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.