Accounting of player’s contract renewal/extension under IFRS: Leo Messi (FC Barcelona)

This series of articles wouldn't be complete without featuring an article about Leo Messi. Born in Rosario, Argentina, in 1987, this player was already part of the Newell's Old Boys youth teams at the age of five. At the age of 11, he was diagnosed with a growth hormone deficiency. After a failed attempt to join River Plate due to financial constraints in treating his deficiency, he tried his luck in Europe. FC Barcelona decided to sign him and take charge of his treatment after witnessing his talent during a trial. The contract was drafted on a paper napkin in a restaurant.

After progressing through all the FC Barcelona youth teams, he made it to the first team led by Frank Rijkaard, which was filled with stars like Ronaldinho, Eto'o, Deco, Marquez, and Xavi. After an exciting final against Juventus in the Joan Gamper Trophy, the club decided to make him a professional contract, putting a halt to possible loans to Espanyol and Cadiz. From then on, the Argentine's career has been unstoppable, especially after Pep Guardiola took over as the coach in 2008 and Ronaldinho, the star of the moment, departed, passing on the number 10 jersey to him. Since then, he has broken all records, won several leagues, four Champions League titles, seven Ballon d'Or awards, a Copa America, and a World Cup in 2022.

From FC Barcelona's perspective, having the best player in the world in their squad has been both a pleasure and an advantage. However, having the world's best player comes with a cost, and it's not a cheap one. Since his first professional contract in the 2005-2006 season, the player has signed multiple renewals, each time increasing his remuneration, incentivizing the player to stay in the club.

Last Messi's renewal with Barcelona was before the end of the 2017/18 season. Leo Messi's contract expired in June 2018, but FC Barcelona, with Josep Maria Bartomeu as a president, renewed the Argentinian star until June 2021. The player and the club agreed in a salary of 100 millions euros plus two renewal bonus. The concept and amounts of the renewal bonus differ depending on the source, but let's assume that they amounted 78 million and were distributed as follows:

• 39 millions, as signing bonus. Let's assume that they are paid in two installments:
• 21 millions at the beginning of Messi's new contract (July 2018)
• 18 millions two years later.
• 39 millions, as loyalty bonus, if the player remains in FC Barcelona until the end of his contract, that is, 30th June 2021.

How should we account for this renewal?

First of all, we would need to consider to reestimate the yearly amortization of the player based on his new useful life. However, this is not applicable in the case of Messi, since he is a product of Barcelona's youth academy, La Masia, and he joined the club for free.

Now, let's go to the interesting part: the signing bonus ant the loyalty bonus.

Accounting of the signing bonus

Next step should be the accounting of the signing bonus. In this case, as in Haaland's case, we need to determine if there is a service obligation or not. In other words, can Messi leave FC Barcelona freely at any moment? If he leaves, should the player refund the signing bonus?

In Messi's case, it was reported by the press that he had a clause in his contract that he could leave Barcelona for free at the end of any season. Therefore, we should assume that there is no service obligation. However, we are going to explain both approaches.

No service obligation

In this case, FC Barcelona should account for the salary expense of 39 million immediately. Since only 21 million is paid in the signing day, it should credit this amount as cash and register a liability of 18 million for the remaining amount. See journal entry:

For simplicity, we are not discounting the 18 million payable in two years.

Service obligation

If Messi's contract did not include a clause that allows him to leave the club freely, FC Barcelona would have an enforceable right to retain Messi's services for the entire term of the new three-year contract. Therefore, it is reasonable to believe that the amount paid is an advance payment for Messi's services over the course of three years. As a result, the club should recognize the expense over the duration of the three-year contract rather than recognizing the entire amount upfront. Exactly the same as in the case of a signing bonus, as we observed in the example of Haaland.

See below the journal entries that should be done in this case (again, we are not discounting the 18 million for simplicity):

As in the case of a signing bonus, if the club sells the player before the end of the contract, the renewal bonus amount should be immediately expensed when the transfer happens.

Accounting of the loyalty bonus

The loyalty bonus of 39 million will be paid to Messi when his contract ends, but only if he fulfills his contract obligations. If Messi is likely to complete his contract, the club must record an expense in their financial records over a period of three years (as a liability), which will be settled when the payment is made on June 30, 2021. The club should discount the amounts, if material. Let me know if you want a numerical example for this case, although I consider it is very similar to previous examples.

Although, in 2020, Messi tried to activate the clause that allowed him to leave FC Barcelona for free, the Club did not allow him to do so. To avoid entering in legal disputes with Barcelona, he stayed in the club until June 2021, getting the loyalty bonus, and pursuing a new renewal with the blaugranes. Unfortunately, an agreement could not be reached due to the FC Barcelona's poor economic situation. He then leave to PSG where he played two seasons and won a World Cup with Argentina before moving to Inter Miami this summer.

This article is part of the series Accounting Treatment of Football Transfers under IFRS. Click here to access the rest of the articles.

Accounting of other types of loans under IFRS: Juan Roman Riquelme, Kingsley Coman and Francisco Trincao

After discussing the player's loans without call-back option and the temporary transfers with unconditional obligation to buy, we are going to explore other types of loans, such that loans with a "call back" option, loans with an option to buy, and loans with conditional obligation to buy.

Let's go step by step. Please, take into account that we are not going to include here journal entries, given that all the relevant journals and calculations were already explained in the first article about loans.

Loans with a call back option - Juan Roman Riquelme

Juan Roman Riquelme amazed the world in 2000, in the final of the Intercontinental Cup. Boca Juniors' number 10, who was only 22 years old, outperformed one of the most terrifying teams in the world, Real Madrid, which had global superstars like Figo, Raul, and Roberto Carlos. He also produced nightmares to one of the best midfielders at that time, Claude Makelele.

