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.