UNITED FOOTBALL LEAGUE (90 MINUTES)

The United Football League (UFL), a North American professional football league, has been in work
stoppage since July 1, 2018, immediately after the six-week training camp ended. Faced with stalled
negotiations, the players’ union representing the league’s 28 teams, the UFL Players’ Association (UFLPA),
called a general strike. It led to the cancellation of games scheduled for the beginning of the regular season,
which was to start on July 5 and end with playoffs in mid-December.

The main disputed issue is player compensation. According to the team owners, the current compensation
system has created an excessive increase in players’ salaries (more than 300% in 10 years), which has most
teams incurring net losses and several facing extinction. Currently, players are contracted by the teams for
fixed periods. Owners are free to negotiate personalized compensation terms with each player. The UFLPA
likes the current system and wants it maintained for the duration of the next collective bargaining agreement.

The team owners are proposing a new compensation system. Under this new system, owners and players
would still be free to negotiate, but the annual amount each team could spend on payroll could not be outside
a predetermined range. The lower limit of this range would be based on a percentage of the annual “gross
football revenues” generated by the team. The owners’ last proposal suggested this percentage should be
55%. The upper limit of this range, also known as the salary cap, was proposed at US$30 million. Therefore,
the annual amount each team could spend on payroll would be no less than 55% of the team’s gross football
revenues, but no more than US$30 million.

The UFLPA objects to this system for two reasons. First, the players are against the salary cap because they
see it as a way for owners to pay players less than market value. They contend that owners wouldn’t enter
into these contracts if they didn’t receive sufficient value for the high salaries they pay. Second, since the
players’ compensation would be based on the teams’ gross revenues, the players are not convinced that the
owners will properly account for revenues.

The dispute is dragging on: more than half of the current season games have already been cancelled, and
some players and owners are growing impatient with the slow progress at the negotiating table. Faced with
these pressures, the UFLPA’s executive committee has decided to take a closer look at the owners' proposal,
but wants to consult with public accountants to get a clearer picture. The team owners have, for the first
time, agreed to show the UFLPA their financial statements. The Calgary Cowboys (the Cowboys), one of
the teams that has incurred major losses in the last few seasons and claims that it is going under, has already
handed over its unaudited GAAP financial statements to the UFLPA.

You, CPA, are employed by McMaster & Caisse, Chartered Professional Accountants (M&C). Your boss,
Marie Caisse, calls you into a meeting with Billy Baker, star quarterback for the Regina Rebels and chair
of the UFLPA executive committee. Billy is asking M&C to analyze the financial statements submitted by
the Cowboys so that he can formulate sound arguments to bring to the negotiating table. Given the financial
statements provided were unaudited, Billy wants M&C to evaluate the financial viability of the team and
determine whether the Cowboys have a net loss in accordance with ASPE. Marie asks you to draft a report
that will address Billy’s requests.

Reprinted from the 2009 UFE Report, with permission Chartered Professional Accountants of Canada,
Toronto, Canada. Any changes to the original material are the sole responsibility of the author and have not
been reviewed or endorsed by the Chartered Professional Accountants of Canada.
Billy goes on to explain that the UFLPA would also like to entrust M&C with an annual special engagement.
According to Billy, the players will soon accept the owners’ offer, and when that happens, M&C would be
responsible for auditing the gross football revenues of each of the 28 league teams to ensure the owners are
disclosing their actual revenues for the purpose of calculating the 55% limit. Marie asks you to draft a memo
to her attention which scopes out the special engagement and addresses any significant engagement planning
considerations you identify for M&C.

As the meeting is ending, Billy receives an email that seems to trouble him. The email comes from a former
teammate of his, Frank, who is now playing for an American franchise. Frank is bragging about how he
now pays less tax despite having the same salary. Billy questions the high personal tax paid by Canadian
players compared to their American counterparts. He wonders what he would have to do to avoid being
taxed as a Canadian resident.

Following the meeting, you receive the unaudited financial statements of the Cowboys for the year ended
December 31, 2017 (Exhibit I), and meet with the team’s financial controller to obtain additional
information (Exhibit II).
 EXHIBIT I

CALGARY COWBOYS LIMITED

STATEMENT OF LOSS AND DEFICIT
For the year ended December 31

(in thousands of Canadian dollars)

2017 2016
(unaudited) (unaudited)

Revenue
National TV broadcast rights $ 19,500 $ 19,500
Local TV broadcast rights 1,500 1,250
Ticket sales 21,154 18,653
Corporate boxes 3,546 2,436
Advertising revenue 2,100 1,876

47,800 43,715

Expenses
Signing bonuses 5,000 4,000
Salaries and benefits (players) 38,540 34,767
Other salaries and benefits 661 547
Stadium rental 375 375
Business taxes 90 89
Miscellaneous supplies 91 76
Administration 1,099 1,548
Interest on advance from parent company 344 551
Travel 2,610 3,267
Amortization — capital assets 15 19
Amortization — non-competition clause 5,000 5,000
53,825 50,239