His performance brought interest of many top European clubs, but it was FC Barcelona who ended up signing the Argentinian player. The agreement with the Catalan club stated that the Barcelona acquired Riquelme's registration rights in exchange of 22 million dollars.

Although Riquelme initially excited the blaugrana fans, he had a hard time fitting into Van Gaal's tactics and didn't play regularly. They had problems and didn't understand each other, which resulted in Riquelme not getting much playing time and feeling unhappy.

At the end of his first season, with a new president, Joan Laporta, and after signing Ronaldinho, FC Barcelona decided to loan Riquelme out to Villarreal for two seasons, 2003/04 and 2004/05. However, the Catalan club included a "call back" option in the loan agreement. That is, if needed, FC Barcelona had the option to get the player back before the end of the loan term.

Although FC Barcelona never exercised this option and eventually sold the player to Villareal, it is interesting to know how to account for this operation.

According to IFRS 16, paragraph 18, the lease term comprises the following:

• non-cancellable period of a lease,
• periods covered by an option to extend the lease – if the lessee (customer) is reasonably certain to exercise that option; and
• periods covered by an option to terminate the lease – if the lessee (customer) is reasonably certain not to exercise that option.

And according to IFRS 16, paragraph B34-35, the non-cancellable lease term (and, as a consequence, the lease term) includes the period during which only the lessor can terminate the lease.

Therefore, both FC Barcelona (lessor) and Villarreal (lessee) should account for Riquelme's loan in the same way that Real Madrid and AC Milan registered Brahim Diaz's lease.

If the loan agreement granted Villarreal the right to unilaterally extend or terminate the lease, Villarreal should assess whether it is reasonably certain to exercise the option and, if so, taking this into account when determining the lease term (paragraphs B35 and B37). But, again, this was not the case, since it was FC Barcelona (the lessor) who had the option to terminate the lease.

Loans with an option to buy - Kingsley Coman

Mario Mandzukic, Medhi Benatia, Arturo Vidal, Douglas Costa... The list of players that have been traded from Bayern to Juve, or the other way around, in the last decade is quite extensive. One of the most relevant names of this list is Kingsley Coman. 

Coman is a product of Paris Saint-Germain's youth academy who joined Juventus after his contract with the French team ended. In his first years as a professional player, he didn't get enough opportunities to play, so he asked his club to leave. As a consequence, Juventus and Bayern Munich reached an agreement to loan him for two years (15/16 and 16/17), with Bayern paying 7 million euros for the loan, to be paid in two installments. In addition, Bayern got an option to permanently sign the player for 21 million euros until June 2020.

After seeing Coman's good performances and recognizing his talent and potential during his first two years in Munich, Bayern made the decision to exercise the option to buy the player. They paid Juventus the agreed amount of 21 million euros to secure Coman's permanent transfer to Bayern.

Our question is how should both Bayern and Juventus initially recognize the operation. Should they register it as a regular loan, like in Brahim's case? Should they account for it like in Mbappe's case, even though in this case the option to buy is not mandatory?

First of all, we should remember that Bayern, as a lessee, can decide whether to apply IFRS 16 or not, as the player's registration rights are intangible assets.

Let's assume that Bayern decides to apply IFRS 16. In this case, they should assess if the exercise of the purchase option is reasonably certain:

• If it is reasonably certain, they should include the 21 million euros transfer fee in the lease liability, applying the corresponding discounting and amortize the player until the useful life of the registration rights (that is June 2020).
• If it is not reasonably certain, should not include the 21 million euros transfer fee in the lease liability, and amortize the player over the lease term, that is, until June 2017. 

It can be tricky to assess if the exercise of the purchase option is reasonably certain or not. But one hint is to compare the market value (fair value) of the asset with the transfer fee. In this case, Coman's market value at that time (according to Transfermarkt) was approximately the same as the fee to be paid to Juve. But let's imagine that Coman's market value was 50 million euros. In this case, it is highly likely that Bayern would exercise the option to purchase. They could do this even if their intention was to immediately sell the player and generate a profit from the transaction.

Loans with a conditional obligation to buy - Francisco Trincao

In 2020, FC Barcelona signed Francisco Trincao from Sporting Braga for 31 million euros, with high hopes that he would become the new Figo, but unfortunately, he did not even reach the level of Simao during his time at Barcelona. After a disappointing 2020/21 season, he was loaned out to Wolverhampton with an option to buy, which the English team chose not to exercise. Subsequently, during the summer of 2022, the Catalan club decided to loan the player to Sporting Clube de Portugal for 3 million euros, with a conditional obligation to buy for 7 million (which concerns only 50% of the Portuguese rights, but let's ignore this, to avoid complexity). This obligation to buy was dependent on Sporting remaining in the first division; if they were relegated, the obligation to buy would be waived.

In this case, the accounting will depend on whether the condition can be considered virtually certain. If that is the case, the player’s registration must be recognized by both clubs as a permanent transfer from the beginning of the loan agreement, such as the Mbappe's case. If the fulfilment of a condition cannot be assessed with sufficient certainty, the player’s registration must be recognized first as a loan (Brahim's case) and then as a permanent transfer once the condition is met.

Therefore, the accounting treatment of this operation is subject to interpretation. You are always going to be right applying the prudence principle suggests waiting until the relegation is impossible before registering the 7 million obligation. However, I would say it is acceptable to register an initial amount of 10 million (3+7 million) from the start of the loan. At the end of the day, Sporting has one of the best teams in Portugal, finished 4th in the league with a comfortable 20-point lead over the 5th placed team the previous season, and has never being relegated.

This article is part of the series Accounting Treatment of Football Transfers under IFRS. Click here to access the rest of the articles.

Accounting of a temporary transfer (loan) with unconditional obligation to buy under IFRS: Kylian Mbappe (PSG and Monaco)

After a veeery long article about Brahim Diaz, I promise you that this time I'll keep it shorter. However, I'll still provide interesting information as we will discuss one of the most exceptional players in the world, if not the best: Kylian Mbappe.

