Frame of references
This chapter portrays relevant literature connected to the topic of choice. It starts out with an overview of the financial reporting within the industry and continues with specific accounting principles associated with the topic. Further, the regulation of Financial Fair Play is depicted along with relevant theories applicable to the subject.
Financial reporting within the football industry
To be able to review the level of transparency in various football clubs one must understand the issues and features of financial reporting in the business of football. As suggested by Baboukardos and Rimmel (2016), accounting information should be designed to assist stakeholders to make sound and rational decisions. The public limited companies in the football industry have, due to European Union regulation (European Commission, 2002; European Commission, 2008), strict minimum requirements on their financial reporting through International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), thus ensuring that the information presented is comparable and understandable (European Commission, 2011). The decision to regulate the harmonization of IAS/IFRS is sought to enhance the functioning of the internal market as well as promoting convergence of accounting standards world-wide to improve comparability between the publicly traded companies and strive for the ultimate objective; a single set of global accounting standards (European Commission, 2002).
Private limited companies however have the possibility to apply national accounting standards and principles as long as they are in compliance with the requirements of FFP. This leads to a possibility to prepare two separate financial statements to fulfill FFP’s demands but at the same time only disclose the bare minimum, of what the national standards require, to the public (Morrow, 2014). However, considering the fact that UEFA demands that the information provided is audited, their hopes are that the extra expense of dual audit will enhance the incentives for the private limited companies to only deliver one integrated report (Morrow, 2014).
Issues that arise when a social business is turned into a profit-driven business, as any other, are extended to accounting. Two frequently discussed issues are the valuation of the clubs’ intangible assets and human resource accounting. Intangible asset are defined as non-monetary assets that are without physical substance but still identifiable (either being separable or through legal rights or contractual agreements) (European Commission, 2010). These assets are separated from tangible assets, which in contrast have physical substance and can hence be separated (Property, machines, equipment etc.).
Dietl, Franck and Lang (2008), as well as Franck (2010), points to the issue that the structure and rewards of sporting competition is distorted and creates financial segregation. As football players are the clubs’ most valuable assets (Lozano & Carrasco-Gallego, 2011), the unique situation where organizations’ human resources are so closely related to financial success causes issues in accounting.
In the accounting framework of IASB (International Accounting Standards Board), the matter of accounting treatment for intangible assets is presented in IAS 38. The framework contains a set of rules and requirements to be able to identify an asset as an intangible and the objective is to offer proper treatment on an accounting basis. The rules and requirements are to be applied on assets that are not specifically dealt with in any other standard (such as tangible assets in IAS 16 Property, Plant & Equipment) (European Commission, 2010). In addition to recognition, the standard also specifies how to measure the carrying amount (recorded cost of an asset, net any potential depreciation or impairment loss) of intangible assets and require a specified amount of disclosure regarding the subject (European Commission, 2010).
In order for an asset to be recognized as intangible, an entity is required to demonstrate that the asset is in compliance with:
• The definition of an intangible asset, and
• The recognition criteria.
In order to be distinguished from goodwill, the definition of an intangible asset requires the item to be identifiable (European Commission, 2010). An asset is considered identifiable if the item is either:
• Separable, meaning that the asset needs to be capable of being separated or divided from the entity (sold, transferred, rented or exchanged) (European Commission, 2010), or
• Arises from contractual or other legal rights, regardless if the item is transferable or separable from the entity (European Commission, 2010).
The second criteria from passing as an intangible asset are recognition. To pass this last step, it must be probable that future economic benefit will flow from the asset and that the cost can be measured reliably at initial cost (Article 21 in IAS 38). To determine this, an entity needs to assess this probability using reasonable and supportable assumptions that corresponds to management’s best estimate of the financial conditions that will occur during the assets useful life (European Commission, 2010).
When acquiring an asset separately, the price an entity pays is considered a reflection of the expectation about the probability that future economic benefits will flow to the entity through the asset (European Commission, 2010). In a simplistic way, funds paid for the asset shows that the entity expects future economic benefits, even though there is uncertainty about the timeliness and amount of the inflow (European Commission, 2010). Therefore, the probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination (Article 25 in IAS 38).