Loss before income taxes (6,025) (6,524)

Income taxes - -
Net loss
(6,025) (6,524)

Deficit, beginning of year (6,524) -

Deficit, end of year $ (12,549) $ (6,524)

 EXHIBIT I (continued)

CALGARY COWBOYS LIMITED

BALANCE SHEET
As at December 31

2017 2016
(unaudited) (unaudited)
Assets
Current assets
Cash $ - $ 55
Accounts receivable 380 320
Prepaid expenses 177 170
557 545

Capital assets
Furniture and equipment (net) 96 91

Other asset
Non-competition clause (net) 90,000 95,000

$ 90,653 $ 95,636

Liabilities

Current liabilities
Bank overdraft $ 110 -
Accounts payable 36 28
HST and withholding taxes payable 13 12
Accrued liabilities 3,343 657
3,502 697

Advance from parent company 1,567 3,772

Deferred exchange gains 566 124

Shareholder’s equity

Share capital 567 567

Deficit (12,549) (6,524)
Revaluation adjustment 97,000 97,000
85,018 91,043

$ 90,653 $ 95,636
 EXHIBIT II

NOTES FROM DISCUSSION WITH THE FINANCIAL CONTROLLER

OF CALGARY COWBOYS LIMITED

1. Calgary Cowboys Limited (CCL) was created in 1997 by Crystal Roberts, a wealthy businesswoman
from Calgary, when the company acquired the UFL franchise. On January 1, 2016, Crystal sold all her
shares in CCL to Crystal Roberts Management Inc. (CRM). She is the sole shareholder of CRM.
Following the sale, a comprehensive fair value revaluation of CCL’s assets and liabilities was
undertaken. On January 1, 2016, the fair values of CCL’s assets and liabilities approximated their book
value, except for the non-competition clause, which had a fair value of $100 million and a book value of
$3 million. This clause, included in the Cowboys’ contract, states that no other UFL team can be
established within a 200 kilometre radius of the Cowboys stadium until 2036. As a result of the
revaluation, the intangible asset related to the non-compete clause was increased by $97 million, with a
corresponding amount disclosed as a separate equity item. The balance of retained earnings was reduced
to zero and a corresponding amount was transferred to share capital. Before the revaluation, the non-
compete clause was being amortized at a rate of $150,000 a year.

2. CRM is a financial holding company that owns several other subsidiaries, including the Calgary Sports
Channel, which broadcasts all of the Cowboys games in the Calgary area. The amount billed by CCL
was recorded under “Local TV broadcast rights” in the statement of income. Calgary Sports Channel’s
main competitor made an offer of $8 million per year to broadcast Cowboys games locally, but Crystal
felt it would be more profitable to have the Calgary Sports Channel benefit from the team’s popularity.

3. CRM leases the huge parking lot adjacent to the stadium from the city for one dollar per year and charges
$10 per car. The parking lot can hold over 15,000 cars and is always full for Cowboys games. CRM
owns the company that operates all the food concessions in the stadium where the Cowboys play.

4. Players who sign long-term contracts often ask for a signing bonus in addition to their annual salary. A
typical contract is for two to four years with an additional one-year renewal option. When a player signs
a contract, CCL expenses the bonus. Bonuses are disclosed separately in the statement of income to
facilitate financial analysis. These bonuses are refundable if the player leaves within the first year of the
contract.

5. UFL players are all paid in US dollars, since most of the teams are American. The spectacular volatility
of the Canadian dollar against the US dollar in 2017 triggered a number of exchange gains and losses in
the salaries payable. The net gains were shown separately as deferred exchange gains on the balance
sheet.
 EXHIBIT II (continued)

NOTES FROM DISCUSSION WITH THE FINANCIAL CONTROLLER

OF CALGARY COWBOYS LIMITED

6. Travel expenses include all costs related to the private jet owned by Crystal, which she graciously allows
CCL to use during the football season. The team uses it for all out-of-province trips. The plane’s
operating costs are approximately $2 million per year. Without the plane, players would fly business
class at an average return fare of $2,000 per trip.

7. The advance from the parent company bears interest at the annual rate of 20% due to the significant risk
of operating a football team.

8. Accrued liabilities include C$3 million in salary for defensive tackle Jimmy Swagger for the 2018 and
2019 seasons ($1.5 million per season). Swagger, one of the best tackles in the UFL, was paid a signing
bonus of $1 million at the start of the 2017 season. However, he has formally asked to be traded to
another team because of a run-in with the Cowboys’ head coach during the last game of 2017. The UFL
has declared a trade moratorium until the strike is settled. Since Swagger will probably not provide any
future benefit to the Cowboys, CCL has expensed the salary remaining in his contract. Once Swagger is
traded to another team, CCL will no longer have an obligation to him.

9. The Cowboys’ stadium seats 40,000 spectators and is almost always full. The team plays 10 home games
per season and as many on the road. Spectators pay approximately $53 per ticket and around $25 for
food and beverages per game. The team has 40 players, as well as 10 coaches and trainers who travel
with the team.