Kylian Mbappe, born in Paris, started taking his first steps in football at a local club called Association Sportive Bondy. However, at the age of 14, he made a significant move joining the youth academy of AS Monaco. Within a couple of years, he managed to progress from the academy to the club's first team, becoming the youngest footballer to play with AS Monaco.

But when Mbappe truly caught the attention of football fans worldwide was during the 2016/17 season when he led AS Monaco to the semi-finals of the Champions League, astonishing Europe with his amazing talent, and winning the French League, surpassing a PSG full of stars. After that extraordinary season, Real Madrid, FC Barcelona, Manchester City, Manchester United and PSG, among others, became really interested in signing the young French player. 

In an attempt to strengthen their squad and assert their dominance in French football, PSG, who had just spent a record-breaking 222 million euros to acquire Neymar Junior from Barcelona, secured the signing of Kylian Mbappe from their rivals, AS Monaco. To manage their treasury effectively, PSG opted for a one-year loan deal with an unconditional obligation to buy at the end of the loan period. The agreed amount for the obligation to buy was 180 million euros, making Mbappe the second most expensive signing in history, behind Neymar. During the loan period, PSG covered Mbappe's salary, and after the season, Mbappe and PSG would sign a contract until June 2022.

In practice, this loan represents a permanent transfer due to the presence of an unconditional obligation to transfer upon signature. Risks and control over Mbappe's rights are transferred to PSG at the moment of the loan agreement, since neither club has the option to "go back" and cancel the arrangement under any circumstances.

Based on the information provided, the accounting for the operation would be indistinguishable from that of a permanent transfer with a deferred payment agreement.

Accounting for Paris Saint-Germain (lessee / recruiting club)

PSG needs to calculate the present value for the total amount to be paid and spread it out over the contract's duration of five years. Considering a discount rate of 3% and the effective payment of 180 million euros one year later, the present value would be 174.75 million euros. PSG should record this amount as an intangible asset (rather than a right-of-use) and a liability with Monaco. PSG should also record an annual amortization of 35 million euros (174.75 divided by 5).

Accounting for Monaco (lessor / selling cub)

Similarly to what was described earlier, although the operation is formally a loan, it is in practice a permanent transfer. Therefore, when Monaco transfers control of the player registration rights to PSG (that is, when the loan agreement with obligation to buy is signed, and the transfer registered in the UEFA electronic system), it needs to remove it from their accounting records. This removal will lead to the recognition of a gain or loss on the sale. The gain will be determined by calculating the present value of 180 million euros. Since Kylian Mbappe was a "home-made product", the full amount will represent a gain in the income statement.

Given that there is no difference between a permanent transfer with a deferred payment and loan with an unconditional obligation to buy, I do not understand why clubs keep arranging this kind of operations. If someone knows why, please let me know! Meanwhile, I am going to read the sports newspaper to find out if Mbappe is finally joining Real Madrid. As a FC Barcelona fan, I hope this never happens!

This article is part of the series Accounting Treatment of Football Transfers under IFRS. Click here to access the rest of the articles.

Accounting of a temporary transfer (loan) without any call-back option under IFRS: Brahim Diaz (Real Madrid and AC Milan)

Brahim Diaz's name was in the news in the previous weeks due to the player's return to Real Madrid, after a couple of seasons playing for AC Milan. For those who do not know him, Brahim is a technically gifted Spanish attacking midfielder with excellent dribbling, vision, and creativity. At the age of 23, he has already played for three of the top clubs in Europe: Manchester City, Real Madrid and AC Milan. And I am proud to say that I am one of the first few hundreds of people outside Andalucia to have seen Brahim's talent. In Easter 2011, my dad and I went to watch the final of the Mediterranean International Cup (MIC) for under-12 players in my hometown, Palamós. Malaga played against Athletic Club, and the Andalusians won 4-1. There was a super talented player, Malaga's number 10, who was much better than everyone else. You could tell he was going to make it big. His name was Brahim. Brahim Diaz.

While attending the match at the stadium, we heard rumors that he might join either FC Barcelona or Real Madrid. However, to our surprise, the president of Malaga offered the player more favorable conditions, leading Brahim to remain in Andalucia until 2015. It was at that time when Manchester City secured the signing of the player, in exchange of 200,000 pounds plus variable fees. The following year, he made his debut with Manchester City's senior team, and after a couple of seasons, he played his first Champions League match. Despite his talent, he didn't receive many opportunities in a team filled with renowned players. Consequently, he made the decision to transfer to Real Madrid before his contract expired, in January 2019, in exchange of a fee of 17 million euros.

However, his playing time remained limited at Real Madrid, causing an agreement between the Spanish club and AC Milan for a one-season loan. 

Following the conclusion of the initial loan, AC Milan expressed their desire to retain the services of the Spanish player for an extended period. Consequently, Real Madrid agreed to a second loan for two additional seasons in exchange for a total of 4 million euros for both years. In addition, AC Milan was responsible for covering the player's salary for both years. As a result, Brahim Diaz was set to play with the Italian team for the 2021/2022 and 2022/2023 seasons.

As far as we know, Madrid did not keep a call back option. Additionally, AC Milan did not have a option to permanently purchase the player at the end of the loan. At the time of the second loan, Brahim's market value (according to Transfermarkt) was about 15 million euros, and his contract with Real Madrid expired in 2025.

In this case, we're discussing a temporary transfer in football, which is informally called a loan. When a player is loaned, their registration rights are temporarily transferred to another club for a fixed period. Think of it like your landlord leasing his/her apartment to you for two years in exchange for rent price. Similarly, Real Madrid loans out a player like Brahim to AC Milan for a couple of years in exchange for a fee. These operations align with the concept of lease, and therefore we should refer to IFRS 16 - Leases. 

