Football Club Arsenal - Essay Example

?Arsenal Holdings Plc (Financial Reporting) Financial ments are of pivotal importance to the investors if they are reported in an accurate way representing the true value of the entity, since these statements are the basis of economic decisions for a wide range of investors. Financial reporting is correlated with good corporate governance and the brand image of the organization. These financial reports are used for a wide variety of purposes. They can be used for equity valuation, evaluating a merger or acquisition, determining the creditworthiness of the company or forecasting future income and cash flows (CFA Institute, 2010). Arsenal is a renowned football club and it has received widespread popularity among the football supporters. In the recent decades, football clubs have gained enormous publicity because of the commercialization of the sports. According to Morrow (1996), football clubs are generally involved in three major activities. Firstly, they involve themselves in commercializing by selling tickets and receiving broadcasting fees from media. Secondly, they involve themselves in active trading and disposal of players. Finally, they develop in-house talent through mentoring and training from the beginning. Arsenal is listed as a commercial organization which derives its revenues from football fixtures, broadcasting and real estate development. In fiscal year 2010, football accounted for 59% of the revenues while real estate development proportion accounted for 41% of the revenues. The Arsenal group reported a profit before tax figure of ?55.96 million in 2010 which was very impressive for the shareholders (Arsenal Holdings Plc, 2010). The organization is committed to a long term strategic plan by carefully investing in talented players and developing them. At the heart of Arsenal lies its Emirates stadium where it aims to continue investing so that it stays best-in-class and has a clear identity as Arsenal’s home. This paper aims to analyze one aspect of the financial reporting quality of Arsenal holdings plc since the quality of financial reporting can have a huge impact on the results. The annual report of 2010 for Arsenal mentions that the club capitalizes the cost of the player’s registration fees and amortizes over the contract life. However, they do not include any current value for their players or any value at all for ‘home grown’ players. Although it may sound ridiculous to include human as assets but they can be accounted as intangible assets if they fulfill the definitions put forth by financial reporting frameworks. A salaried person is generally expensed in the income statement whereas professional sports players are treated in a different manner in the accounting statements. Wagner (2007) in his publication mentioned that human resources are one of the most critical factors which investors look for while evaluating a company. Thus, we can metaphorically consider every human as vital for the organization and he may be regarded as an asset for the organization but it is not done practically since it differs from the definition formulated by the financial reporting frameworks. We will be analyzing and interpreting this aspect from International Financial Reporting Standards. As per the definition of an asset, it is anything that can be controlled by an organization or entity and it expects future benefits will be flowing to the organization from that asset. An asset is controlled if the organization is entitled to certain rights over that asset particularly restricting others from utilizing that asset for their own advantage. The definition of asset is applied in the case of Arsenal as it holds right over its players for a certain period due to the legal agreement arranged between the player and the club. The players are supposed to provide their services to the club according to the terms of contract. Arsenal expects that future benefits will flow from these players as they will be playing for Arsenal, and Arsenal will be deriving its revenues through fixtures and broadcasting which will be only possible if these players will represent Arsenal. Among the asset, we can further categorize these football players as intangible assets. The definition, recognition and measurement of intangible assets are explained by IAS 38 (IASB, 2010). We can analyze the capitalizing of Players fees in the light of this standard put forth by International Accounting Board. According to the definition of intangible asset, it is an identifiable non-monetary asset without any physical existence. Although the physical existence of human capital can be argued but since they render services for a span of time thus it can be assumed that there services do not have a physical existence. The characteristic of identifiable with intangible assets implies that they should be separable, exchanged or transferred from one entity to another. The definition of identifiable is also fulfilled if it is created from a legal right. We know that Arsenal can bind its players to play for the club for the contract specified plus it holds rights to dispose any of its players through trading them or exchanging them with other players. Hence, the definition of intangible asset is also fulfilled according to the criteria placed by IAS 38. The recognition criteria enforces that the definition of intangible asset must be fulfilled. Furthermore, it also demands that the cost of that asset can be measured reliably. The cost of these players can be measured reliably since clubs are showing greater interest in football players and they can price players based on their value. Furthermore, the historical costs can be a reliable measure since as the contract period approaches its end, the future benefits entitled from these players will be less therefore we can amortize the cost of these players to obtain the real cost. The measurement criteria of IAS 38 requires that the intangible assets should be measured using either the cost model or revaluation model. The cost model requires that the players should be measured at historical costs less any accumulated amortization and accumulated impairment losses. Impairment losses are evident in the case if the players do not perform up to the required expectations as they are not able to deliver which decreases their market value. The annual report of Arsenal states that its club capitalizes the cost of the player’s registration fees and amortizes over the contract life. However, they do not include any current value for their players. This seems to be in conflict with IAS 38 if they do not take into account the impairment losses if the market value of the player has gone down. For instance, a player such as David Beckham initially might be high in demand therefore he will have a higher worth but as soon as new emerging and talented players enter the into the football industry there might be a chance that the value of Beckham will diminish and thus he should be reviewed for impairment. Hence, we can deduce that the balance sheet of Arsenal might not be representing the fair view of the organization. The revaluation model on the other hand requires that the intangible assets should be carried at the revalued value less any accumulated amortization and accumulated impairment losses. The revaluation model will be only practical if an active market exists for the player where they can be traded at a fair value. According to the definition of World GAAP (2009), an active market has frequent buyers and sellers, the items traded are homogenous and prices are publicly available. Furthermore, the standard also requires that if an intangible asset is measured using the revaluation model, than all other same classes of assets should be measured using this model (IASB, 2010). Although it is not evident from the financial report that which model is Arsenal using for measurement but we can infer that even this model have been used; the figures would have not depicted a true representation since they explicitly mention that they do not include the current value for their players. The auditors have expressed their opinion in the financial statements as these statements give a true and fair view of the state of the Group’s and the parent company’s affairs. It also states that they have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice. It may have been the case that the UK framework is different from International framework that’s why some of the discrepancies are not being revealed. REFERENCES Arsenal Holdings Plc, 2010. Investor Relations., Available at: [Accessed 24 December 2010]. CFA Institute 2010, Financial Reporting and Analysis. Pearson: New York International Accounting Standard Board (IASB), 2010. Framework, Available at: [Accessed 24 December 2010]. Morrow, S., 1996. Football Players as Human Assets. Measurement as the critical factor in Asset Recognition: A case study investigation. Journal of Human Resource Costing and Accounting, 1 (1), pp-95-97 Wagner, C.G. 2007. Valuing a company’s innovators. The Futurist, 41 (5), p-7. World GAAP 2009, IAS 38 Intangible Assets, Available at: [Accessed 25 December 2010]. Read More

 

Read More