Capturing the Value of Football Players in Corporate Reporting

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Surname, Initial(s). (2012). Title of the thesis or dissertation (Doctoral Thesis / Master’s Dissertation). Johannesburg: University of Johannesburg. Available from: http://hdl.handle.net/102000/0002 (Accessed: 22 August 2017).

CAPTURING THE VALUE OF FOOTBALL PLAYERS IN FINANCIAL REPORTING

MICHAEL STEENKAMP

LIMITED SCOPE DISSERTATION

Submitted in fulfilment of the requirements for the degree

MAGISTER COMMERCII

INTERNATIONAL ACCOUNTING

in the

COLLEGE OF BUSINESS AND ECONOMICS

at the

UNIVERSITY OF JOHANNESBURG

SUPERVISOR: PROFESSOR D COETSEE

2020

DECLARATION

I, Michael Steenkamp, certify that the limited scope dissertation submitted by me for the degree Masters of Commerce (International Accounting) at the University of Johannesburg is my independent work and has not been submitted by me for a degree at another university.

ACKNOWLEDGEMENTS

I would like to acknowledge the interest, support and encouragement of all those who contributed to the successful completion of this study. In particular I would like to express my gratitude to:

 My daughter, Mikayla Steenkamp, who is the reason why I do everything that I do.  My mother, Bernyce Marais, who has always supported and encouraged me in achieving my academic and personal goals.  My brother and sister, Vernon and Nadine Marais, who, through their determination in their own studies, motivated and encouraged me throughout this process.  My study supervisor, Professor Daniel Coetsee, who patiently guided me in my research.  My fellow colleagues and friends at RSM South Africa who never failed to provide consistent support to me in my studies.

ABSTRACT

The accounting for football players is currently not consistent regarding the recognition of players who have been internally developed and those who have been purchased from another club. When a football club purchases the registration rights of a football player, such rights are capitalised as an intangible asset and amortised over the player’s contract period. However, the costs that are incurred in developing home grown players are recognised as an expense and there is no value captured for such players in the financial statements of a football club.

There has been previous research on the possible need for the capitalisation of human resources and to place a value on these in the accounting records of an entity, which would include that of football clubs. The accounting principles currently available for accounting for internally generated intangible assets are not likely to change in the short term. Due to this, the need for additional disclosure of non-financial information in the, for instance, integrated report is noted. The objective of this limited scope dissertation is to identify and suggest the most appropriate manner in which to capture the value of football players in financial reporting.

In fulfilling the research objective, this study followed a three-step, qualitative approach of an exploratory nature. The first step discussed the concept of human resource accounting and how this could possibly be accounted for. The second step focused on the current accounting policies and practices applied by football clubs. The third step then proposed an alternative approach to accounting for football players or disclosing the value of football players in the accounting records of a football club.

The outcomes of the study indicate that there is a need for a revised approach in accounting for human capital and, in particular, football players. This could either be by way of capitalising football players and accounting for them at fair value in the accounting records of football clubs or by providing additional, more comprehensive disclosures.

iii

KEY WORDS

Human Resource Accounting, intangible assets, development costs, intellectual capital, human capital.

CONTENTS

DECLARATION ...... I ACKNOWLEDGEMENTS ...... II ABSTRACT ………………………………………………………………………………...III KEY WORDS ………………………………………………………………………………IV CHAPTER 1 – INTRODUCTION ...... 1 1.1 Background ...... 1 1.2 Research problem ...... 4 1.3 Research objective ...... 6 1.4 Research methodology...... 6 1.5 Motivation ...... 8 1.6 Ethical considerations ...... 8 1.7 Limitation ...... 8 1.8 Structure of limited scope dissertation ...... 9 CHAPTER 2 – LITERATURE REVIEW ...... 10 2.1 Introduction ...... 10 2.2 A call for Human Resource Accounting (HRA) ...... 10 2.3 Measurement of HRA...... 13 2.4 Development costs in the football industry ...... 15 2.5 Intellectual capital as an intangible asset ...... 18 2.6 Reporting on social aspects ...... 20 2.7 Conclusion ...... 24 CHAPTER 3 – HISTORICAL AND CURRENT ACCOUNTING POLICIES AND GUIDANCE ...... 26 3.1 Introduction ...... 26 3.2 Background to accounting for football players ...... 26 3.3 Accounting requirements for football clubs ...... 30 3.4 IFRS requirements for accounting for intangible assets ...... 32 3.5 UEFA accounting guidance ...... 35 3.6 Current accounting practices of football clubs ...... 36 3.7 Conclusion ...... 37 CHAPTER 4 – ALTERNATIVE APPROACH ...... 40 4.1 Introduction ...... 40 4.2 Capitalisation of human development costs ...... 40 4.3 Applying the revaluation model to capitalised development costs .... 41

4.4 Subsequent accounting for the development costs at fair value ...... 42 4.5 Disclosures to capture the value of football players ...... 44 4.6 Conclusion ...... 45 CHAPTER 5 – CONCLUSION ...... 47 5.1 Introduction ...... 47 5.2 Summary of literature review chapters ...... 47 5.3 Proposed solution ...... 48 5.4 Potential areas of future research ...... 49 REFERENCES ...... 50 ANNEXURE A – ACCOUNTING POLICY EXTRACTS ...... 54 1. Manchester United ...... 54 2. Tottenham Hotspur ...... 57

LIST OF TABLES

Table 1 – Policy choices by football clubs ...... 29 Table 2 – Current accounting verses fair value picture ...... 35

CHAPTER 1 – INTRODUCTION

1.1 Background

Born on 15 March 1993, Paul Labile Pogba (Pogba) is a professional football player who currently plays in the English Premier League for well-known club Manchester United as well as the French international football team (Guinee Foot, 2009).

According to Football Italia, 2016, after starting his professional football journey at Manchester United in 2011, Pogba moved to the Italian side Juventus in 2012. During his time with the Italian team, he helped the club win four Serie A (Italian premier league) titles in a row, including the Coppa Italia and the Supercoppa Italiana title, both of these won twice. While at Juventus, he proved himself to be one of the most exciting and encouraging young players around, and due to his achievements at Juventus, he was awarded the Golden Boy award in 2013, after which he was awarded the Bravo Award in 2014. Furthermore, he was named amongst the best players in the world and appeared on the ten-player list of most promising young players in Europe. Further honours during his so far short career, were being included in the UEFA Team of the Year and the FIFA FIFAPro World XI, both in 2015. These recognitions were bestowed on him after he assisted Juventus in reaching the UEFA Champions League Final in 2015. Pogba left his first club, Manchester United, on a free transfer only to return to the same club in 2016 for a transfer fee of €105 million (£89.3 million), which, at that point, was a world record transfer fee paid for a player.

Born on 2 May 1975, David Robert Joseph Beckham (Beckham), a former English football player, is one of the most famous football players to have ever played the game. He has played for a number of the biggest and well-known football clubs around the world. These include Manchester United, Real Madrid, Milan, LA Galaxy and Paris Saint-Germain. Beckham also had an illustrious international career with the England international team for which he, until Wayne Rooney overtook him, had the English record for most caps for an outfield player. He was the first English player to win the premier league title (or its equivalent) in four different countries: England, Spain, the United States and

France. He finally hung up his boots in May 2013 after a most successful 20- year career in which he won 19 major trophies with the teams that he had played for (MLS Soccer, 2013) (Guardian, 2013).

Well known for his variety of skills and exceptional talent with regards to passing, crossing and free-kick ability as a right winger, Beckham just missed receiving the Ballon d’Or, the most recognised award a professional football player could receive. He was placed as runner up and was also twice named in second place for FIFA World Player of the Year. In 2004 he was named by Pele as one of the world’s best living football players in the FIFA 100 list of such players (Taylor, 2013) (BBC, 2004) (ESPN, 2013). Beckham was admitted to the English Football Hall of Fame in 2008 and as a global ambassador for football, he is considered as a British cultural icon (Reavis, 2014).

Having joined Manchester United as a trainee on 8 July 1991 (h2g2, 2003), Beckham's professional club career began with Manchester United where he made his first appearance for the first team in 1992 at the young age of 17 (Biography, 2017). At Manchester United, he won six Premier League titles, two FA Cup trophies, and the UEFA Champions League in 1999, the year in which Manchester United managed to obtain the so-called treble (winning the three major titles of the Premier League, the FA Cup and the UEFA Champions League, all in one season (Biography, 2017). After leaving the club in which he had grown up, Beckham then moved to another football giant, Real Madrid, where he spent four seasons (BBC Sports, 2003), winning the Spanish league, La Liga championship in his last season with Real Madrid (BBC Sports, 2007). In July 2007 Beckham joined USA Major League Soccer side LA Galaxy on a five-year contract (Bandini, 2007). As a Galaxy player, he was often referred to as the face of soccer in the USA. During his time with LA Galaxy, he spent two loan spells with the Italian club Milan. He was the first British football player to have played 100 UEFA Champions League matches.

As an international footballer, Beckham played for England for the first time on 1 September 1996 at the age of 21. He was captain for six years and played for his country 58 times (BBC Sports, 2000). He has regularly been ranked as one of the highest earning players in football, and in 2013 reached the summit

2 when he was named as the highest paid player in the world, earning over $50 million in the previous year (Settimi, 2013).

From a comparison of the two football players discussed above, it would be difficult to argue against the fact that during his peak at Manchester United, Beckham was potentially amongst the most “valuable” players in the world. It is even possible to argue that, based on the accolades bestowed on each player and their relevant successes, that in a comparison between their two statements of financial positions the value of the balance sheet of David Beckham should be significantly higher than that of Paul Pogba.

However, the statement in the preceding paragraph is in reality not true. Current accounting standards, as well as those of the Union of European Football Associations (UEFA) (UEFA, 2015), do not allow for the costs incurred in developing young players to be capitalised and reflected on the statement of financial positions. According to current accounting requirements, these costs are to be expensed (Goshunova & Kulikova, 2014).

In current accounting practice, when accounting for an employee (football player) cost, the accounting requirement is to expense these costs. It could further be argued that employees (football players) are the product that is being used to create revenue for the football clubs and that the development costs of such players should, therefore, be recognised, similar to other product intangible assets.

According to Robertson (2009), it is noted that there is an endeavour to recognise the human capital of an entity in financial terms, and that these resources should be recognised as an asset and reflected on the statement of financial position. Robertson asserts that, historically, companies have shown interest in applying a value to their employees’ expertise and income- generating potential. Unfortunately, the idea has not been successful due to the complexity of recognising and measuring such resources. Service providers such as marketing companies, which rely on the skills and expertise of employees, find this concept of recognising human capital particularly relevant (Robertson, 2009).