How should AC Milan and Real Madrid record the operation in their books?

Accounting for AC Milan (lessee)

According to IFRS 16 - Leases, player's registration rights are not part of the exemption from the standard, as stated in paragraph 3. The only type of intangible assets that are exempt of the application of the standard are rights held by a lessee under licensing agreements. However, as a lessee of an intangible asset, AC Milan has the option to choose not to apply lease accounting to this contract, as permitted by paragraph 4 of IFRS 16.

Therefore, the accounting treatment of the operation would vary depending on whether AC Milan chooses to adopt IFRS 16 or not. In the event that the club decides to implement IFRS 16, the recording of the transaction will differ based on whether it makes the payment for the two-year loan in advance on the day of signing or if it pays in two installments.

If AC Milan applies IFRS 16 - Loan amount paid at signing day

When applying IFRS 16, AC Milan should register 4 million euros as a right-of-use asset at initial recognition and subsequently amortize this amount over the two year contract. No liability needs to be recorded, since AC Milan is paying for its two-year loan fees upfront. 

The amount should be amortized over the two-years, as follows:

As you can see, this does not varies from the accounting of a permanent transfer, except for the name of the asset ("right-of-use asset" instead of "intangible asset", and some disclosure requirements).

If AC Milan applies IFRS 16 - Loan amount paid in two installments

In this scenario, let's suppose that AC Milan pays the loan fee in two installments: one at signing day and one at the beginning of the second season of the loan. The main difference with respect to the previous case is that half of the fee is not paid on the signing day, so a lease liability is generated. 

In this case, AC Milan should also register the right-of use asset at cost. This cost of the right-of-use asset shall be comprised of the amount of the initial measurement of the lease liability, plus any lease payments made at or before the commencement date, and other amounts that are not relevant in this example. 

When applying IFRS 16, AC Milan should recognize the lease liability at the present value of the lease payments that are not paid at the initial recognition date. To calculate this present value, AC Milan should discount the lease payments using either the interest rate implicit in the lease (if determinable) or the lessee's incremental borrowing rate.

Before starting playing with numbers, let's summarize all the journal entries that we expect during the Brahim's loan period:

• Initial recognition:
• amount of the right-of-use asset, against:
• Cash, for the amount paid at the signing day
• and lease liability, calculated as present value of the future lease payments
• Subsequent measurement:
• Amortization expense of the right-of-use asset, and accumulated amortization
• Interest expense of the lease liability
• and payment of the lease liability.

Let's discount the lease payments to obtain the amount to be initially recognized, assuming that the AC Milan's incremental borrowing rate is 3%.

The amount to be initially recognized as a right-of-use is 3,941,747.57 euros, 2,000,000 euros are paid at the signing day and 1,941,747.57 corresponds to the amount to be paid after one year, before the start of Brahim's second season. See journal entry:

Next step is construct the lease amortization schedule:

As we can see, the lease generates an interest expense of 58,252.43 euros, which is the difference between the present value of the lease payments and the actual payment. At the end of the first season, the outstanding amount is 0 and, as a consequence, during the second season no interest expense will be registered in the income statement.

Next step is to calculate the amortization expense. The monthly amortization expense will be 164,239 euros (3,941,747 euros divided by 24 months).

See below all the journal entries that have to be recorded from the commencement date to the end of the loan:

If we examine the total of the amortization expense and interest expense, it amounts to 4,000,000 euros. This means that whether you pay the entire loan amount on the signing day or in installments, there is no difference in the impact on the income statement. The only difference is that in case of paying in installments, the expense is divided between the amortization and interest components.

If AC Milan does not apply IFRS 16

As we mentioned above, AC Milan has the option not to register Brahim's loan using IFRS 16. How should the club register the operation in this case?

In this case, AC Milan should account the transaction using IAS 38 - Intangible Assets. Therefore, the Italian club should recognize the 4,000,000 euros cost as an intangible asset, and this amount would be amortized over the two years (that is, the loan term). At the end of the loan, Milan should derecognize the asset. 

Here you have the journal entries to be registered, considering that the loan fee is paid upfront:

Accounting for Real Madrid (lessor)

The accounting treatment for lessors is a bit different according to IFRS 16.

First of all, Real Madrid, as a lessor, should determine if Brahim's loan is a finance lease or operating lease. According to the standard, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. And a lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. If the temporary transfer is classified as a finance lease, Real Madrid should reclassify his asset as a receivable, valued at the net investment in the lease. If it classifies it as a operating lease, it should recognize income on a straight-line basis or another systematic basis.

Now we are left with the question of whether the loan of Brahim from Real Madrid to AC Milan is a financial or operating lease. Based on IFRS 16.63, I consider that Brahim's loan should not be considered a financial lease and, as a consequence, should be classified as an operating lease, due to the following:

• the lease does not transfer ownership of Brahim's registration rights to AC Milan by the end of the loan term.
• the lessee does not grant to AC Milan any option to purchase the Brahim's registration rights.
• Expiration of Brahim's contract with Real Madrid was on June 2025. Loan to Milan was until June 2023. Therefore, the loan term is not for the major part of the economic life of Brahim's rights.

Take into account that, unlike the lessees, the lessors have the obligation to record their leases using IFRS 16. 

In this case, we agreed that Brahim's loan to Milan is an operating lease. As a consequence, Real Madrid should continue to recognize its intangible asset, which should continue to be amortized. On the other hand, it should register a lease income on a straight-line basis over the lease term. The payments received in advance are a credit to deferred income.

Find below the journal entries to be registered by Real Madrid during the first year of the loan. For determining the amounts we will be taking into account the following:

• Considering that Brahim Diaz was acquired from Manchester City in January 2019  in exchange of 17 million euros with a six-and-a-half year contract. His annual amortization is 2,615,384 euros.
• Loan fee of 4,000,000 is paid by AC Milan in one installment, at signing date.