Additionally, when an intangible asset is acquired separately, the cost can usually be measured in a reliably manner, especially if the compensation is paid in cash or other monetary funds (European Commission, 2010), which is important when it comes to recognizing football players as intangibles (Oprean & Oprisor, 2014).
When it comes to assessing internally generated intangible assets, the requirements usually become more difficult. This is due to the fact that it is very hard to pass the recognition criteria. Determining whether and when an identifiable asset that will generate expected future economic benefits is present, along with measuring the cost reliably is very complex (European Commission, 2010). This fact is another trigger of controversy when it comes to accounting deficits in football. The complexity of internally generated intangible assets is applicable to “home-grown” players9 and the lack of reliable measures often causes a distorted balance sheet (Lozano & Carrasco-Gallego, 2011).
An entity can choose between two accounting policies to apply after recognition; the cost10- or revaluation11 model. If the revaluation model is chosen for an intangible asset, the entity needs to apply this policy for all other assets in its class, unless there is no active market for those assets (European Commission, 2010).
Another issue that needs to be assessed after recognition is whether the intangible assets useful life12 is indefinite or definite. When, after analyzing all the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity, the intangible asset should be considered indefinite. Unlike assets with definite useful life, these kinds of intangible assets should not be amortized but instead tested for impairment in accordance with IAS 36 (European Commission, 2010).
Connecting this to football players as intangible assets, IAS 38 (European Commission, 2010) clearly states that the useful life of an intangible asset that arises from contractual or other legal rights shall not exceed the period of the contractual or other legal rights, but may be shorter depending on the period over which the entity is expected to use the asset.
9 Players generated through the clubs own youth academy.
10 Cost less any accumulated amortization and any accumulated impairment loss (IAS36) (European Commission, 2010).
11 An intangible asset shall, under a revaluation model, be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses. Fair value in this case shall be measured by a reference to an active market (European Commission, 2010).
12 Useful life is the period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from the asset by an entity (European Commission, 2010).
Accounting for football players
All players, whether acquired on the transfer market or “home-grown”, are registered by their club and are contractually obliged to perform on the behalf of the club holding their registration (Morrow, 1996). In other words, through the registration the clubs obtain economic benefits and can restrict access from others to those benefits. In this sense, you could argue that football players are no different from other groups of employees, such as teachers who are under a fixed term contract (Morrow, 1996). However, Morrow (1996) identifies differences that make the case of football players, along with other sports, unique.
Football players cannot resign from their contracts thus making the premises of the contracts different (Morrow, 1996). Practically they can withhold their services but in such cases they cannot play for another club. Additionally, fees are paid between clubs to transfer the registration right, which is a unique form of control (Morrow, 1996). Without players, a football club would not be able to participate in any competitions, nor would it be able to justify its entire existence. Thus, the players generate the assumptions of potential economic benefit for the club (Oprean & Oprisor, 2014). As Mnzava (2013) describes it, players provide future economic benefits through their sporting performance on the pitch, thus enabling the club to generate revenue through gate receipts, merchandising, broadcasting-contracts and sponsorship.
Despite this fact, it is not permitted for a club to account for their players as assets within the books, since one does not have the property rights of another person (Oprean & Oprisor, 2014). However, the right to use the players derives from their contracts and they can therefore be accounted for as an intangible asset by capitalizing on the player’s registration cost (Mnzava, 2013; Oprean & Oprisor, 2014). When the club registers the contract to the governing body, the club acquires the federative right and license to use the player in competitions; enabling the club to capitalize on the cost. This is a very rare case where the human resource management has impact on the assets of an economic entity. Thus, the IFRS do not accurately state the recognition of human resources in the asset category, but rather offers the preconditions for accounting them (Article 21 in IAS 38)13. A major issue that arises from this is that there are three types of player registrations: players registered through transfer, players registered as free agents14 and lastly players promoted to the first squad from the youth academy (“home-grown”) (Oprean & Oprisor, 2014). This causes troubles when it comes to the valuation criteria, as described in IAS 38. In the first case, registered through transfer, a reliable valuation of the asset cost can be carried out because there is a firm payment derived from an active market, which according to Article 25 in IAS 38 can be considered ground for valuation (Oprean & Oprisor, 2014). Thus, the costs can be accounted for as an intangible asset that needs to be gradually depreciated throughout the useful life of the asset; meaning the duration of the contract (Oprean & Oprisor, 2014).
