The IFRS Interpretations Committee (Committee) discussed the following matter and tentatively decided not to add it to its standard-setting agenda. The Committee will reconsider this tentative decision, including the reasons for not adding the matter to its standard-setting agenda, at a future meeting. The Committee invites comments on its tentative agenda decision. All comments will be on the public record and posted on our website unless a responder requests confidentiality and we grant that request. We do not normally grant such requests unless they are supported by good reason, for example, commercial confidence.
Tentative agenda decision
The Committee received a request about the recognition of player transfer payments received. In the fact pattern described in the request:
- a football club (entity) transfers a player to another club (receiving club). When the entity recruited the player, the entity registered the player in an electronic transfer system. Registration means the player is prohibited from playing for another club, and requires the registering club to have an employment contract with the player that prevents the player from leaving the club without mutual agreement. Together the employment contract and registration in the electronic transfer system are referred to as a ‘registration right’.
- the entity had recognised costs incurred to obtain the registration right as an intangible asset applying IAS 38. The entity uses and develops the player through participation in matches, and then potentially transfers the player to another club. The entity views the development and transfer of players as part of its ordinary activities.
- the entity and the receiving club enter into a transfer agreement under which the entity receives a transfer payment from the receiving club. The transfer payment compensates the entity for releasing the player from the employment contract. The registration in the electronic transfer system is not transferred to the receiving club but, legally, is extinguished when the receiving club registers the player and obtains a new right.
- the entity derecognises its intangible asset upon the receiving club registering the player in the electronic transfer system.
The request asked whether the entity recognises the transfer payment received as revenue applying IFRS 15 Revenue from Contracts with Customers or, instead, recognises the gain or loss arising from the derecognition of the intangible asset in profit or loss applying IAS 38.
Recognition of transfer payment received
In the fact pattern described in the request, the entity classified the registration right as an intangible asset applying IAS 38. Accordingly, the entity applies the derecognition requirements in IAS 38 on derecognition of that right.
Paragraph 113 of IAS 38 states that ‘the gain or loss arising from the derecognition of an intangible asset shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset. It shall be recognised in profit or loss when the asset is derecognised…Gains shall not be classified as revenue’. Applying that paragraph, the entity recognises in profit or loss, but not as revenue, the difference between the net disposal proceeds and the carrying amount of the registration right.
Does the transfer payment represent disposal proceeds?
The transfer payment arises from the transfer agreement, which requires the entity to release the player from the employment contract. The entity is therefore required to undertake some action for the right to be extinguished; the right does not expire or dissipate. Accordingly, the transfer payment compensates the entity for its action in disposing of the registration right and, thus, is part of the net disposal proceeds described in paragraph 113 of IAS 38.
The Committee concluded that, in the fact pattern described in the request, the entity recognises the transfer payment received as part of the gain or loss arising from the derecognition of the registration right applying paragraph 113 of IAS 38. In the fact pattern described in the request (in which the entity recognises the registration right as an intangible asset), the entity does not recognise the transfer payment received, or any gain arising, as revenue applying IFRS 15.
Is there a circumstance in which the entity would recognise the transfer payment received as revenue applying IFRS 15?
Paragraph 2 of IAS 2 Inventories requires an entity to apply IAS 2 to intangible assets that meet the definition of inventories. In the fact pattern described in the request, the entity has concluded that the registration right does not meet the definition of inventories and, accordingly, has applied IAS 38 in accounting for that right.
If the registration right were to meet the definition of inventories, the entity would apply IAS 2 in accounting for the right and, on disposal, apply the derecognition requirements of that Standard. Paragraph 34 of IAS 2 states that ‘when inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised’. Had the entity classified the registration right as inventories, the entity would apply IFRS 15 in accounting for the transfer payment received (as long as the transfer agreement were within the scope of IFRS 15).
Paragraph 6 of IAS 2 defines inventories as ‘assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services’. IAS 40 Investment Property also specifies that inventories include property in the process of construction or development for sale in the ordinary course of business.
The Committee observed that, for an entity whose ordinary activities include the development and transfer of players, it is conceivable that circumstances exist in which registration rights associated with some players meet the definition of inventories. In applying that definition, on initial recognition such an entity would consider whether the registration right is acquired for development and sale in the ordinary course of business. The Committee noted that whether a registration right meets the definition of inventories requires an assessment of the facts and circumstances.
Statement of cash flows
IAS 7 Statement of Cash Flows lists cash receipts from sales of intangibles as an example of cash flows arising from investing activities. IAS 7 also lists cash receipts from revenue as examples of cash flows arising from operating activities.
Accordingly, an entity presents cash receipts from transfer payments:
- as part of investing activities if it had recognised the registration right as an intangible asset; or
- as part of operating activities if it had recognised the registration right as inventories and the transfer payment received as revenue.
Disclosure of accounting policies
Paragraphs 117 and 122 of IAS 1 Presentation of Financial Statements require an entity to disclose significant accounting policies, and the judgements management has made in the process of applying accounting policies that have the most significant effect on the amounts recognised in the financial statements. The Committee observed that, for a football club, such disclosures are likely to include accounting policies in relation to the classification of registration rights and the recognition of transfer payments received.
The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for the entity to determine the recognition of player transfer payments received. Consequently, the Committee [decided] not to add the matter to its standard-setting agenda.
The deadline for commenting on the proposals was 14 February 2020. The Committee will consider all comments received in writing by that date; agenda papers analysing comments received will include analysis only of comments received by that date.