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This article was first published in the April 2020 UK edition of Accounting and Business magazine.

Every good financial reporting lecturer has a favourite financial reporting standard. Some may try to hide it, while others of us wear it as a badge of honour. In my office I have a whiteboard where I get students to write their favourite standard before I will answer any questions. This is not always a popular move, and the wall remains sparsely populated.

In a world of big data and innovation, the nuances of accounting standards can sometimes fail to capture the imagination. I dare say there are even times when considering developments in the world of financial reporting can even be a slightly arduous task.

Sometimes, though, a news item emerges that is a gift to the financial reporting nerd and can grab the attention of students. So when Kathryn Donkersley of the International Accounting Standards Board (IASB), which sets IFRS Standards, tweeted: ‘After a morning of IFRS 16, the IFRS Interpretations Committee will resume at 13.40 to discuss the accounting for football players,’ I knew that I finally had something that would not fail to engage my students.

Football finance has become an increasingly common topic for discussion. UEFA, the body responsible for organising European football competitions, implemented something called Financial Fair Play (FFP) in 2009, which has been updated periodically since. Its aim is to prevent what some see as financial doping in football, where investors put in huge resources, spending far more than their income to achieve success.

The FFP regulations were born out of the desire for clubs to be sustainable over a period of time. This is done by limiting the losses that football clubs are able to make if they are to qualify for European competitions, such as the UEFA Champions League or Europa League. At the time of writing, Manchester City has been banned from European football competitions for two years following an FFP breach. The club has registered its appeal to the Court of Arbitration for Sport.

The question arises as to where exactly the IASB comes in. The board’s IFRS Interpretations Committee (IFRIC) is responsible for responding to questions on the application of accounting standards. As these questions are raised, IFRIC makes a series of agenda decisions, which clarify the application of a particular standard in specific circumstances.

The recently implemented standards IFRS 16, Leases, and IFRS 15, Revenue from Contracts with Customers, are valuable tools for limiting potential off-balance-sheet financing or incorrect recognition of revenue, both of which are very relevant for FFP. In addition, questions can still arise in specific cases, which takes us to the recent discussion from the committee.

Transfer request

IFRIC received a request about how to recognise payments relating to player transfers, which can obviously be a key source of income for football clubs. Current practice is generally not to include the income from such transfers as revenue, but as a gain or loss on disposal of a non-current asset.

The query to IFRIC was made by a club that had acquired a player’s registration. In such a case, the player is prohibited from playing for any other club, and the registering club has an employment contract with the player that prevents the player from leaving without mutual agreement. The club had recognised the employment contract and the player registration together as a registration right, which was held as an intangible asset. This was capitalised at the cost of obtaining the asset under the principles of IAS 38, Intangible Assets.

The club then sold the player to another club under a transfer agreement, with the selling club receiving a transfer payment in return for releasing the player from the employment contract. The playing registration did not transfer to the new club but was extinguished when the new club registered the player.

Revenue or asset disposal?

The question raised with IFRIC was whether the entity could record the transfer payment in revenue, through the application of IFRS 15, or should recognise the transaction as a disposal of an intangible asset.

The tentative agenda in this situation was consistent with the current treatment: that this would be a disposal of an intangible asset. IFRIC quoted paragraph 113 of IAS 38, which states: ‘The gain or loss arising from the derecognition of an intangible asset shall be determined as the difference between the net disposal proceeds if any and the carrying amount of the asset. It shall be recognised in profit or loss when the asset is derecognised… Gains shall not be classified as revenue.’

IFRIC decided that as the payment had been made in respect of extinguishing the registration right, it represented compensation for disposing of an intangible asset. Therefore neither the proceeds nor the gain on disposal could be recognised within revenue by applying IFRS 15.

Is revenue even possible?

So far, the response appears pretty much as expected, with the suggested treatment being in line with the current treatment. But the interesting part of the decision relates to whether it would even be possible to recognise the transaction as revenue. There was a surprising response from IFRIC here.

For an entity to record the proceeds as revenue through IFRS 15, the registration right could not have been initially held as an intangible through IAS 38 but would have had to be held as inventory in accordance with IAS 2, Inventories. In the case presented to IFRIC this was not possible, but IFRIC accepted that such a situation could arise. The committee pointed out that paragraph 2 of IAS 2 requires an entity to apply IAS 2 to intangible assets that meet the definition of inventories.

To be classed as inventory, the registration rights have to be held for sale in the ordinary course of business. IFRIC decided that, for an entity whose ordinary activities include the development and transfer of players, it is conceivable that circumstances exist in which the recognition rights associated with some players meet the definition of inventories.

This situation provides an interesting point of discussion. While some of the larger, global football clubs may not appear traditionally to have the transfer of players (or at least the sale of players) as part of their ordinary activities, this may be changing. The combination of the emergence of FFP and the increased number of players in football academies has led to larger squads of players and increased sales of surplus players, even from the largest clubs.

It can certainly be argued that the transfer of players may be part of the ordinary business of smaller clubs. As a supporter of one of these clubs (Grimsby Town, an English Football League Two club in a port community where the fans sing songs about fish), I know what it is to see an exciting prospect develop with the certain knowledge that the player will be transferred to a larger club before long.

Accordingly, we may start seeing some football clubs assess whether they can start to hold some player registration rights as inventory. This development could change the accounts, as these rights would possibly be held as cost (or the lower of cost and net realisable value) as set out in IAS 2, instead of being amortised over the life of the contract as in IAS 38. This could impact profits annually, and start to change how a club’s assets are held.

The value of the asset could change as well. It would now be held at the lower of cost and net realisable value. This means that the rights could hold their value longer, due to the lack of amortisation. There could be more judgmental discussions over the net realisable value, as players reach the end of their contracts, which could introduce a greater amount of judgment than the current intangible asset treatment. In theory, the current treatment allows for judgments in the form of revaluing the rights. However, the rights are unlikely to meet this criteria due a lack of active market.

On the face of it, IFRIC’s decision seems to have maintained the status quo, but the door has been opened to a possible change in treatment for some clubs. Perhaps unwittingly, this could lead to more changes than expected.

So there we have it. The combination of new accounting standards and the existing practices of older accounting standards is busy at work helping to protect aspects of the beautiful game. It is unlikely that members of the IASB will ever get to hear their names sung on the terraces, but the board continues to be an important part of the financial fabric of the industry.

Adam Deller is a financial reporting specialist and lecturer.