Discussion of Accounting, Valuation and Duration of Football Player Contracts JOHN FORKER*
Investment by football clubs in player contracts provides a natural experiment to evaluate the mandated accounting requirement that purchased intangible assets must be capitalised (ASB, FRS 10, 1997b). The study is well grounded for three reasons. First, the availability of industry level transaction price data for transfer fees, second, a choice between capitalisation and amortisation of purchased intangible assets and immediate expensing was exercised in the UK prior to FRS 10, and third, in the period 1991–1998 only five out of the 58 clubs included in the study did not select immediate expensing, and only three clubs switched accounting methods. The aim of the paper is to investigate whether the accounting regulation (FRS 10, ASB, 1997a: IAS 38 (Revised), IASB, 2004b: SFAS 142, FASB, 2001) that purchased intangibles must be capitalised is appropriate. In these standards the application of the asset recognition criteria, that the expected future benefits from the asset are probable and will flow to the entity, is taken to be satisfied by the existence of the purchase transaction (IAS 38 (Revised), 2004b, para. 21). The authors’ question the adequacy of this line of reasoning on two grounds. First, some *The author is Professor of Accounting at Queen’s University Belfast. Address for correspondence: John Forker, School of Management and Economics, Queens University Belfast, Belfast BT7 1NN, Northern Ireland, UK. e-mail: firstname.lastname@example.org #
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assets may be so speculative as to cast doubt on the prospect of recovery, and second, even if the duration of the asset is longer than one year the costly procedures associated with asset valuation relating to capitalisation, amortisation and impairment may not be justified. The analysis in the paper is based on two types of test. The first uses accounting-based data and seeks evidence of the existence and duration of a positive relation between investment in player contracts and contemporaneous and prospective benefits. Positive associations are identified for the current and previous year but not for a second period lag. On the basis of these findings the authors’ question the validity of the presumption in favour of the capitalisation of purchased intangibles. The second test focuses on the association between players’ transfer fees and the market value of listed football clubs. Here a positive association is identified indicating that investors’ view investment in player contracts as assets consistent with the capitalisation requirement. The authors’ also exploit the different regulatory regimes pre- and post-FRS 10 to investigate whether the incremental explanatory power of investments in player contracts changed following the effective date for FRS 10. They find a higher level of explanatory power pre-FRS 10 which indicates that investors interpret reported accounting values as reliable valuation indicators. Finally, using post-FRS 10 data the relative explanatory power of capitalisation is contrasted with immediate expensing and the former is found to have a stronger association with share prices than the latter. The failure to find conclusive evidence in favour of the existence of a positive relation between investment in player contracts and future benefits is based on the results of the accounting-based tests in the study. The authors’ infer that the uniform requirement to capitalise all purchased intangibles may lead to the recognition of items that do not meet the accounting definition of assets. For this reason the authors’ favour the discretion available to management regarding the capitalisation of intangibles that was exercised prior to FRS 10...