As a consequence of the loan, the impact of Brahim in Real Madrid's income statement would be an expense of 615,384 euros, instead of the 2.6M expense that the club should have had if Brahim had stayed in Real Madrid.

In case that Brahim's loan were considered a financial lease (which is not), Real Madrid should account for finance leases by initially derecognizing the asset and recognizing a receivable for the net investment in the lease.

We've come to the end of the article, and I know it's been a bit longer than usual! Now, why not take a moment to relax and enjoy watching the highlights of a young Brahim during his time with Malaga? Enjoy!

This article is part of the series Accounting Treatment of Football Transfers under IFRS. Click here to access the rest of the articles.

Accounting of player's salaries, sign-on bonuses and agent fees under IFRS: Erling Haaland and Mino Raiola

Erling Haaland is a football sensation right now. He recently won the Champions League, FA Cup, and Premier League with Manchester City. In his first season with the club, he scored an amazing 52 goals in just 53 matches, leaving his rivals terrified. The Norwegian, along with Kylian Mbappe, is considered the most valuable football players in the world today. Who knows if the rivalry between Haaland and Mbappe will be the great rivalry of the next decade, just like Messi and Cristiano Ronaldo once was.

Despite holding a Norwegian passport, Erling Haaland was actually born in Leeds, England, while his father was playing in the Premier League. When Haaland was five years old, his family moved back to Norway and he began playing in the youth academy of his hometown, Bryne. Later on, he joined Molde, a team in the Norwegian first league. Haaland's exceptional performances caught the attention of Red Bull Salzburg, who signed him in January 2019. In the 2019/20 season, he made a huge impact by scoring five goals in the Champions League group stage, which impressed football fans all over Europe. As a result, Borussia Dortmund decided to sign the talented Norwegian player in January 2020, paying a reported fee of 20 million euros.

After his incredible performances with Borussia Dortmund, Erling Halland signed a five-year deal with Manchester City at the end of season 2021/2022. The English team paid the release clause of the Norwegian player, 51 million pounds, and the footballer granted a yearly salary of 19.5 million pounds. It has been reported that additional 35 million pounds were paid by the citizens in concept of signing bonus, agents’ fees, among others. Since we do not know the breakdown, for the purpose of this article we are going to assume that 20 million was paid to the player as a one-off signing bonus and the remaining 15 million was transferred to Mino Raiola as an agent fee.

Let’s summarize all the amounts of the operation before accounting for each concept:

1. Transfer fee: 51 million pounds.
2. Player’s wage: 19.5 million pounds, yearly, during 5 years.
3. Player’s sign-on bonus: 20 million pounds.
4. Agent fee: 15 million pounds.

Pretty impressive for a 22-year-old player, isn't it? Now, as accountants, let's analyze whether we can achieve the same level as Haaland by accurately recording each aspect of his transfer operation.

Accounting of the transfer fee

For City’s accounting of the transfer fee, we refer to the article devoted to the signing of Halland’s colleague John Stones. We can also find there the accounting of the selling club (in this case, Borussia Dortmund; in John Stones’ case, Everton).

Accounting of the player’s wage

As mentioned, Haaland will receive 19.5 million pounds every year, during five seasons, amounting a total of 97.5 million. But how should Manchester City account for the player’s wage?

Instead of recording a liability of 97.5 million euros from day 1, Manchester City should simply recognize the player's salary expense and a short-term liability as the player's services are provided. When the salary is paid, City should cancel the short-term liability against cash. As simple as that. Let's see how City should register Haaland's salary during his first year in the club, assuming that he gets paid at the end of the season:

As far as I know, Manchester City would not be obliged to disclosure its future salary commitments with his players. At least, listed-clubs that issue its financial statements under IFRS (Borussia Dortmund, Juventus, Olympique Lyonnaise...) do not do it.

Please, take into account that, for simplicity, we are ignoring taxes, social security charges, etc. in all the examples.

Accounting of the player’s sign-on bonus

The sign-on bonus is a one-off payment made by the signing club to his newly joined player in the moment of signing his contract.

Let’s first discuss the characteristics of a player’s sign-on bonus:

• It is an amount paid from the club to its new player as part of a transfer operation and the player’s contract.
• It is part of the signing agreement and, ideally, should be paid immediately.
• It is a one-off payment.

Once we have the concept clear, let’s explain how to account for Haaland’s 20 million sign-on bonus.

As we discussed in previous articles, the signing club can capitalize and classify as intangible asset all those costs directly related with the transfer. This includes the transfer fee, but not only. Therefore, someone could wonder if the sign-on bonus could be capitalized as an intangible asset, together with the 51 million pound transfer fee. At the end of the day, it is a one-off payment and closely related with the transfer. However, this reasoning fails to understand the real nature of the sign-on bonus payment: it is a payment from the company to its employee and, as such, should be considered an employee benefit.

The accounting of this sign-on bonus as an employee benefit will differ depending if we find ourselves in one of the following cases:

1. The signing bonus is paid with no further service obligation (i.e. the club has no choice but to make the payments). In this is the case, Manchester City should recognize the 20 million as a personnel expense immediately, at the signing day.
2. The signing bonus agreement includes a service obligation, in this case, City should recognize the personnel expense, not immediately, but on a systematic basis over the relevant period. That is, the expense should be recognized proportionally during every season played by Haaland.

We do not have much public information about Haaland's signing bonus, but I will share with you my interpretation based on what we know.

Even though we can assume that City "has no choice but to make the payments", and that the signing bonus is not refundable in case that Haaland is transferred before the end of his contract, Manchester City has, by contract, the right to retain Haaland in the squad during 5 years. Since, as far as we know, there is no an "escape clause" in his contract by which he can leave when he wishes for free, City can keep the player during 5 years, even against his will. 