A similar concept to consider is Human Resource Accounting (HRA) (Bullen & Eyler, 2010), which relates to the recognition of a company’s employees, including management, as human capital that provides future benefits. In the HRA proposed approach, costs associated with human resources are recognised as assets on the statement of financial position. This is opposite to the current accounting approach which recognises costs related to a company’s human resources as expenses on the statement of comprehensive income that would ultimately lower the financial performance. Although the start and early evolution of HRA occurred mainly in the USA, interest and input into developments in this area have been noticeable in a number of other countries around the world (Bullen & Eyler, 2010). As time has passed, many countries have realised the need for a form of HRA and the importance thereof and have investigated ways in which this could be achieved.

One final matter that will be addressed briefly in this research is that should the status quo remain the same with regard to the accounting for human capital and in particular, football players, what should then possibly be disclosed in the human capital section of the integrated report and how should it be valued. The author did not consider there to be any particular valuation issues with regards to football players as there is an active market in which they are traded.

1.2 Research problem

From the above, the problem that has arisen is that the financial statements of a football club currently do not accurately reflect the employees or products that they “own”. The value of the football players is not captured in the financial statements of the clubs. This, in turn, results in the value of football players not being captured in the financial reporting of football clubs. The resulting question is whether the cost of developing these employees or products should be allowed to be capitalised or alternatively, whether the football players should be valued to reflect their fair value in the financial statements. A possible need exists for a change in financial reporting standards in order for human assets to be recognised in the statement of financial position in order to capture their value in the financial statements of football clubs.

Currently, International Financial Reporting Standards (IFRS), specifically IAS 38 – Intangible Assets, speak to the non-capitalisation of internally generated intangible assets during the research phase and that the cost of internally developed assets during the research phase should be expensed and that, like the football industry, can only recognise the player registrations as an asset. Additionally, IAS 19 – Employee Benefits, requires all short-term employee benefits to be recognised as an expense unless allowed by and other standard to be included in the cost of an asset. There is no provision in IAS 19 to capitalise short-term employee benefits as a separate asset. This accounting is viewed as being potentially outdated (Goshunova & Kulikova, 2014). Internally generated intangible assets that arise during the development phase that relate to an internal project shall be recognised only if certain conditions are met. However, internally generated brands, mastheads, customer lists and similar items, for example football players, cannot be recognised as an intangible asset as these cannot be distinguished from the costs incurred in developing the business as a whole (IASB, 2018). If the research and development phase cannot be separated, costs incurred should be expensed in accordance with the research phase guidance embedded in IAS 38. Robertson (2009) refers to this in his publication and documents that there is a definite interest by organisations to recognise human capital on the statement of financial position. However, the problem is, how these “assets” are valued. It would appear that football players are valued with less complexity.

A further publication by Goshunova and Kulikova (2014) on this matter states that current financial accounting with regards to the purchasing (or transferring) of professional football players’ registrations is well established and used in the practical management of sports organisations. However, accounting for the costs of internally developed young players has not been addressed fully. As a result, a significant portion of possible value created is not adequately taken into account in the accounting information and financial reporting of a football club.

From the above, the research problem could be summarised as being “How does a football club capture the value of all football players in their financial statements”? Alternatives to be considered are whether the cost of developing

such players be capitalised and once capitalised, should the player’s value subsequently be recognised at fair value. In light of these problems, what disclosure would be required to capture the value of football players accurately in the financial statements?

1.3 Research objective

The objective of this limited scope dissertation is to assess the appropriateness of capturing the value of football players in financial reporting. Currently, IFRS and in particular IAS 38, does not allow for the capitalisation of internally generated intangible assets and development costs can only be capitalised if certain conditions are met. This results in all internally generated intangible assets and so-called human capital to be expensed.

The limited scope dissertation also identifies an alternative solution if capitalisation is not accepted. This will be achieved by addressing the possibility of an alternative accounting model that would allow for such costs to be capitalised and how the value of football players can be captured in financial reporting.

1.4 Research methodology

This limited scope dissertation is conducted within both the interpretative paradigm as well as the critical paradigm as it aims to interpret how football players are currently being accounting for in accordance with IFRS. An alternative method of accounting for such players is then proposed. Wehyuni (2012) explains that interpretivism speaks to what is referred to as constructivism. Interpretivists are of the view that reality is constructed by social actors and people’s view of these actors. They believe that people with their own different backgrounds, assumptions and experiences contribute to the ongoing construction of reality existing in their broader social context through social interaction. They prefer to work with qualitative data which provides rich descriptions of social constructs. In this study interpretation is used by unpacking what the current accounting treatment is with regards to football players with reference to the financial reporting standards and accounting policies currently applied by football clubs.

Within the critical paradigm, the research fits into reform-oriented research which is research that intensively evaluates the appropriateness of existing rules and which recommends changes to any rules found wanting (Hutchinson & Duncan, 2012).

As there is limited literature available that gives guidance for the composition of strictly theoretical or conceptual accounting research papers (van Aardt van der Spuy, 2015), the author has made use of the research methodology for theoretical papers written by Hutchinson and Duncan (2012). The legal environment as well as the accounting world often come across similar problems from a theoretical standpoint. On the one side, the legal professionals observe how legislation in a particular country is currently applied or how it is interpreted or read by judges and advocates. On the other hand, accounting students observe the development and amendment of accounting principles and how those who prepare financial statements interpret and apply the rules or principles of the selected accounting framework or accounting standard. As part of a repetitious process, both legal and accounting academics seek to identify issues or concerns in the current use or interpretation of legislation, aiming to provide useful criticism and valuable recommendations for improvements to such legislation by means of a relevant collaborative process.

It is therefore relevant to apply Hutchinson and Duncan’s (2012) theoretical research methodology. They explain conceptual research as:

Research which provides a systematic exposition of the rules governing a particular legal category, analyses the relationships between rules, explains areas of difficulty and, perhaps, predicts future developments (Hutchinson & Duncan, 2012).

Furthermore, this limited scope dissertation follows a qualitative, doctrinal approach in that it seeks to interpret the current financial reporting framework and current accounting practice in order to identify any gaps in these. Should a gap be identified, recommendations are made for improvements to capture the value of football players in the financial statements. Doctrinal research is concerned with legal prepositions and doctrines. The sources of data are financial reporting standards, academic journals and articles as well as reviewing the policies in financial statements of football clubs to confirm the

practice applied. Doctrinal research, also called traditional research, is not concerned with people but with documents (Hutchinson & Duncan, 2012).

This limited scope dissertation thus applies a qualitative, doctrinal approach by means of a purely theoretical and documentary analysis which is complemented and accompanied by relevant discussions and logical arguments (van Aardt van der Spuy, 2015).

1.5 Motivation

The author’s motivation for compiling this limited scope dissertation was to suggest an alternative to the accounting treatment of football players and to bring the value of internally developed players compared to those players who are bought in line in the financial statements and, in particular, the statement of financial position of football clubs.

1.6 Ethical considerations

The risk of overstepping the ethical boundary in this limited scope dissertation is low. All information and documents that are being used or made reference to, are available to the public on a public platform. The financial statements that are referred to have also been extracted from the relevant football clubs’ websites which are open to the public.

Further reducing the ethical risk is the fact that no interviews have been conducted and no personal information is being used or referred to in this document.

1.7 Limitation

Possible limitations in relation to this document are that the discussions relate only to accounting for football players and not any other sports person or entertainer. Furthermore, this limited scope dissertation is based on current literature that is available to the public.

1.8 Structure of limited scope dissertation

1.8.1 Chapter 2 – Literature review

This chapter examines what other academics and literature are proposing on this matter and what other views there are in relation to capitalising human assets or internally developed skills and talent.

1.8.2 Chapter 3 – Historical and current accounting policies and guidance

This chapter discusses the current accounting treatment in relation to the accounting for development costs and the capitalisation of such costs by reference to the financial reporting standards.

Furthermore, the author discusses how football clubs used to account and how they are currently accounting for both internally developed players as well as players that are purchased from other clubs.

1.8.3 Chapter 4 – Alternative approach

This chapter focuses on the possibility of a new or different accounting model or one that would allow for the capitalisation for human development costs.

Lastly, the question is posed as to should the status quo remain the same and development costs of players are not capitalised, what disclosure could be included in the Integrated Report in order to capture the value of football players in the financial information.

1.8.4 Chapter 5 – Conclusion

In the final chapter, the author will summarise the findings from the other chapters and conclude on what is believed to be the most appropriate accounting treatment for football players and the most appropriate method to capture the value of football players in financial reporting.

CHAPTER 2 – LITERATURE REVIEW 2.1 Introduction

It is documented that in current times, professional sports have become an independent economic industry. In an analysis of the income structures of European football clubs conducted by UEFA, it is identified that more than 90% of the clubs’ income is from the main sporting activity of that club (Goshunova & Kulikova, 2014).

The respective successes of a sports club are primarily dependant on the composition of the players within the club that form the team. Without these highly skilled and talented football players in a football club, the club has very little chance of attracting a large number of supporters or spectators, and furthermore, little chance of attracting potential investors (Goshunova & Kulikova, 2014).

It is due to this reason that football clubs invest significantly in the acquisition of these highly skilled and talented football players, with the aim of improving the quality of the football played at the club, which, in turn, promotes growth and draws investment to the club (Goshunova & Kulikova, 2014).

This chapter reviews the literature on human capital accounting and the capitalisation of human development costs. The chapter also addresses what is being proposed with regards to how such costs should be accounted for in financial reporting.

2.2 A call for Human Resource Accounting (HRA)

Bullen and Eyler (2010) note that HRA involves the capitalising of human resource expenditures and recognising such expenditure as an asset as opposed to the traditional IFRS accounting where such costs are expensed, which results in reduced profits. The purpose of HRA is to account for management and employees as human capital in the view that they will provide future benefits to the entity (Bullen & Eyler, 2010).

Kalpana and Gopinath (2018) document that people are one of the most important assets of an entity. Where there is a team of loyal, motivated and driven employees, it could result in the conversion of a poor performing

10 organisation into a good performing organisation. Conversely, poor or disruptive employees could lead to the downfall of an entity. Until around 1965, the accounting professionals had not paid attention to the obvious importance of people within an organisation. Nowadays there appears to be a growing interest in HRA. The American Accounting Society Committee on Human Resource Accounting (Kalpana & Gopinath, 2018) defines it as follows:

Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties.

