record for the conditional portion? Why? (I'm not sure there is a clear right answer here, but I am looking for your reasoning.
2. One of the areas for which ManU is best known is developing young talent and selling the player registrations. Beckham, for example, signed up with a ManU club team as a teenager and was developed internally. In exchange for training, a player like Beckham commits to a long-term contract with no upfront payment. Suppose that ManU spent £500 developing Beckham to the point where he was ready to play for a professional club. Would they recognize an asset for the £500? Explain briefly.
3. For the parts of this question, assume year-end 2011 total equity was £220,423 and 2011 total assets were £1,017,188. Use total revenues for sales and assume a 25% tax rate.
What was ManU's return on equity (ROE) in 2012?
Decompose ManU's ROE into the three pieces as we did in class.
Suppose that ManU's CEO is evaluated based on ROE. Suggest a way that he could increase the third term in the decomposition (leverage). Which of the other three terms is most likely to be reduced and why?
What was Manchester United's return on assets (ROA) in 2012?
Decompose ManU's ROA into the two pieces as we did in class.
Suppose the CEO decided to issue long term debt and use the proceeds to pay a dividend. Would that change ROA? If so, would it go up or down? Explain briefly.