Therefore, we can say that there is a link between the payment and the player providing his services during 5 years. As a consequence, the sign-on bonus represents a prepayment for the employee services, and the club should recognize the employee benefit as an expense over the five-year contract period, with the excess payment being deferred as a prepaid expense.

Therefore, Manchester City should record the 20 million sign-on bonus at initial recognition in the following way:

And since Haaland's contract is for 5 years, we should transfer to the income statement 4 million pounds every year (20 million divided by 5). See journal entry below:

Note that, even though the Haaland's annual salary is 19.5 million pounds, the annual cost in the income statement is 23.5 million (his annual salary plus the corresponding amount of his signing bonus).

However, based on the explanation above, there are some cases in which the sign-on fee should be immediately expensed: if management believes that the contract does not provide an enforceable right to receive the player’s services. This would happen, for example, in case that Haaland and City agreed in a clause in which, despite having signed a five-year contract, the player could leave the club unilaterally at any moment.

In this case, the journal entry to be registered when the bonus is paid is the following:

In case that City and another club agree to transfer Haaland, I would immediately cancel the remaining balance in "Prepayment to employees" immediately in the income statement, unless the signing bonus was refundable (which we do not know, but I don't think it is the case)

But, in any case, to know the real solution of this case, we would need to have access to Manchester City agreement with Haaland.

Accounting of the agent fees

The agent fee of 15 million pounds that Manchester City paid to Mino Raiola is connected with the transfer of Haaland's registration rights and, according to IAS 38 (paragraph 27), these costs should be included in the cost of the intangible asset. The main reason is that they are costs needed to “prepare the asset for its intended use”. The 15 millions have to be amortized over the five years of contract.

Find below the journal entry to be registered in relation to intangible assets on the signing day:

And that's the end of the story. We learned a bit more about football accounting, Borussia Dortmund successfully made another sale, Manchester City won the Champions League, Erling Haaland received a significant amount of money, and Mino Raiola... well, he passed away a few days before Haaland's transfer was finalized. As a result, he never received the 15 million pounds. It is more likely that his cousin Vicenzo Raiola and lawyer Rafaela Pimienta received the commission instead.

This article is part of the series Accounting Treatment of Football Transfers under IFRS. Click here to access the rest of the articles

Accounting of contingent and/or deferred transfer fees under IFRS: Ousmane Dembélé (FC Barcelona and Borussia Dortmund)

World champion Ousmane Dembélé has recently concluded his sixth season in FC Barcelona. The winger is a fast, agile player, excellent at dribbiling, someone who ensures a significant number of goals and assists - when he is fit. Some experts consider that Dembélé is equally skilled with both his left and right foot. However, some of us jokingly suggest that it's not a matter of him being proficient with both legs, but rather that the player himself never seems to remember which one is his dominant foot. His seasons in FC Barcelona have been marked by injuries. In fact, the Frenchman has been injured a total of 784 days and has missed 119 matches. Despite of his injury historial, Barcelona's manager, Xavi Hernandez, still considers Dembélé one of the pillars of his project.

On November 2015, Dembélé made his professional debut in Ligue 1 with Rennes, completing a great season and becoming the leader of his team, at the young age of 18. At the end of the season, German club Borussia Dortmund reached an agreement with the French club to transfer Dembélé for a fee around 15 million euros. Dembélé had a very good season in the Bundesliga, being one of the best players of his team, scoring 10 goals and assisting 22 times.

After the end of that season, Paris Saint-Germain activated Neymar's 222 million euros transfer release clause and Barcelona lost one of his stars. Robert Fernandez, the blaugrana's sports director at the time, needed to find a replacement quickly. Two names were the favorites, Ousmane Dembele and Kylian Mbappe, who had completed an excellent season in Monaco, reaching UEFA Champions League semifinals. Robert Fernandez, God knows why, preferred the Dortmund player to replace the Brazilian. Mbappe ended up joining Neymar in PSG.

The agreement reached between FC Barcelona and Borussia Dortmund included a fixed and a variable fee. The fixed fee amounted to 105 million euros, and the variable amount could rise up to an additional 40 million.

It was agreed that FC Barcelona would pay the fixed 105 million as follows:

• 70 million immediately after the transfer fee.
• 35 million after 1 year of the signing date.

The breakdown of the 40 million variable fee was the following:

• 5 million euros when Dembélé plays his first 25 official matches with FC Barcelona.
• 5 million euros when Dembélé plays his first 50 official matches with FC Barcelona.
• 5 million euros when Dembélé plays his first 75 official matches with FC Barcelona.
• 5 million euros when Dembélé plays his first 100 official matches with FC Barcelona.
• 5 million euros when Dembélé plays his first Champions League edition with FC Barcelona.
• 5 million euros when Dembélé plays his second Champions League edition with FC Barcelona.
• 5 million euros when Dembélé wins his first Champions League with FC Barcelona
• 5 million euros when Dembélé wins his second Champions League with FC Barcelona.

We learnt in the previous article how to account for a permanent transfer fee that included no variable amount. Now we are adding a bit more complexity. How should FC Barcelona account for this transfer, that contains contingent (variable) and deferred transfer fees? 

Before anything else, we should distinguish between amounts that are unconditional and those that are contingent. The unconditional amounts, regardless of the payment dates, are the ones that should be accounted in the signing day. 

In this case, the amounts of 70 and 35 million are fixed and unconditional, meaning FC Barcelona is obligated to pay them come rain, snow, or shine. Therefore, FC Barcelona should record 105 million euros at the moment of the signing, regardless of the timing of each installment. Since 70 million euros is paid immediately, this amount should be credited against cash, and the remaining 35 million to be paid in one year, should be credited as a liability. See the journal entry below:

Take into account that, if material, we should discount the 35,000,000 euros. We do not discount the amount in the journal entry above to keep things simplier.