In other words, HRA is the process of matching costs and revenues to communicate relevant information to its stakeholders (Kalpana & Gopinath, 2018). In his paper, Arkan (2016) proposes that there is a widely accepted view that human resources are an important factor in the success or failure of an organisation. HRA assists management in providing policies for human resources and specifically, where it is necessary to identify, measure and disclose information about the people within an organisation (Arkan, 2016).

Kalpana and Gopinath (2018), also submit that HRA is the platform of a number of research studies that have been conducted in the accounting fraternity. A human resource is an asset whose value is appreciated in the period in which the individual provides a service to an entity. Until recently, entities have done little to assign a value to human resources in their accounting records. It is noted by Kalpana & Gopinath (2018) that behavioural scientists have started the process of developing an appropriate methodology of measuring the value of human resources. Furthermore, it has been expressed that the traditional approach to accounting for human resources has been to charge these costs against revenue as they do not create an asset to the entity. Currently, there is a change in the thought process relating to such accounting, which is to capitalise such expenditure as an asset due to the fact that economic benefits are generated by individuals over a long period of time (Kalpana & Gopinath, 2018).

Arkan (2016) further asserts that the concept that human beings are an asset to an entity is a historic phenomenon and dates back to labour theory or value where pioneering economists argued for a firm value creation via labour.

Bullen & Eyler (2010) document that, other than in financial reporting, HRA may be useful as a tool to assist management in making managerial decisions. Unlike external financial reporting, internal reporting used by management is not required to adhere to any accounting standards or framework. HRA used in the internal reporting process is a useful mechanism that can be employed by management to assess their investment in a particular project or person. By placing a value on human capital, it aids management in regarding such human capital as an investment and not simply as a cost. It will thus assist in focusing management on the human side of the organisation and they will more likely see the value someone has for the organisation. For example, where retrenchments are needed to be made: if management uses HRA measures, it would have a much clearer and better idea of the underperforming human capital and the correct decisions could be made (Bullen & Eyler, 2010).

Arkan (2016) posits that the concept that is at the heart of HRA is that people in an organisation represent a certain value that is comparable to other resources within the same organisation. HRA refers to the accounting for people as human assets which could be used as a tool in order to measure human resources as well as a management tool (Arkan, 2016).

Bullen & Eyler (2010) further discuss the possible HRA measurement models that could be used in valuing HRA. HRA could potentially be valued in terms of human resource costs or in terms of human resource value. There are two significant categories to human resource costs: acquisition costs and learning costs. All costs incurred in recruiting, hiring and placement of employees are perceived as acquisition costs, while learning costs are costs such as formal training costs, orientation costs and on-the-job training costs. In HRA, these costs are accounted for as an asset with future economic benefits as opposed to an expense (Bullen & Eyler, 2010).

In their publication, Bullen & Eyler (2010) document that the interest in HRA reporting and other similar types of reporting has grown in a number of countries around the world. It was recorded that 66 percent of the 250 biggest companies in the world issue sustainability reports alongside their annual financial reporting as a means to capture the full value of the entity. Part of the global sustainability reporting standards, entities are required to disclose

information relating to their workforce and include information regarding their workforce that reflects the future performance and profitability potential (Bullen & Eyler, 2010).

As noted by Bullen & Eyler (2010) and Morrow (1996 and 1997), the idea could also be considered that football players represent human assets with a significant value. Capturing the value of such human assets could provide useful information.

In their journal article, Enyi and Akindehinde (2014) discuss the potential effects HRA will have on the decision-making process within an organisation as well as its impact on the business valuation. The content and the background provided in this journal article is similar to those mentioned above. It is concluded by Enyi and Akindehinde (2014) that there is a need to value human resources and account for these as intangible assets in the financial statements of an entity. It is further theorised that HRA is the only path towards complete business information goal congruence (Enyi & Akindehinde, 2014).

2.3 Measurement of HRA

According to Bullen and Eyler (2010) the United States has moved towards adopting a more complex measurement approach as opposed to the traditional historical cost basis of accounting used to measure assets. Furthermore, in IFRS we also see the use of fair value in some standards that could be used as an alternative accounting measurement basis for human capital (Bullen & Eyler, 2010).

It is documented, as a potential measure of human capital, that the expected cash flow approach, in many instances, is a more reliable measurement basis than what has traditionally been applied and the accountants should use this approach in the absence of contractual cash flows when measuring and reporting on assets and liabilities. Furthermore, it is noted that there has been a strong move in IFRS to account for progressively more assets and liabilities at fair value. This attempts to reflect the present value of future cash flows relating to such assets and liabilities (Bullen & Eyler, 2010).

Accountants have become more accustomed to applying complicated measurement approaches, some of which are alike to the approaches taken in

13 developing HRA value measures. It seems fair to assume that uncommon HRA measures may be better received in future financial reports. Additionally, there has been an increased focus in accounting for intangible assets in financial reporting by both the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). As human resources are a primary component of intangible assets, the stage is being set for a renewed interest in HRA from a financial accounting perspective (Bullen & Eyler, 2010).

The need for potential HRA and the valuation thereof originates many years ago. Flamholtz (1999) submits that human resource value is obtained from general economic value theory and therefore human capital is able to be valued as it is able to provide future services to the entity. An individual’s value to an entity can be defined as the present value of future services provided by an individual over the period during which the individual is expected to provide the services to the entity. This model is known as the Stochastic Rewards Valuation Model. This model is a four-step process that starts with defining the various positions an individual many occupy within the entity. The next step is to determine the value of each position: the service position value, which can be calculated either by using a number of methods such as the price-quantity method or the income method. The individual’s service period within the entity and the individual’s probability of moving position or occupying the different positions available, obtained from archived data, are determined. Following this, the expected cash flows that the individual generates are discounted in order to determine their present value.

According to Flamholtz (1999) there is a dual aspect to an individual’s values. The first is the individual’s “expected conditional value”, which is the amount the entity could potentially realise from the individual’s services should the individual stay in the employment of the entity throughout the period of the individual’s productive service life. Secondly, there is the individual’s “expected realisable value”, which is the amount actually expected to be derived, taking into account the individual’s likelihood of generating turnover (Flamholtz, 1999).

The International Accounting Standards Board (IASB) is primarily responsible for the issuing of the IFRS standards. IFRS does not currently have an accounting standard that recognises or requires HRA. However, it seems that

there is an indication of the possibility of a move towards a more flexible approach to accounting reporting and measurements. This is seen in IFRS standards such as IAS 38 and IFRS 3 – Business Combinations, which make provision for the recognition of goodwill. This indicates the possibility of allowing for the valuation of assets that are not typical tangible assets such as human resources. The valuation of goodwill often requires a complicated assessment of fair values, including annual reassessments to understand whether the fair values have become impaired. These rather difficult and demanding measurements of goodwill and other fair values are the same as the challenges documented historically related to the measurement of human resources, specifically when using the value approach to HRA. The shift towards fair value accounting noted in recent years thus indicates a more comprehensive approach to the measurement of both tangible and intangible assets. This might indicate the possibility of capturing HRA in future financial reporting as it would provide a clearer understanding as to a football clubs financial position (Bullen & Eyler, 2010).

2.4 Development costs in the football industry

In a publication by Kulikova and Goshunova (2014), it is submitted that professional sport has become its own independent economic industry. It is advanced that the success of a sports team is primarily dependent on the make- up of the team and the players within the team. Without popular, skilful players, a sports club has little potential of attracting a large number of spectators, possible investors, sponsors or others interested in doing business with the club (Goshunova & Kulikova, 2014). It is arguably a truism in the industry that football clubs make significant investments to acquire a specific player’s registration right on an annual basis. All this is done with the aim to attract other players, improve the quality of the sport in the club and in turn attract bigger investors.

Lozano and Gallego (2011) put forth that the main and central asset in a football club is a player’s transfer rights. However, these are only partially recognised as an asset in financial reporting. Internally generated player rights are not accounted for in the Statement of Financial Position. It is further noted that

although capitalised, the acquired player’s transfer fees are accounted for at historic cost. This results in a significant difference between the market value of a club when compared to its carrying value (Lozano & Gallego Carrasco, 2011).

In discussing the development of youth players by football clubs, Kulikova and Goshunova (2014) document how the accounting for youth players has impacted Germany. They posit that results in the Champions League and the World Cup in 2014 evidence that Germany was arguably one of the leading teams in world football. Much of this success is as a direct result of the German youth development system. Following the failure suffered by Germany at Euro 2000, the German Football Association conducted a detailed investigation into the state of football in the country and concluded that the most successful German Clubs are those where the best German football schools were located. Due to the impossibility of having only a few schools fulfil the needs of all football clubs and the country, the German Football Association developed a programme to develop youth players all across the country that could feed into all the football teams, even the weaker teams. Over a period of two years, 390 training centres were established around the country. Each school was able to feed into 70 clubs near to the school. On an annual basis, the German Football Association would spend approximately 10 million Euros on this program. It is further reported that the 18 top German football clubs spent approximately 80 million Euros during the 2012/2013 session on various youth development initiatives. Clubs are reported to have spent 820 million Euros on youth development since 2001 (Goshunova & Kulikova, 2014).

It is clear from the above that the investment in youth development yielded a significantly high return for German football. The problem, however, is that current international accounting principles and practices do not allow for these costs to be reflected as an investment in the financial reporting of these clubs. In accordance with the UEFA Club and Licensing and Financial Fair Play Regulations (UEFA, 2015), with specific reference to the accounting for player registrations, regardless of the fact that football clubs benefit from using ingrown players, when it comes to the accounting for development and education of in- house developed players, such expenditure cannot be reflected on the

Statement of Financial Position (Goshunova & Kulikova, 2014). Only the costs of acquiring a player’s registration are able to be capitalised.

Lozano and Gallego (2011) cite cases where there was a remarkable shortfall in accounting for youth players. Players such as Xavi Hernandez, Iniesta, Casillas, Puyol, Pique, Busquets, Navas, Llorente, all players in the Spanish National Team representing Spain in both World Cups and European Cup Championships with great success, have no value on the Statement of Financial Position of their respective clubs of origin as a result of them being internally developed players. Another example is FIFA Golden Ball winner Leonel Messi. No transfer fees were paid for these players and therefore there is no value taken into account for them in financial reporting, except for a possible increase in salary expenses (Lozano & Gallego Carrasco, 2011).

