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In this article we will summarise the accounting consideration concluded by the IFRS Interpretation Committee (“IFRIC”) on player transfer payments. The recent transfer of the Christiano Ronaldo from Juventus to Manchester United is perhaps something that you can relate to in understanding this IFRIC Agenda Decision. In this recent transfer, Manchester United was reported to have agreed for a €20m in the transfer deal.
Background of the issue in the IFRIC Agenda Decision
In this IFRIC Agenda Decision, IFRIC was asked the appropriate accounting treatment for the recognition of player transfer payments received. IFRIC was provided with the following fact pattern in order to provide guidance on the issue:
- A football club transfers one of its players to another football club. When the football club first recruited the player, it registered the player in an electronic transfer system. The registration prohibits the player to play for another club and requires the hiring club to have an employment contract with the player. Such an employement contract prevents the player from leaving the club without mutual consent. Both the employment contract and registration in the electronic transfer system are referred to as a “registration right”.
- The hiring football club had recognised costs incurred to obtain the registration right as an intangible asset under IAS 38 Intangible Assets. As part of its ordinary activities, the hiring club uses and develops the player through participation in matches, and then potentially transfers the player to another club.
- The hiring club and the receiving club enter into a transfer agreement under which the hiring club receives a transfer payment from the receiving club. The transfer payment compensates the hiring club for releasing the player from the employment contract before the contract ends. The registration in the electronic transfer system is not transferred to the receiving club but is legally extinguished when the receiving club registers the player and obtains a new right.
- The hiring club then derecognises its intangible asset upon the receiving club registering the player in the electronic transfer system.
In the issue submitted, the submitter asked whether based on the fact pattern, the hiring club:
- recognises the transfer payment received as revenue under IFRS 15 Revenue from Contracts with Customers; or
- it should recognise the gain or loss arising from the derecognition of the intangible asset in profit or loss under IAS 38.
What is IFRIC Agenda Decision on the transfer player payments?
IFRIC concludes its view in the IFRIC Agenda Decision issued in June 2020 whereby based on the fact pattern:
- The hiring entity applies the derecognition requirements in IAS 38 in relation to the derecognition of the registration right. This is because the hiring entity recognised the registration right as an intangible asset. IAS 38 is clear that “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”.
- The transfer payments arises from the transfer agreement, which requires the hiring entity to release the player from the employment contract. Accordingly, the transfer payment received is part of the gain or loss arising from the derecognition of the registration right. Accordingly, the hiring entity does not recognise the transfer payment received, or any gain arising, as revenue in IFRS 15.
- The hiring entity should present the cash receipt from transfer payments as part of its investing activities in the Statement of Cash Flows. This is due to the fact that it represent cash receipts from sales of intangible asset and IAS 7 lists it as one of examples of cash flows arising from investing activities.
Although this is just an agenda decision, it plays an important role and gives a significant impact on entities whose accounting policy is different from the agenda decision. We have covered the discussion on the role of IFRIC Agenda Decision in our article – IFRIC Agenda Decision: How does it affect you?
We will catch up with you again in our upcoming articles. Meantime, please enjoy other related articles in the Financial Accounting Section.