Once we know how to account for the unconditional amounts, you may be wondering when we should capitalize the contingent amounts. However, before that, we should ask ourselves if we can capitalize the contingent payments at all. The first step is to determine if the contingent payments are related to the purchase of the asset or not. In Dembele's case, all the variable fees are linked to the player's performance, either individually or collectively. Therefore, we can conclude that the contingency payments are closely related to the player's registration rights. 

If FC Barcelona and Borussia Dortmund had agreed to a payment of 10 million euros in the event that Ousmane Dembele gets married, this amount could not be capitalized and should be accounted as an expense in the income statement, since this event is unrelated to the player's registration rights. The same could be said if there is a contingent payment based on the event that Dembele plays 100 official matches with the French national team, since this situation is not within FC Barcelona's control.

Now let's solve the question of when the contingent amounts can be capitalized. Here, according to "Accounting for typical transactions in the football industry", by PwC, there is diversity in practice. We have two (maybe three) options:

1. FC Barcelona considers that the contingent payments of 40 million are not liabilities at the signing date. This is because FC Barcelona has no obligation to ensure that Dembele plays a specific number of official games or features in the Champions League. Therefore, the variable fees of the contract are excluded from the initial cost of the intangible asset and are not recognized until the obligating event occurs
2. FC Barcelona considers that the payments are contractual and a financial liability arises. The liability should be recognized at fair value at the date of recognition of the asset and subsequently remeasured. The measurement of the liability is impacted by changes in the amount of payment, the likelihood of payment and the timing of payment. Subsequently, and at each reporting date, the changes in the expected cash flows would alter the amortized cost of the liability and would either be:
• 2.1) recognized in the income statement, without impacting the cost of the intangible asset.
• 2.2) adjusted against the cost of the registration rights.

For options 1 and 2.2, the additional costs are amortized separately, until the end of the contract. 

Let me know in the comments if you want a numerical example. I decided to skip it to avoid the article being too long.

Have there been any attempts to end the ambiguity regarding this issue? Yes. The IFRS Interpretation Commitee was requested to address the accounting for variable payments to be made for the purchase of an intangible asset (or PPE item) that is not part of a business combination, such as the players' registration rights. However, the Interpretation Comitee's conclusion was that the issue was too broad for it to address. Therefore, it is up to the entities to decide which accounting policy to choose, as long as the same approach is applied to all the comparable cases. That is, if FC Barcelona had chosen option 1 to account Dembele's variable payments, it cannot choose option 2 to record Coutinho's variable payments.

Unfortunately, I cannot explain how FC Barcelona would have accounted the variable payments under IFRS, because the club's financial statements are prepared under Spanish GAAP (and its sectorial adaptation). However, I can confirm that based on the local principles, FC Barcelona decided to use the first approach. See extract from its 21/22 financial statements: "The contracts for the acquisition of players’ registration rights usually include variable remuneration, which basically depends on the sports performance of the Club and the player himself. These variable payments are entered in the books when the conditions precedent are fulfilled, and are amortized from the date of registration up to the termination of the labour contract in force with the player."

Although most of the football clubs prepare its financial statements based on local GAAPs, there are some exceptions: European clubs that are listed on the stock market, which have to present its financial information under IFRS. The most relevant listed football clubs in Europe are Manchester United, Juventus, Borussia Dortmund, Olympique Lyonnaise, Celtic CF, and Ajax. Although, disclosures for this specific issues are not found in the financial statements of Juventus, Borussia and Ajax, we can see which option the other three clubs chose:

• Olympique Lyonnaise (OPTION 1): "Sell-on fees and other contingent fees are recognised when the condition precedent is met. So long as the condition precedent is not met, the contingent fee is recognised as an off balance-sheet item."
• Celtic CF (OPTION 1): "Subsequent amounts are capitalised upon crystallisation of all contingent events relating to their payment and where the value of the asset is enhanced by the underlying event."
• Manchester United (OPTION 2.2): "The costs associated with the acquisition of players’ and key football management staff registrations include an estimate of the fair value of any contingent consideration. The estimate of the fair value of the contingent consideration payable requires management to assess the likelihood of specific performance conditions being met which would trigger the payment of the contingent consideration. This assessment is carried out on an individual basis"

As we can see, two clubs chose option 1, one chose option 2.2 and none chose 2.1. However, we should increase our sample of clubs to be more conclusive.

We do not know if, some day, the IFRS Interpretation Board will conclude regarding the variable payments. But we are certain about once thing: Dembele played more than 100 official games with FC Barcelona, participated in the Champions League with Barcelona more than twice and, unfortunately, he did not win the Champions League with the Catalan team. The total cost of the Frenchman ended up being 135 million euros, and he signed a new contract with Barcelona right after the expiration of the first one. At this moment, his net book value is 0. 

This article is part of the series Accounting Treatment of Football Transfers under IFRS. Click here to access the rest of the articles

Accounting of permanent transfers and sold-on clauses under IFRS: John Stones (Everton, Manchester City... and Barnsley)

The name of John Stones has been quite in the news recently. A few weeks ago, the Manchester City defender won the Champions League in Istanbul against Inter Milan. Not only that, the Englishman contributed to winning the treble, after also being victorious in the FA Cup and lifting the Premier League trophy following an incredible comeback from the 8-point lead Arsenal had over them. 

Stones was born in Barnsley, South Yorkshire, where he started playing football in the youth academy of the local club, Barnsley FC. At the age of 17, he signed his first professional contract. After a good half-season in the Championship, on January 2013, Stones signed a contract with a Premier League club: Everton FC. The transfer came to a cost, since the toffees had to pay a transfer fee of 3 millions pounds to Barnsley. Despite letting one of its best players go, Barnsley inserted a 15% sell-on clause into the deal with Everton. In other words, if Everton sold the player to a third club in the future, Stone's youth club would keep 15% of the price. During his years in Everton, he debuted with the English national team, and his good performances in the Premier League made him one of the best center-backs in England.