Goshunova and Kulikova (2014) further document that football clubs in countries such as the United Kingdom, Italy and Spain have all indicated in their accounting policies that it is impossible to capitalise the costs associated with the development, and specifically the costs associated with the education of youth players. At the time Goshunova and Kulikova published their paper, IAS 38, backed this impossibility as it prohibited the capitalisation of internally generated intangible assets (Goshunova & Kulikova, 2014). This has subsequently been changed and will be discussed in a later chapter in this paper.

Goshunova and Kulikova (2014), refer to a publication by Brommer (2011), where they analyse this accounting dualism, identifying that the value of a purchased player’s registration is able to be measured reliably by reference to the transfer fees paid for the player’s contract, while the value of internally generated youth registrations is not able to be assessed accurately (Goshunova & Kulikova, 2014).

Lozano and Gallego (2011) affirm that this is corroborated by research by Amir and Livne (2005). They purport that, based on 58 football clubs whose shares are publically traded in the United Kingdom and where the financial statements are available to the public, that there was a direct correlation between the market value of the club and the investment in player contracts. It is, therefore,

the consensus reached in these articles, that not being able to capitalise internally generated players is fundamentally incorrect. Experiences throughout the football world have indicated that a well-developed academy is the most effective method of growing a club and ensuring the club’s stability which, in turn, is for the good of the game as a whole. Another important point to note is that having a youth system within a football club is compulsory for football clubs. If this has not been adhered to, the club’s licence could be cancelled by UEFA, restricting the club from participating in certain competitions. As a result, the development of youth players could enhance future economic benefits for clubs (Lozano & Gallego Carrasco, 2011).

Furthermore, Goshunova and Kulikova (2014) indicate in a publication by Oprean and Oprisor (2013) that they agree that the youth development system in a club is very important as it ensures the continuous flow of players through the club to senior level. It is also highlighted by Oprean and Oprisor (2013) that youth players developed in the club cannot be capitalised as an asset because they do not meet the criteria set out in IAS 38. The reason is that clubs are not in a position to control the asset due to the inability to enter into professional contracts with underage players (Goshunova & Kulikova, 2014).

It is concluded by Goshunova and Kulikova (2014) that youth development costs meet the recognition criteria of an asset since they result from long-term preparation, they are able to bring further economic benefits to the club and are controlled by the club by means of their employment contracts.

Despite the limitation within IAS 38 in capitalising internally generated intangible assets, modern researchers have alluded to the negative effects that ignoring youth football players’ development costs has on financial reporting. The measurement of such development costs and the development of a reliable costing system, have not been discussed in the literature referenced in this section.

2.5 Intellectual capital as an intangible asset

Anghel (2008) published an article discussing intellectual capital and intangible assets. In this article it is noted that intellectual capital comprises the knowledge available in a company. Furthermore, such intellectual capital, regarded as an

18 intangible asset, along with tangible assets, determine the market value of a business. Furthermore, it is suggested that intangible resources are defined as factors other than financial or physical assets.

Anghel (2008, page 76 to 77) notes that the idea of intellectual capital was developed in the 1990s. It was during this time that people recognised that there are two issues regarding the way in which management and the valuation of an entity are only effected from one perspective. These are “what you want to manage you have to measure” and the other “what you can measure you could manage”. Intellectual capital marries these two matters (Anghel, 2008).

Anghel (2008) cites that the intellectual capital of an entity is generated by its human capital and by its structural capital. It is further mentioned that human capital is the knowledge within the minds of employees that fulfils the purpose of the entity. Good human capital management could, therefore, create value for an entity. Anghel (2008) asserts that with regards to business valuations, it is important to take both the value of tangible and intangible assets into account.

The ACCA head of corporate reporting, Richard Martin, discusses in an article (Martin, n.d.), that the gap between the market value of a company and its book value is becoming progressively wider. He theorises that an entity’s book value only accounts for approximately 15 percent of its market capitalisation. The gap, as noted by Martin, is intangible assets that are not recognised under current accounting practices. The gap, referred to as the intangibles gap by Martin, corresponds with the current trend of many economies to move towards investment in intangible items such as brands, human capital and software, as opposed to the traditional investment into property, plant and equipment or inventory (Martin, n.d.).

Martin includes two examples in his article which illustrate the current accounting practice. The first is Samsung, which, in 2016, incurred significant research and development costs of which only 5 percent was recognised as an asset. The other is Novartis which spent 9 billion dollars on internal research and development of which none was capitalised (Martin, n.d.).

A final publication reviewed by the author is one that does not directly relate to the capitalisation of human capital but rather discusses the current non- recognition of internally generated brands. Although not the same as human capital, the principles discussed in the publication are relevant to this limited scope dissertation.

Van Aardt van der Spuy (2015) makes reference in his article to the fact that, what is important in a brand is not disclosed to users of financial statements. The article further addresses the need and importance of disclosing information about unrecognised brands and not only those that have been recognised.

Van Aardt van der Spuy (2015) mentions that it is increasingly important for companies to market their brands and to grow their brand portfolios in order to sustain financial performance. The managing of such intangible assets has become one of the most important commercial tools used in gaining market share. Brands and brand names are currently regarded as possibly being the most important assets that a company has and therefore information regarding such brands is important when valuing an entity. It is thus concluded by Van

Aardt van der Spuy (2015) that brands are the lifeline of many businesses.

Van Aardt van der Spuy (2015) does not address the possibility of recognising brands in the financial statements of an entity but rather recommends certain mandatory disclosures with regards to unrecognised brands. The recommended disclosures would be in the form of mandatory note disclosure about unrecognised brands, disclosure of the operating segment in which the unrecognised brands are used and, should management wish to dispose of any unrecognised brands, then such intention should be disclosed in a manner as required by IFRS 5 – Non-current Assets Held for Sale (van Aardt van der Spuy, 2015). This potential for additional disclosure as addressed by Van Aardt van der Spuy is also applicable to the potential disclosure with regards to human resources which are discussed in Chapter 4.

2.6 Reporting on social aspects

According to Morrow (2013) the IFRS framework states that in order for financial statements to be useful, they need to be relevant and they must further represent the information presented within them faithfully. It is also noted that

20 while the accounting principles provide a politically unbiased set of social technologies with which to manage the activities of a business, the application of these technologies is nonetheless political and is generated by the institutional and cultural setting in which the regulation takes place. Financial reporting, according to Morrow (2013), is viewed by many as something that is not or cannot simply be a technical process. Financial reporting has clear political and social dimensions with regards to the rules and guidance provided by accounting standards as well as to how people respond to the figures in the financial statements. It is therefore noted, that in order to develop a wider understanding of accounting and its role in society, it is necessary consider and understand accounting from a social perspective, considering the connection there is between financial reporting and broader social structures (Morrow, 2013).

Morrow (2013) postulates that football takes place in a very specific institutional, social and political environment. Furthermore, in Europe as well as around the world, football is highly regulated by bodies such as UEFA and FIFA as well as at national level, regulating the rules of the game around the world. There are a number of factors which differentiate football clubs from normal companies, such as, the nature of the relationship among stakeholders and the football club, customer or supporter loyalty, the high level of stakeholder interaction with the club and the relationship between the club and the communities in which they operate. Taking the above into account, the interest in accounting as being both a social and institutional practice rather than being purely technical, is of significant relevance to football clubs (Morrow, 2013).

Morrow (2013) also proposes that accounting for social and institutional practices emphasises the connection between what we measure, how we measure it and why we measure it and the varying approaches in managing organisations and societies. Focusing on social and institutional practices in accounting further places focus on real practical contributions rather than the traditional scientific credentials (Morrow, 2013).

In order to address the financial situation impacting many European football clubs, UEFA introduced what is referred to as the Financial Fair Play 21

Regulations (FFP). The aim of the FFP is to protect the image and smooth functionality of the UEFA club competition. Clubs who wish to take part in European competitions are encouraged by means of the FFP to implement a more economical approach to their activities (Morrow, 2013).

The aim of the FFP in UEFA club competitions is to achieve, with a specific focus on (Morrow, 2013):

 Increasing a club’s transparency and credibility by improving its economic and financial capabilities;  Placing importance on the need for the club to protect its creditors. By doing this it is ensured that players, social and tax authorities and other creditors are paid timeously;  Implementing a more disciplined and rational approach to the way a club manages is finances;  Encouraging a club to operate on the basis of its own revenue;  Encouraging responsible spending for the benefit of football in the long term; and  Ensuring that European football is sustainable and viable.

Morrow (2013) notes that although the FFP encourages financial rationality, it is important to note that the FFP is evidence of the specific sporting and social context in which football exists. It further focuses on accounting as being more than a technical practice and also includes social and institutional practices. The FFP was largely designed to ensure that football continues as a going concern and to safeguard the sustainability of international competition (Morrow, 2013).

From the above discussion, it is clear the there is a need for modified financial information in the football environment. The information provided to users in general purpose financial statements, focus on investors and other finance providers and do not fit the needs of UEFA in terms of the social and sporting purpose. Contradictory to the traditional financial statements which emphasises financial performance at club level, aimed at a narrow group of financially motivated users, the FFP is aimed at placing focus on social and sporting public policy objectives at the level of the competition. In other words, the FFP can be

22 seen as contributing to the moulding of social reality with social benefits. UEFA has in essence used the public interest in football as its justification for the FFP. Lastly, the FFP has a social and political consequence with regards to whether or not a club will receive its licence to participate in UEFA club competition. For a football club, the FFP and the respective accounting process provide an opportunity for the club to legitimise itself and to receive resources from the football environment as it will be participating in UEFA’s very lucrative club competitions (Morrow, 2013).

Morrow (2013) puts forward that in recent times, football clubs have shown evidence of wanting to provide more useful information to its users. This has been done by providing more qualitative disclosure in their annual reports or by providing the more relevant information on their websites, providing a holistic picture of the club as opposed to a purely financial one (Morrow, 2013).

Morrow (2013) states that although the need for disclosure of more qualitative and relevant information is encouraged and welcomed, it does highlight a number of issues. The first of these is that disclosure of social matters is not as standardised as that of traditional financial disclosures and as a result, there is a risk that management captures in the disclosure what they would like in order to promote the club in the public domain. It is also noted that increased narrative disclosure may be motivated by legitimacy concerns. It is suggested that the increase in social disclosures is a response to questions about an entity’s legitimacy. This includes concerns coming from the commercialisation of football such as a player’s wage levels, but also needs to address ethical and social concerns: for example, the clubs’ environmental impact from infrastructure development, racism and hooliganism. Hence, even though a wider picture is provided, it still remains a particularly one-sided picture (Morrow, 2013).