The problem when signing a player as a free agent is that the valuation cannot be carried out in a reliable manner considering the absence of a transfer fee and an active market. The fair value determined by the market parameters cannot be carried out in a reliable way either since free agents have greater negotiation ability in the absence of a transfer fee. Hence, the free agents’ contracts cannot be recognized as an intangible asset because of the lack of a source of valuation (Oprean & Oprisor, 2014). Moreover, internally generated players, or “home-grown”, can neither be recognized as intangible assets due to not fulfilling the preconditions in IAS 38, which causes an even more distorted view of the balance sheet in football clubs (Lozano & Carrasco-Gallego, 2011). This kind of deficit in accounting causes large gaps between market value and net book value, which adds enormous “hidden values” to the intangible assets. To illustrate this, Lozano and Carrasco-Gallego (2011) takes Lionel Messi, the FIFA Ballon D’or 2015 winner (Fédération Internationale de Football Association’s award for the best player in the world), as an example. Despite being crowned the best player in the world, Messi is considered a “home-grown” player and have no contribution to the balance sheet of his club FC Barcelona.
Lozano & Carrasco-Gallego (2011) further argue that accountancy might be losing relevance due to these hidden values and Biancone (2011) stresses the need for homogeneity of accounting rules, with strict application of IFRS, in order to minimize the freedom of creating different financial situations. Considering the lack of relevance and the difficulties in obtaining a complete and fair view of the football clubs, Oprean & Oprisor (2014) calls for an improved framework for human resource disclosure.
1.2 Problem discussion
1.2.1 A new regulation – Financial Fair Play
1.3 Research question
1.6 Disposition of thesis
2 Frame of references
2.1 Financial reporting within the football industry
2.2 Intangible assets
2.3 Accounting for football players
2.4 Financial Fair Play
2.4.1 Introduction of UEFA Club Licensing and Financial Fair Play Regulation
2.4.2 Break-even requirement & Revenue disclosure
2.4.4 Consequences for non-compliance
2.6 Disclosure & Legitimacy Theory
2.7 Stakeholder Theory
2.8 Agency Theory
3 Methodology & Method
3.1.1 Research paradigm
3.1.2 Research approach
3.1.3 Research strategy
3.1.4 Time horizon
3.2.1 Conducting the study
3.2.2 Sample selection
3.2.3 Data collection
3.2.4 Disclosure checklist
3.3 Data analysis
3.4 Quality assurance
4 Empirical findings
4.1 Results from the disclosure checklist
4.2 Disclosure of Intangible assets
4.2.1 Fundamental questions
4.2.3 Indefinite useful life and revaluation of intangible assets
4.2.4 Other information
4.3 Disclosure of Tangible assets
4.3.1 Fundamental questions
4.3.3 Revaluation of tangible assets
4.3.4 Other information
4.4 Disclosure of Profit/Loss Account & Revenue
4.4.2 Arsenal FC
4.4.3 FC Barcelona
4.4.4 Borussia Dortmund
4.4.5 Everton FC
4.4.6 FC Porto
4.4.7 Juventus FC
4.4.8 Manchester City
4.4.9 Manchester United
4.4.10 Olympique Lyonnais
4.4.11 Real Madrid
4.5 Further findings
5.1 Disclosure of intangible assets
5.2 Disclosure of revenue
5.3 Different legal forms in football corporations
5.4 The European football industry’s effect on transparency
6.1.1 Relation of thesis findings to broader ethical and social issues
6.1.2 Suggestions for further research
6.1.3 Limitations of the study
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