Contingent consideration relating to a football player"s registration
Entity A is a football club which signs a new player on a 4 year contract. In securing the registration of the new player, Entity A agrees to make the following payments to the player"s former club: €5.5 million on completion of the transfer; €2.8 million on the first anniversary of the transfer; €1 million as soon as the player has made 25 appearances for the club; €0.2 million when the player is first selected to play for his country; and 25% of the gross proceeds from any onward sale of the player before the expiry of the initial contract term.
It is determined that the expenditure meets the definition of an intangible asset because it allows Entity A to negotiate a playing contract with the footballer that covers 4 seasons and prevents other clubs from using that player"s services over that time. How does Entity A determine the cost of the player registration?
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View 1 – All of the above payments are contractual and a financial liability arises under IAS 39 as soon as that the player signs for the club. Accordingly, the cost of the intangible asset comprises the initial payment of €5.5 million, plus an amount representing the present value of the €2.8 million payable in one year and an amount to reflect the fair value of the other contingent payments (most likely determined using some kind of probability-weighted estimation technique).
View 2 – The contractual terms requiring a payment of €1 million on the player achieving 25 appearances for the club and another payment of 25% of the gross proceeds from any onward sale of the player are not liabilities of Entity A at the inception of the contract, as there is no obligation on the part of Entity A to use the player in more than 24 fixtures or to sell the player before the end of the 4 year contract term. Accordingly, these elements of the contract are excluded from the initial cost of the intangible asset and are not recognised until the obligating event occurs. However, the element that is contingent on the player being selected to play for his country is not within the entity"s control and is included in the initial measurement of cost.