Over the last number of years, there has been an increase in interest by accountants looking to widen the scope of the accounts to something other than being exclusively economic and financial in content, looking for a mechanism in which an entity can be held responsible for a wider range of activities and to a wider range of actors (Morrow, 2013). These wider focuses on accountability 23

are quite significant in terms of FFP as they are aimed at the understanding of the nature of football, its football clubs and football competitions. It is therefore perceived that FFP is the appropriate basis to start from with regards to the best way in which to provide an alternative understanding of a club’s performance and contributions both financial and socially. In the football environment, it could be argued that the health of the relationships a club has with its stakeholders such as supporters, employees and the greater community in which it finds itself, is as important as financial performance and cash flows. A wider conception of reporting will likely enable clubs to present a broader and more positive picture of their role in society than what they are currently providing (Morrow, 2013).

2.7 Conclusion

There have been a number of contributions made by various writers supporting and justifying the need for HRA. Wider research has also been done on human capital, intellectual capital and the management of an entity in relation to these.

The first section of this chapter documents the call and need for HRA or accounting for intellectual capital and theorises that it will have implications from the very beginning on providing measures that can stand alongside other investments opportunities for the entity’s resources. Furthermore, HRA can demonstrate the long-term benefits of investing in such human capital. Authors such as Bullen and Eyler (2010) and Kalpana and Gopinath (2018), in explaining what is meant by HRA, posit that there is indeed value in human capital and that the traditional accounting models are not taking such value into account.

Subsequent to the latter discussion, the chapter then focuses on the different measurement proposals documented for HRA. In recent times there has been a clear move towards fair value accounting in both US GAAP and IFRS standards. This move indicates a more enhanced approach to the measurement of tangible and intangible assets. This move could also possibly provide a platform to recognise and measure HRA in external financial reporting in times to come. The literature identifies that fair value could be a potential measure used in accounting for human capital.

It is further concluded in the literature that the costs of training and developing young football players in a particular youth academy meet the criteria of an asset:

 The abilities of the players are as a result of long-term preparation;  The players have the potential to generate future economic benefits in the form of income streams from playing football for the club; and  The player is controlled by the club through his employment contracts which ensure compliance with the principles of contractual stability, guaranteed by regulations set by UEFA.

As a consequence, investments into youth players represent an asset which is formed over the years in sports academies in the course of training and education, and which is capable of generating economic benefits as a part of club’s squad (Goshunova & Kulikova, 2014).

The final section deals with intellectual capital in the broader sense and the critical role that intellectual capital plays in an organisation and proposes that the value thereof is not always captured through traditional accounting. Thereafter, the value and need to report on the social aspects within football clubs are addressed.

From the documented research in this chapter, it is concluded that human capital within certain organisations should perhaps be capitalised. Possible further research on the topic of HRA could include measuring and valuing human capital or describing and explaining an entity’s success as a result of its human capital.

CHAPTER 3 – HISTORICAL AND CURRENT ACCOUNTING POLICIES AND GUIDANCE 3.1 Introduction

In this chapter, the author will document and discuss what the current accounting standards permit with regards to the recognition of internally generated intangible assets. The discussion will include an assessment of the elements that make up the definition of an intangible asset and how these apply to human capital. The chapter will cover both the IFRS guidance and principles and those stipulated by UEFA in the UEFA Club and Licensing and Financial Fair Play Regulations.

Nowadays, the financial accounting and reporting of acquired football player registrations are well developed. Yet, the accounting for costs incurred in developing youth football players has been sadly neglected. Thus, the author will examine the historical and current accounting practices with regards to football players at certain football clubs, by referring to accounting policies included in financial statements as well as certain publications that have been written on this topic.

3.2 Background to accounting for football players

Current practice with regards to the capitalisation of the costs incurred in acquiring player registration costs, resulting in some of these costs being reflected on the statement of financial position of the football club, has already been created. It has been documented by a report done by UEFA - “Club licensing benchmarking report on the financial year 2010”, that 60% of European football clubs consider acquired player registrations to be an asset and therefore recognise these as intangible assets in their accounting records (Goshunova & Kulikova, 2014).

The basic principle with regards to player registrations, according to Morrow (2005), is that football clubs acquire the rights to hold the registration of a player. Should another football club want to purchase that player during his existing contract, the club would usually be required to pay a transfer fee for the player’s registration. Should the player be at the end of his contract, then no transfer fee will be payable to transfer the player’s registration (Morrow, 2005).

In the United Kingdom, it has historically been common practice to account for acquired player registrations as an expense and reflecting these costs in profit or loss. The reason for this was that there was uncertainty as to whether the club had sufficient control over the future economic benefits relating to the player’s contract. The first football club to depart from this accounting practice was Tottenham Hotspur which, in its 1989 financial report, reflected the costs incurred in acquiring player registrations as an intangible asset on the then called “balance sheet”. By the mid-1990s, 18 British football clubs had adopted this accounting practice. The player registrations would be accounted for at cost, less impairment and accumulated amortisation. The amortisation would be accounted for over the period of the player’s contract (Goshunova & Kulikova, 2014).

In the 2003/04 transfer spend, English Premier League club Chelsea accounted for 45% of the entire league’s spend, an amount of GBP175 million. As mentioned earlier, historically, any transfer fees paid or received by a football club were included in profit or loss. Considering this, the spend by Chelsea would have a significant impact on the financial performance of the club as presented in the financial statements (Morrow, 2005).

The accounting for transfer fees, both historically and presently, is further confirmed by a publication by Rowbottom (2002). In this publication, it is explained that transfer fees are payments made by football clubs for the acquisition of a player’s registration rights. The accounting treatment depends on whether or not the payment for the player registration is accounted for as an asset or expense and whether or not the club has, through the player’s contract, sufficient control with regards to the revenue generating ability of the player. The historic policy on the accounting of the rights and the resultant reporting caused much controversy in the football industry (Morrow, 2005).

This controversial, albeit historical, accounting treatment was to account for these fees in profit or loss. The transaction was recognised as an operating or “exceptional” item in which the particular contract was signed. There was, therefore, no value placed on the player registrations. The policy to expense for these fees was referred to as an expense policy and the justification was due to 27 the uncertainty of future benefits received from the player due to possible injury or lack of form and the inability to control the player providing the football service as the player was allowed to leave the club to pursue employment elsewhere. The result of this policy was that there was a resulting increase in expenditure reported, meaning less retained earnings being carried forward to the statement of financial position and ceteris paribus a decrease in net assets (Morrow, 2005).

With the introduction of accounting standard FRS 10 – Intangible Assets and Goodwill in 1997, the accounting practice in accounting for player registrations completely changed, requiring all player registrations to be accounted for as an intangible asset and amortised over the period of the player’s contract. The same practice was adopted by Italian authorities which set standards and who also required the capitalisation of player registrations. According to the accounting policies of Italian football clubs such as Milan, Napoli, Roma and Juventus, which are required to prepare their financial statements in accordance with IFRS, purchased player registrations are accounted for as an intangible asset and amortised over the length of the player’s contract (Goshunova & Kulikova, 2014).

According to Goshunova and Kulikova (2014) at the time of their publication, Spain had not yet adopted IFRS as their reporting framework. However, there was a move to align their accounting principles to those being applied globally. It is further noted that there was not a significant distinction between Spanish local accounting reporting and IFRS and that the Spanish clubs - Barcelona and Real Madrid both had a policy of capitalising their acquired player registrations (Goshunova & Kulikova, 2014).

The conclusion submitted by Goshunova and Kulikova (2014) on this section of their publication, was that there is evidence of global experience with regards to the capitalisation of player registrations that are acquired. However, the matter that had not been adequately addressed was the accounting for costs of internally developed youth players. As a result of this neglect, there are a significant number of assets that are not reflected in the accounting records of football clubs (Goshunova & Kulikova, 2014). 28

Morrow theorises that an alternative recognition approach takes on the characteristics of an HRA approach where the costs incurred in purchasing and generating player registrations are recognised as an asset. The first is a capitalisation policy where player registration rights acquired are accounted for as intangible assets and amortised over the contract period. This has been discussed in detail above. According to this policy, no asset value is allocated to internally generated player registrations held by the club. The other valuation approach uses attributes a value to all player registrations. Each player registration is valued by management and accounted for as an asset in the financial records. The transfer fees paid are capitalised and included in a player registration account. Any movement in the carrying value of both internally generated and externally acquired player registration is accounted for in a revaluation reserve. Both these policies have resulted in an increase in assets recognised in the financial statements, resulting in an increase in net profit overall: ceteris paribus, there was an increase in net assets of the club. The following table demonstrates the policy choice elected by a sample of football clubs in 1995 (Morrow, 2005):

Recognition policy Number of clubs Capitalisation and amortisation policy. 8 Every player’s registration is recognised as a fixed asset. 5 Every player’s registration is recognised as a current asset. 2 Every player’s registration is recognised as a fixed asset and 1 transfer fees are written off. 16 Expense policies Accounted for as operating expenses. 44 Accounted for as exceptional expenses. 41 Written off with remaining debit. 1 86 Table 1 – Policy choices by football clubs

3.3 Accounting requirements for football clubs

Because a football club’s business model is relatively narrow and focused on a specific business activity, no guidance exists for football clubs with regards to financial statement presentation or practices, other than those determined by UEFA for clubs that take part in international competitions. Depending on the nature of the legal entity in which the football clubs reside, financial communication can differ from one football club to another. The different categories in which a club could find itself are as follows (Biancone & Solazzi, 2012):  Publically listed football clubs partaking in European competition;  Non-publically listed football clubs partaking in European competition;  Publically listed football clubs not partaking in European competition; and  Non-publically listed football clubs not partaking in European competition.

With regards to a regulatory point of view, publically traded companies are required to follow the IFRS accounting standards, similar to any other listed company. Furthermore, clubs that take part in European competitions are also required to apply the standards determined by the UEFA Club and Licensing and Financial Fair Play Regulations (FFP). Clubs that are not publically traded or do not take part in European competitions, are required to prepare their financial information based on the national law of the country in which they operate (Biancone & Solazzi, 2012).

Biancone and Solazzi (2012) refer to multi-annual rights to exploit the performance of football players. This is the link between the player and the club and can be considered as a typical intangible asset. Such exploitation rights are able to be purchased in one of three ways:

 By entering into a contract with a football player whose contract has expired with another club, making such a player a “free agent”;  By entering into a contract with a football player as a development youth player from another club; or  By entering into a transfer contract with another football club.

