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