In summer 2016, Manchester City signs a new manager: Pep Guardiola. The Catalan coach, after his success with FC Barcelona and FC Bayern München, landed in England to consolidate the citizens as one of the best clubs in Europe and, eventually, win the Champions League. But he did not come to Manchester alone. Pep arrived with a long list of signings: Claudio Bravo, Nolito, Gundogan, Zinchenko, Sané, Gabriel Jesus... and John Stones. City paid to Everton 47.5 million pounds plus bonuses, the highest transfer fee paid for a defender at that time.

And now it's time for accounting... how would you record this transaction if you were Everton? And what about if you were City?

Accounting for Manchester City (signing club)

As we saw in the first post of this series of articles, the player's registration rights meet the definition of asset, and more concretely, the definition of intangible asset.

Now it is clear for everyone that Manchester City can capitalize the cost of the purchase. But someone could ask, when should the asset be recognized? It should be recognized when control on Stones' registration rights are transferred from Everton to Manchester City. However, to avoid adding complexity, we will discuss this issue in another article.

Initial recognition (2016/2017)

As mentioned, Manchester City is entitled to capitalize all the costs directly attributable to the John Stones' transfer, that is, 47.5 million pounds, and classify it as an intangible asset. Yes, I know, Stones' transfer was closed by 47.5 million, plus bonuses... But's let ignore the variable component for today, since we are going to devote a special article to bonuses and contingent fees.

Manchester City should book the following journal entry:

 

Subsequent recognition

As mentioned in the first article, the player's registration rights are amortized, as a general rule, on straight-line basis over the player's contract. Easy, right? So considering that Stones signed his contract with Manchester City for 6 seasons, we divide 47.5 M by 6, and we get a yearly amortization of 7.9 million pounds. That is the amount that City will expense in the income statement every year.

If the player keeps the same contract until June 2022, the net book value of the intangible asset becomes 0. In that case, if a new contract between the player and the club is signed after the expiration of the first contract, the yearly amortization from season 2022/23 onwards would be 0.

It sounds too good to be true to have a top player in your team who costs you 0 euros in your profit and loss account. The truth is that, with the exceptions of those players who are "home-made" (for example, Messi when he played in FC Barcelona) or free agents, this is rarely the case. The reason is that top-players normally renew their contracts before the expiration of the original one. In this way, the club makes sure that his footballer keeps playing for them for longer and does not sign a contract with the competitors, and the player gets a higher salary.

And this was exactly what happened with City and Stones. At the beginning of year 2021/2022, the citizens and the defender reached an agreement to extend Stones' contract until the end of season 2025/2026. Good news for City and Stones, but... what about the club's accountants? How should they register the player's amortization? The answer is that the amortization should be revisited.

At the beginning of season 2021/2022 (or ending of season 2020/21), the player's book value is 7.9 million pounds. Given that he signed a new six year contract, we should divide this amount by six to get the new yearly amortization.

The 7.9 million remaining to be amortized at the end of season 2020/21 are now spread in six years, resulting in a yearly amortization of 1.3 million pounds.

Accounting for Everton (selling club)

What about Everton? How should the club record the selling of his former player? It is quite straightforward. You should register the operation in the same way that you register the sale of a building or a machine: you just need to derecognize the rights initially recognized and amortized and register any difference as a profit or loss in the income statement. 

We will understand it better with some numbers. Stones signed a five-and-a-half years contract with Everton in January 2013, and the transfer fee was 3 million. If we take a look at the amortization table, the net book value of the player was 1.6 million at the time of the transfer (end of 15/16 season / beginning of 16/17 season):

Given that Everton sold the player for 47.5 million, a gain of 45.8 million was registered. See journal entry below:

Remember, the gain obtained from the sale of intangible assets is not considered revenue. Instead, it is presented as a separate line item within operating profit.

This may look like the end of the story. City signed a great player, Everton made a huge profit, Stones increased his chances to win the Premier League, we learned how to record permanent transfers under IFRS and they all lived happily ever after. But aren't we forgetting about someone? Yes, we are forgetting about Barnsley.

Accounting for the additional consideration received by Barnsley

In January 2013, Barnsley sold Stones to Everton. Since Stones had emerged from their youth academy, no costs were incurred for his registration rights. Consequently, Stones' book value was recorded as 0, and the entire 3 million received from Everton was registered as profit.  

In the agreement with Everton, the club included a 15% sale-on clause. According to IFRS 15, the profit related to the sale-on clause should be recognized when it is considered 'highly probable.' However, at that time, it was uncertain whether Everton would sell Stones. What if Stones remained with Everton for the rest of his professional career? Or what if Stones decided to move to another club as a free agent after his contract with Everton expired? Additionally, even if we could determine that it was highly probable that Everton sold Stones, we wouldn't be able to determine the exact amount involved. For all these reasons, it was prudent not to register any amount at the time.

However, once the deal between Everton and City is closed, Barnsley should recognize gain of 7.1 millions (in line "other income/gain", not in "revenue") and a receivable with Everton for the same amount.

Everton, on the other hand, should net the 7.1 expense to Barnsley against the gain arising from the transfer (note that this fact is not reflected in the previous journal entry, for simplicity).

And that concludes our lesson for today. We have learned not only how to account for standard permanent transfers under IFRS but also how to record transfer operations that involve sold-on clauses. Do you know who else learned the lesson? Southampton, the youth club of Gareth Bale. When they transferred their star player to Tottenham, they included a 15-25% sold-on clause. However, one year later, they waived the clause in exchange for 1.5 million pounds and spurs goalkeeper Tommy Forecast. The rest is history. Tottenham later sold Bale to Real Madrid for a fee of 86 million pounds, and Southampton missed out on an estimated amount of around 13-21 million pounds.

This article is part of the series Accounting Treatment of Football Transfers under IFRS. Click here to access the rest of the articles