The accounting of the “purchased” football player differs from scenario to scenario. Under the first bullet point above, the amount paid would be expensed by the club. In the scenario set out in bullets two and three, these purchased exploitation rights are intangible by nature and would be recognised as such by the football club (Biancone & Solazzi, 2012).

The international accounting standards, (IFRS), are required to be mandatorily applied by a listed football club. Non-listed football clubs which operate on the world stage also have the option to use IFRS as its reporting framework. With the growing need for football clubs to attract investors, it has become ever more necessary for clubs to use a common accounting practice. Common accounting rules will allow investors comparability and will further allow them to allocate their resources appropriately (Biancone & Solazzi, 2012).

In an explanation of the reason and purpose of the FFP, Plumley (2019) advances that the financial behaviours and activities of football clubs competing in UEFA club competitions should be regulated (Plumley, 2019).

The two main objectives of the FFP are, firstly, there is the no overdue payables rule and secondly, the break-even rule. According to the break-even rule, there are principals which note that losses of a football club can be incurred to account for normal business transactions and transitions known as “acceptable losses”. Currently, the acceptable loss permitted is based on a three-year rolling average and has a cumulative total of EURO 30 million for the 3 seasons (Plumley, 2019).

As discussed in chapter 4, should the capitalisation of a football player’s costs be an acceptable accounting model and accounting for football players at fair value, this would significantly improve the statement of financial position, reduce the football club’s losses and in turn allowing it to invest in more expensive or rather, talented players. However, this does not take into account the reason, as mentioned above, for the FFP which was introduced in order to “level the playing field” amongst football clubs.

3.4 IFRS requirements for accounting for intangible assets

In order for a club to be able to recognise multi-annual rights to exploit the performance of football players as an asset, the criteria set out in IAS 38 need to be considered. These are, identifiability, control and the existence of future economic benefits. Should any of these not be present with regards to the acquired exploitation rights, the amount paid will be recognised as an expense in the year in which it is incurred (Biancone & Solazzi, 2012).

With regards to assessing the identifiability of an intangible asset, IFRS states that an intangible asset is identifiable if it is separable, capable of being separated or sold, leased or exchanged, either on its own or together with other assets. Furthermore, the intangible asset is identifiable if it arises from a contractual or other legal rights, regardless of whether or not such rights can be transferred or separated from the entity. Identifiability is the criterion that differentiates intangible assets from goodwill. Goodwill is defined as the amount paid for the purchase of future economic benefits generated by a group of intangible assets that are not separately identifiable (Biancone & Solazzi, 2012).

Control is assessed by the ability to obtain all the remaining future economic benefits associated with an asset and also the ability to restrict others from obtaining any economic benefits from such assets. Control usually takes place through legal rights guaranteed by law, for example, multi-annual rights to exploit the performance of a football player. In the absence of such a right, control is harder to prove. Regardless of this, legal protection is not a necessary requirement in order to prove control as it is considered that an entity can gain control of the future economic benefits associated with the asset through its experience in the market in which it operates (Biancone & Solazzi, 2012).

In a publication by Lloyd Austin (Austin, 2007), it is cited that expenditure incurred with the aim of generating future economic benefits is classified as assets. It is further acknowledged by him that internally generated intangible assets have caused recognition issues. He mentions that such assets are

32 usually generated over time and the accounting for these intangible assets has typically been ignored. As such, these are not recognised in the financial statements of an entity. The main reason for this is that there is a perceived idea that there is a disconnect between the cost of such an intangible asset and the future income that will be generated from the asset (Austin, 2007).

Austin (2007) notes that IAS 38 is the IFRS standard that provides the necessary guidance on accounting for intangible assets. He discusses the definition of an intangible asset and the meaning of identifiable and separable, similar to what is discussed above in the publication by Biancone and Solazzi, 2012. Austin further proposes that an intangible asset can be obtained by an entity in the following ways (IASB, 2018) (Austin, 2007):

 By acquiring the intangible asset separately;  By creating the intangible asset oneself, being an internally generated intangible asset;  By an exchange for another asset; and  As part of a business combination.

According to Austin, which is in line with the requirements of IAS 38, when an intangible asset is separately acquired, the requirement for the intangible asset to generate future economic benefits is likely to be satisfied. The reason is that an entity would only likely purchase an intangible asset with the view to its ability to generate economic benefits. Such an intangible asset would initially be recognised at cost on the statement of financial position (Austin, 2007).

Both IAS 38 and Austin state that the requirements to recognise an internally generated intangible asset are more difficult to prove or satisfy. IAS 38 separates the stages of an internally generated intangible asset into two stages: the research phase and the development phase. Research is defined as (IASB, 2018):

Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

The costs incurred during the research phase are considered to be too distant from the probability of generating future economic benefits and are therefore required to be expensed (Austin, 2007).

From the point when the costs incurred enter into the development phase, certain conditions need to be satisfied prior to capitalising these costs. These conditions, as per IAS 38, are (IASB, 2018):

 It is technically feasible to complete the intangible asset with the ability to either use or sell the asset;  The entity intends to complete the intangible asset for use or sale;  The entity will be able to use or sell the intangible asset;  The intangible asset is able to produce future benefits. If it is sold, the existence of a market must be established and if kept for own use, the asset’s usefulness must be demonstrated;  The entity has the technical, financial and other resources to complete the asset; and  The costs incurred during the development phase are able to be measured reliably.

The problem with this approach is that all costs incurred before the development phase are expensed and therefore, not all the costs incurred in generating the internal intangible asset are capitalised (Austin, 2007).

Up to this point in the discussion, it could be argued that human capital meets the requirements listed above required for the capitalisation of costs incurred during the development phase. However, IAS 38 specifically prohibits certain internally generated intangible assets from being recognised, even if these do meet the development phase criteria above. These prohibited intangible assets include (IASB, 2018):

 Internally generated brands and goodwill;  Master heads;  Publishing titles;  Customer lists; and  Other items that are similar in substance to these intangible assets.

As discussed by Austin, the reason for these intangible assets being prohibited from recognition is that they are regarded as not being separable, which refers to the fact that the costs incurred in developing these assets are not distinguishable from the costs incurred in developing the business as a whole. IAS 38 further refers to other intangible assets not being identifiable. These are the costs of continuous training or recruitment programmes, marketing, relocation, start-up, pre-opening and pre-operating costs (Austin, 2007).

The following table illustrates the current accounting practice compared to the true fair value of an entity (Austin, 2007):

Current Fair value accounting Intangible assets recorded and recognised CU 100 CU 100 Internally generated intangible assets - CU 500 Total assets CU 100 CU 600 Liabilities and equity CU 100 CU 600 Table 2 – Current accounting verses fair value picture Currently, under the guidance of IAS 38, human resources are not able to be capitalised and therefore are recognised as an expense in the accounting records of an entity.

3.5 UEFA accounting guidance

According to the UEFA Club and Licensing and Financial Fair Play Regulations (UEFA Regulations), each UEFA licence applicant is required to prepare audited financial statements that comply with either their own local reporting standards, IFRS or the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The UEFA Regulations (UEFA, 2015), provide further guidance as to how clubs are required to account for player registrations carried as intangible assets in their accounting records.

In order to comply with the UEFA Regulations, licence applicants that capitalise the costs incurred in acquiring player registrations must adhere to the minimum accounting requirements stipulated in the regulations. In terms of the UEFA Regulations, licence applicants have the option of expensing these costs, if permitted by their local accounting standards, and therefore do not need to

adhere to the minimum accounting requirements listed in the UEFA Regulations for capitalised player registrations (UEFA, 2015).

The minimum accounting requirements of the UEFA Regulations are summarised as follows:

 The depreciable amount for each player registration must be allocated on a systematic basis over the useful life of the registration.  Only the costs incurred directly to acquire the player registration can be capitalised. Furthermore, the player registration may not be revalued even if management is of the opinion that the market value of the player is greater than his carrying value.  Amortisation of the player’s registration must start when such a player registration is acquired.  Each player registration must be assessed by management individually for impairment. Should the recoverable amount of the player be less than the carrying amount, the carrying amount must be written down with such write-down being included in profit or loss.

When a player’s registration is transferred to another club, the profit or loss of such a registration is the difference between the proceeds received and the carrying value of the player’s registration (UEFA, 2015).

3.6 Current accounting practices of football clubs

The initial paragraphs of this chapter addressed what other authors have written about the accounting for registrations of football players both historically and how they are currently being accounted for. This section discusses the accounting policies of two well-known English Premier League football clubs, Manchester United and Tottenham Hotspur and how football players are being accounted for. The accounting policies as extracted from the 2016 financial statements are available in annexure A.

The first accounting policies reviewed are remuneration to identify whether the remuneration costs for development players are being expensed or capitalised.

The other accounting policy researched is the initial and subsequent recognition of players that have been acquired.

With regards to accounting for remuneration costs, there is no distinction between remuneration paid to internally developed players and those players that have been acquired. In both sets of accounting policies, it is noted that remuneration is accounted for in operating expenses on a straight-line basis over the player’s period of his contract.

Fees that are paid to players and key management for signing their respective contracts are usually paid in equal amounts over the contract period. Initially these are recognised as a prepayment and subsequently, these are accounted for as operating expenses on a straight-line basis over the financial year.

With regards to the recognition of players who have been acquired, it has been identified that it is not the players themselves who have been capitalised but rather the player’s registration with UEFA and other acquisition costs. There is consistency between the accounting policies applied by both football clubs, whereby the cost incurred with regards to the purchase of players and key management registrations is capitalised at fair value, which at the time is the consideration paid. These costs would include transfer fees, FAPL levy fees, agents' fees incurred by the club and other directly attributable costs. Acquisition costs would also include the fair value adjustments in relation to any contingent consideration payable, usually to the player’s former club. Such capitalised costs are fully amortised on a straight-line basis over the contract period of the player or key management. The capitalised costs are fully amortised on a straight-line basis over the contract period of the player or key management.

3.7 Conclusion

Intangible assets have unusual and particular features which include unusual measurement and recognition features. This has made it specifically difficult to develop a specific set of rules or guidance in accounting for intangible assets. In an attempt to create constant accounting practices with regards to intangible assets, IAS 38 was introduced. With the introduction of this uniform standard, the determinants of standards prescribe strict criteria as to when an intangible 37 asset can be recognised, especially in relation to internally generated intangible assets where the distinction needs to be made between the research and development phases. Only when certain conditions are met can development costs be capitalised. All research costs need to be expensed. IAS 38 specifically excludes certain internally generated intangible assets from being recognised, regardless of whether or not they meet the recognition criteria. By following this approach to these specific internally generated intangible assets, the recognition and reliability tests are ignored with relation to these intangible assets. These excluded internally generated intangible assets, include developed football players or human capital.

As discussed in section 3.4 of this chapter, it would appear that there is a concern with regards to the valuation of certain intangible assets and therefore these strict rules have been put in place by those who set standards and certain intangible assets have been prohibited from being recognised. It is further noted that the financial reporting standard setters are aware of the potential information disjoint when accounting for intangible assets under IAS 38. This is evidenced by the fact that both the US Financial Accounting Standards Board and the International Standards Accounting Board have noted the gaps and weaknesses of the intangible assets standards and that the former included this on its agenda - “Disclosure of Information About Intangible Assets” in 2002 (Austin, 2007).

The UEFA Regulations further do not provide any guidance on the accounting for development costs associated with football players. The regulations provide very limited guidance and rules to adhere to when acquired player registrations have been capitalised on the statement of financial position.

Furthermore, there seems to have been a clear disconnect in financial reporting historically when all player registrations were expensed compared to what the actual value of a football club was. Guidance was later provided with regards to the recognition of intangible assets with the introduction of FRS 10 – Intangible Assets and Goodwill and IAS 38. Since these standards were introduced, player registrations are accounted for as intangible assets and amortised over the period of the player’s contract. This accounting is concluded to be consistently 38

and appropriately applied by the two football clubs reviewed and also confirmed by the literature on the topic.

Yet, with the prohibition of capitalising internally generated players, there still appears to be a shortfall in intangible asset accounting of not capturing the value of such internally generated players, a view that is shared by the publications quoted in this limited scope dissertation.

CHAPTER 4 – ALTERNATIVE APPROACH 4.1 Introduction

In chapter 2 the author discussed the call for HRA and how human resource are regarded assets of an organisation and also how such human capital should be measured. The chapter then addressed how football is viewed by society; what impact football has on the world and the objectives of financial reporting; and provided a critique of the usefulness of the financial statements produced by football clubs to the users of those financial statements.

Chapter 3 discussed the current accounting principles and polices applied by football clubs in accounting for football players. It was documented that only the cost of acquiring the players registration right is capitalised and amortised over the player’s contract period. All other costs associated with the football player are expensed when they are incurred. By only capitalising the registration of acquired players and other related acquisition costs, the true value of each football player is not being captured in the financial reporting of the football club.

Chapter 4 explores the possible need for the revision of the accounting model applied by football clubs compared to what is required by IFRS and the UEFA Regulations currently being applied in practice by football clubs. Firstly, the chapter explores the capitalisation of human development costs. The chapter also addresses the issues regarding which costs could be capitalised in relation to human capital. Secondly, this chapter examines the different alternatives of capturing the value of football players in financial reporting. The methods discussed in order to capture the value of football players in financial reporting are the revaluation model available in IAS 38 and the fair value option. Thirdly, the option of additional disclosure is discussed.

4.2 Capitalisation of human development costs

This section of this chapter addresses the possibility of capitalising the youth development costs incurred as well as the costs of internally generating football players. HRA and the possible capitalisation of human resources were discussed in detail in chapter 2. It was further discussed that HRA can be applied by football clubs in the accounting of internally generated football

players. As noted in chapter 3, human capital would satisfy the intangible assets recognition criteria established by IAS 38. However, such intangible assets are specifically excluded from recognition as an asset by those who set standards.

This limited scope dissertation suggests that to reflect the financial position and performance of a football club correctly, the exclusions from recognition that are stipulated in IAS 38 and discussed in section 3.4, should be revisited and revised. The argument entails that all costs incurred by a football club in developing a football player should be capitalised as an intangible asset. The costs to be capitalised while the player is in the development phase would include remuneration, UEFA registration costs, training costs and education costs. By capitalising these costs, it would allow for the cost of both internally developed football players and players whose registration rights have been acquired to be represented on the statement of financial position.

However, concerns exist with regards to the capitalisation of human development costs. Firstly, the determination of which costs to capitalise could be problematic. Furthermore, an adequate costing system would need to be put in place, which could possibly be difficult to implement. Another issue that could arise would be at what point a player stops being a developing player. This would be the time when costs incurred would no longer be capitalised. This would thus not capture the real value of a football player as it is based on historical information.

Allowing the capitalisation of the cost of internally developed football prayers would bring about more alignment to the treatment of acquired football players. However, due to the fact that it might be difficult to identify the nature of the cost to capitalise and that such capitalisations do not capture the real value of football players, this might not be a viable option.

4.3 Applying the revaluation model to capitalised development costs

IAS 38 currently allows for two methods of subsequent measurement of intangible assets: the cost model or the revaluation model. The standard allows for the revaluation model to be used when the fair value can be measured with reference to an active market. Football players are perceived to operate in an 41

active market as there are two transfer windows each year in which football players are bought and transferred between clubs. The active market criterion in IAS 38 is thus met and football players are able to be measured using the revaluation model under IAS 38.

The advantages of being able to revalue these costs are that the capturing of the value of football players can be achieved by reflecting this value on the statement of financial position. Subsequently, when applying the revaluation model, the revalued amount would be required to be depreciated over the life of the asset. This would have an impact on the entity’s profit or loss.

But IAS 38 also imposes certain restrictions when applying the revaluation model. These restrictions are that an asset could only be revalued if it had previously been recognised as an asset, and secondly, that it excludes intangible assets that are initially recognised at amounts other than cost. Therefore, to be able to revalue both acquired football players and football players that are internally developed, the cost of internally developed football players needs to be capitalised as discussed under 4.2 above. An appropriate costing model for internally developed football players will still be required, including an assessment from when capitalisation might commence.

Based on the discussion above, the revaluation option might not be the preferred method of measuring football players. The reason is that in order to apply the revaluation model, certain costs would still be required to be capitalised. The shortfall in capitalisation of the development costs is discussed in 4.2 and this complication still exists when applying the revaluation approach.

4.4 Subsequent accounting for the development costs at fair value

Football players are traded between clubs twice a year between the well-known periods called the “transfer windows”. The values placed on football players is widely disclosed and negotiated between football clubs. Unlike one of the reasonings for IAS 38 not to allow for the capitalisation of internally generated intangible assets, since there is no active market to determine the value, the value of football players is readily available. IFRS 13 Fair Value Measurements

42 provide sufficient guidance to measure fair value even when an active market is not available.

This option suggests that both the internally developed football players and the players whose registration rights have been acquired should be recognised at fair value. By accounting for these players at fair value, it would more accurately reflect the value of football players in football clubs’ statements of financial position. It could be argued that the fair value of a football player is not difficult to determine based on the active market in which football players are traded and transferred.

As documented throughout this limited scope dissertation, there is a large body of literature which addresses the need for HRA. It is also suggested that HRA could be used as a management tool in assisting management in making the informed decisions relating to an organisation. Fair value would allow the stakeholders of football clubs to make informed decisions as to the future of players and the club as a whole.

The benefits of applying the fair value model to all football players would be that no specific costing system is required to capitalise internal developed football players. IFRS 13 – Fair Value Measurement provides appropriate guidance in determining the fair values of football players, based on available market prices. The issues identified in section 4.2 and 4.3 of this chapter regarding the capitalisation of internally generated football players, would be overcome. Should a club have a valuable player on its staff, the fair value movements would improve the club’s financial performance. On the contrary, should the value of a football play decrease, the fair value adjustment would have an adverse effect on profit or loss.

The problem is that IFRS does not currently allow for the fair value option to be applied to intangible assets and therefore to HRA. Accounting standards would have to be revised and reissued to cater for the fair value option.

From the documented discussion above, it is the opinion of the author that accounting for football players at fair value is the most appropriate method to

capture their true value in reporting by football clubs. The reason for this is that the obstacles in applying the cost capitalisation or revaluation models would not be applicable. The fair value of football players is readily available and easily determinable as noted above.

4.5 Disclosures to capture the value of football players

If the status quo remains unchanged with regards to how football ball players are currently being accounted for, another way in which the value of football players can be captured in financial reporting is through more comprehensive disclosures that could be provided by football clubs. These disclosures would be provided in order for the football club to communicate information regarding the quantity and quality of football players available to the club. The disclosures could also include the estimated fair value of the football players. The argument is that disclosure is a good starting point for an entity to capture the value of its human capital in an organisation and requires more comprehensive disclosures to assist users and stakeholders to understand the nature and value of an entity’s human capital.

In order to capture the value football players in the financial reporting, with reference to the disclosures suggested by van Aardt van der Spuy (2015), a football club could include note disclosures about unrecognised and recognised football players by providing disclosure of the possible fair value of both recognised and unrecognised football players. The operating segment, if applicable, in which the football players are used could provide information regarding football players who are going to be transferred and also provide information regarding any disposal of football players as required by IFRS 5.

Additional disclosure guidance of financial and non-financial information regarding football players would address the needs of a football club to be accountable to its stakeholders. It will further provide stakeholders and users with accurate and useful information that is needed in decision making.

Van Aardt van der Spuy (2015) proposes that presenting such disclosures in the integrated report might not be a viable option since not all companies are required to produce integrated reports and therefore no disclosure of the 44

necessary information to capture the value of football players. It is therefore recommended that an alternative would be that the additional disclosures be recommended in IFRS or by the regulations prescribed by the football governing bodies around the world to be presented in the financial statements. Since IFRS does not specifically deal with football players only, the more viable option would then be in the regulations of football governing bodies.

4.6 Conclusion

Currently, when comparing the reporting of a football club to another organisation, there is no difference since all entities are required only to disclose what is required by IFRS. The disclosures required by the FFP regulations are very limited and do not provide sufficient information. The information presented is focused on providing useful information to financial decision makers where this information is concentrated on economic circumstances and transactions and their respective financial impacts. However, based on the nature of a football club and the relationship it has with many of its stakeholders, the financial information provided to them is often not suitable to meet their needs or objectives.

With the introduction of the FFP, UEFA acknowledged that there is a need to provide additional information to users other than purely financial information. It addressed the need for a club to be both accountable from a financial point of view as well as a social one. However, the FFP does not provide all the necessary information needed by users or found to be useful by stakeholders.

This chapter discussed alternatives to capture the value of football players in financial reporting; the potential need to revise the intangible asset accounting standard; and issue guidance as to what and how to provide information in the football club’s financial reports.

The alternative approaches discussed were firstly, the capitalisation of internally generated intangible assets and it was concluded that this would not be the preferred approach as it would still not capture the true value of football players in financial statements. Secondly, the option to account for football players by applying the revaluation model was discussed and again it was concluded that 45 this would not be the preferred approach as this approach would still require development costs to be capitalised. Thirdly, the option to measure developed football players at fair value was addressed. It is concluded in this section, in the view of the author, that this would be the most appropriate approach in order to capture the value of football players. Lastly, should none of the three methods be accepted, adequate disclosure of the nature and fair value of football players should be provided in the financial statements of a football club in order to capture the value of football players and provide users with the information they require. The necessary disclosures needed in order to achieve adequate financial reporting should possibly be provided by football governing bodies around the world.

CHAPTER 5 – CONCLUSION 5.1 Introduction

Throughout this limited scope dissertation, it has been noted and argued that the current accounting principles for the recognition of football players are inappropriate and do not provide an accurate reflection of the financial position or performance of a football club.

5.2 Summary of literature review chapters

Chapter 2 addressed the issue of human resource accounting and the available literature regarding this topic. The literature identifies an interest in many different industries and countries for the capitalisation of human resources and human capital. It was further discussed, that although there is a strong interest in human resource accounting, IFRS does not allow for the recognition of human resource nor does it allow for human resource accounting. The valuing of human resources was also discussed and it is proposed that it is possible to value human capital based on specific valuation techniques.

Chapter 3 then discussed the current accounting guidance for the accounting of internally generated intangible assets, including human resources. IFRS currently allows for the capitalisation of development costs only when certain criteria are met. All research costs need to be expensed. IAS 38, however, excludes certain intangible assets from being recognised even if they meet the recognition criteria of IAS 38. Human capital is included in these exclusions. This chapter also briefly discussed the disclosure and accounting guidance issued by UEFA. However, these do not provide any more clarity on the value of football players and accounting for football players.

The historical and current accounting practices were investigated as to the current accounting practice within football clubs with regards to the accounting for football players. It was concluded that football players are currently being accounted for as required by IFRS and that no additional disclosure or values are provided in the clubs’ annual reports to illustrate the true value of a football player to enable users of the financial statements to make appropriate decisions.

5.3 Proposed solution

As a result of the believed inappropriate accounting for football players, the author addressed the alternatives to the accounting for football players in order to capture the value of football players in financial reporting of football clubs. The different alternatives were discussed in Chapter 4 and are summarised below.

The first option that was discussed was the possible capitalisation of development costs. It is concluded that this option is not the most appropriate as there are complexities that need to be overcome: these include identifying which costs are to be capitalised and the need for an adequate cost system. A further issue identified is at what point the capitalisation of the development costs of a football player ceases.

The next approach which was addressed was to account for football players by applying the revaluation model of IAS 38. Again, this proves not to be the most appropriate approach as an appropriate costing model would still be required since IAS 38 only allows the revaluation approach to be applied if the related cost has been capitalised.

The third alternative is that acquired players as well as the internally developed players be recognised on the statement of financial position by applying a fair value model. The conclusion is that fair value could be applied at a minimal cost based on the transfer market in which the players operate. This accounting would provide the users and stakeholders of a football club to assess the financial position of a football club accurately and allow them to make educated and informed decisions regarding their investment into the club. Accounting for football players at fair value is concluded to be the most appropriate measurement basis.

It was lastly discussed that although it is unlikely that the current accounting standards and requirements will change in the short term, it is possible to capture the value of human capital, i.e. football players, through appropriate disclosures. These disclosures would be made in the clubs’ financial statements. It seems that there is currently insufficient guidance as to what 48

should be disclosed for human capital according to current reporting guidelines. Appropriate and clear mandatory disclosure guidance should then be issued in order to provide users with an accurate perspective of an entity’s human capital.

It is concluded by the author that the most appropriate solution to capturing the value of football players in financial reporting would be to account for all football players at fair value in the financial statements of a football club.

5.4 Potential areas of future research

The author proposes three areas of potential further research to be conducted.

The first of these is research into what the views and perspectives of stakeholders are with regards to the proposed approaches and what they regard as the preferred option in accounting for football players.

The second area of potential future research is what information should be disclosed in the financial statements of a football club in relation to the football players if the fair value option is not allowed, and how such disclosures could capture the value of the football player in the financial reporting.

Lastly, possible further research could be conducted into a detailed analysis of what is meant by human capital in integrated reporting and what disclosures could be included in the integrated report to capture the value of football players in financial reporting.

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ANNEXURE A – ACCOUNTING POLICY EXTRACTS

1. Manchester United

According to the 2016 annual report of Manchester United, intangible assets, and specifically registrations and football staff remuneration, are accounted for as follows (Manchester United PLC, 2016):

Remuneration

Remuneration is charged to operating expenses on a straight-line basis over the contract periods based on the amount payable to players and key football management staff for that period. Any performance bonuses are recognized when the Company considers that it is probable that the condition related to the payment will be achieved.

Signing-on fees are typically paid to players and key football management staff in equal annual installments over the term of the contract. Installments are paid at or near the beginning of each financial year and recognized as prepayments within trade and other receivables. They are subsequently charged to the income statement (as operating expenses) on a straight-line basis over the financial year. Signing-on fees paid form part of cash flows from operating activities.

Loyalty fees are bonuses which are paid to players and key football management staff either at the beginning of a renewed contract or in installments over the term of their contract in recognition for either past or future performance. Loyalty bonuses for past service are typically paid in a lump sum amount upon renewal of a contract. These loyalty bonuses require no future service and are not subject to any claw-back provisions were the individual to subsequently leave the club during their new contract term. They are expensed once the Company has a present legal or constructive obligation to make the payment. Loyalty bonuses for ongoing service are typically paid in equal annual installments over the term of the contract. These are paid at the beginning of each financial year and the related charge is recognized within operating expenses in the income statement on a straight-line basis over that period.

Initial recognition

The costs associated with the acquisition of players' and key football management staff registrations are capitalized at the fair value of the consideration payable. Costs include transfer fees, FAPL levy fees, agents' fees incurred by the club and other directly attributable costs. Costs also include the fair value of any contingent consideration, which is primarily payable to the player's former club (with associated levy fees payable to the FAPL), once payment becomes probable. Subsequent reassessments of the amount of contingent consideration payable are also included in the cost of the player's registration. 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 player basis. The additional amount of contingent consideration potentially payable, in excess of the amounts, is included in the cost of registrations. Costs are fully amortised using the straight-line method over the period covered by the player's and key football management staff contract.

Renegotiation

Where a contract is extended, any costs associated with securing the extension are added to the unamortised balance (at the date of the amendment) and the revised book value is amortised over the remaining revised contract life.

Disposals

Assets available for sale (principally players' registrations) are classified as assets held for sale when their carrying value is expected to be recovered principally through a sale transaction and a sale is considered to be highly probable. Highly probable is defined as being actively marketed by the club, with unconditional offers having been received prior to a period end. These assets would be stated at the lower of the carrying amount and fair value less costs to sell.

Gains and losses on disposal of players' and key football management staff registrations are determined by comparing the fair value of the consideration receivable, net of any transaction costs, with the carrying amount and are recognised separately in the income statement within profit on disposal of

intangible assets. Where a part of the consideration receivable is contingent on specified performance conditions, this amount is recognised in the income statement on the date the conditions are met.

Loan fee income on players temporarily loaned to other football clubs is recognised separately in the income statement within (loss)/profit on disposal of intangible assets.

Impairment

Management does not consider that it is possible to determine the value in use of an individual player or key football management staff in isolation as that individual (unless via a sale or insurance recovery) cannot generate cash flows on his own. While management does not consider any individual can be separated from the single cash generating unit ("CGU"), being the operations of the Group as a whole, there may be certain circumstances where an individual is taken out of the CGU, when it becomes clear that he will not participate with the club's first team again, for example, a player sustaining a career-threatening injury or is permanently removed from the first team playing squad for another reason. If such circumstances were to arise, the carrying value of the individual would be assessed against the Group's best estimate of the individual's fair value less any costs to sell and an impairment charge made in operating expenses reflecting any loss arising.

The following is the accounting policy included in the Manchester United 2016 annual report relating to operating expenses:

Other operating expenses

Our other operating expenses include certain variable costs such as match- day catering, policing, security stewarding and cleaning at Old Trafford, visitor gate share for domestic cups and costs related to the delivery on media and commercial sponsorship contracts. Other operating expenses also include certain fixed costs, such as operating lease costs and property costs, maintenance, human resources, training and developments costs and professional fees.

2. Tottenham Hotspur

Extracted from the 2016 annual report and consolidated financial statements, the following is disclosed as the accounting policy applied in relation to accounting for player costs and transactions (Tottenham Hotspur Limited, 2016):

Initial capitalisation

The costs associated with the acquisition of players and key football management staff registrations are capitalised as intangible fixed assets. Any intangible assets acquired on deferred terms are recorded at the fair value at the date of acquisition. The fair value represents the net present value of the costs of acquiring players and key football management staff registrations.

Amortisation

These costs are fully amortised on a straight-line basis over their useful economic lives, in equal annual instalments over the period of the respective contracts. Where a contract life is renegotiated, the unamortised costs, together with the new costs relating to the contract extension, are amortised over the term of the new contract.

Contingent consideration

Under the conditions of certain transfer agreements, further fees will be payable to the vendors in the event of the players concerned making a certain number of First Team appearances or in the occurrence of certain other specified future events. Liabilities in respect of these additional transfers are accounted for as provisions and as additions to intangible assets, when it becomes probable that the number of appearances will be achieved or the specified future events occur.

Impairment

The Group will perform an impairment review on the intangible assets if events or changes in circumstances indicate that the carrying amount of the player may not be recoverable. The Group compares the carrying amount of the asset with its recoverable amount.

The Group does not consider that it is possible to determine the value-in- use of an individual football player in isolation, as the player (unless via a sale or insurance recovery) cannot generate cash flows on his own. Furthermore, the Group also considers that all the players are unable to generate cash flows even when considered together. Accordingly, the Group considers the smallest cash-generating unit to contain all the other first team players, the stadium and the training facility.

Disposals

Profit or losses on the disposal of these registrations represent the fair value of the consideration receivable, net of any transaction costs, less the unamortised cost of the original registration.

Remuneration Remuneration of players is charged in accordance with the terms of the applicable contractual agreements and any discretionary bonus where there is a legal or contractual obligation.