Financial Statements in Arsenal Plc - Case Study Example

ARSENAL PLC Football clubs have gained overwhelming popularity in last few decades. They have generally been engaged in three major activities. Theirmajor chunk of their revenue has been derived from selling tickets, broadcasting, providing food services and through sponsorship. Secondly, they have been involved in active trading of players that is related with acquisition and disposals. The third activity pertains to developing in house talents which are often called “home grown” players (Morrow, 1996). Arsenal Holdings Plc operates in the same segment of football clubs but it also derives it major source of revenue from Real estate development. The Emirates stadium has been at the heart of Arsenal Club and it is constantly investing money in the stadium to attract the soccer fans (Arsenal Holdings Plc, 2010). This paper aims to analyze the accounting policy of Arsenal holding from a particular angle which relates to the capitalization of the cost of players which are amortized but do not include the current value of the marked players. As the annual report states that, the company does not include any value for their acquired or “home grown (internally developed)” players. Since the purpose of financial reporting is to provide a fair view of the organization, therefore we will analyze to how much extent this statement accurately depicts the true picture of the organization. Before making an analysis, we will have a historical review of how these accounting policies have emerged over the period of time. The clubs have historically been an integral element of the business of football. The regulations introduced by English Football Association in 1885 required that all players to be registered annually with a club (Morrow 1997). While on the other hand, accounting of professional sports club have been a very complex topic and especially in the area of human resource accounting due to the striking differences between professional sportspeople and other employees. In the field of Accounting, the traditional practice for football players was to exclude the valuation of players whether they were developed internally or bought through the transfer system (Morrow, 1995). However, this trend has changed during the recent years where a growing number of clubs have noticed that such a practice did not provide a true picture of the financial affairs of the organization therefore now they are incorporating football players as assets. A publication authorized by Wagner (2007) suggested that human resources are one of the most vital capitals (people and teams) and investors often look for these factors in valuation of the company along with the structural capital which consist of processes, information systems and relational capital which is associated with customers, suppliers, and other stakeholders. Accounting policies with respect to sports player significantly changed during the mid of 90’s.The mechanism of transfer system of football players brought a significant influence in the valuation of the companies. The transfer system which pertains to player trading is done by clubs to recoup their investment in training and development of a player’s skill during the contract period. Generally, there are two kinds of transfer mechanism that take place between the clubs: Transfer of players under contract and transfer of players who are outside the scope of a contract who are also called as free agents. Until 1995, if the club aimed to extend the contract of the players and if the player didn’t want to extend the contract and wanted to join another club after the contract period; than the holding club was entitled to receive a transfer fee from the new club to whom the player was joining. In a litigation case of ‘Bosman’, the court ruled that players outside contracts are given the freedom to move freely from one team to another and it was declared void to charge any transfer fees among the clubs after the contract has expired (Morrow, 1997). In United Kingdom, the former club is only entitled to receive a compensation fee if it offers to extend the players contract on no less favorable monetary terms (Morrow, 1997). Now recently many of the clubs are using the International Accounting Standards while preparing their annual reports. In the case of Arsenal Club capitalizing the player’s fees over the period and amortizing it relates with the IAS 38 (IASB, 2010). IAS 38 is related to intangible assets acquired by the company and it determines the definition of intangible asset, its recognition criteria and how it should be measured. As per the definition of intangible asset, it is an identifiable non-monetary asset without any physical existence. From the definition of asset, we know that an asset is controlled by an entity and it expects future benefits emanating from that asset. In the case of arsenal, we know that the football player are intangible assets and as Arsenal signs a contract with the player before making it a part of the club. Therefore, the Arsenal club has controlling rights over the player and it holds the authority to bind the player according to its terms of agreement. Furthermore, it expects future benefits will stem from these players since they will play for Arsenal Club and arsenal club will derive its major revenues from those match fixtures, broadcasting and commercialization. The earning capability of these individuals make them fit for the definition of future benefits. The second aspect of the definition of intangible asset deals with the characteristic of being identifiable, which implies that the club holds the right to separate those players from the entity. To be separable, the club should be able to sell or transfer those assets which is actually done through either trading of the players by exchanging or selling them to other clubs or eventually if the contract period expires. An asset is also identifiable if it is protected by a legal agreement. So the definition, of intangible asset as per IAS 38 is fulfilled according to the criteria specified (World GAAP, 2009). IAS 38 also states that an intangible asset should be recognized if it fulfills the definition of an intangible asset and the cost of intangible asset can be reliably measured. Since the football industry has highly emerged and an active market exists, therefore we can be assured that the cost of intangible asset such as football player can be reliably measured. The third aspect of IAS 38 deals with the measurement of intangible assets. This standard also requires that the intangible asset should be measured either using the cost model or the revaluation model. The cost model calls for carrying the intangible asset at its historical cost less any accumulated amortization and accumulated impairment. The revaluation model on the other hand requires that the players should be carried at revalued value less any accumulated amortization and impairment (IASB, 2010). Now the statement presented in the annual report states that the club capitalises the cost of the players registration fees and amortises over the contract life. However, they do not include any current value for their players or any value at all for ‘home grown’ players. This statement seems accurate to an extent if the organization is using only the cost model since it requires that the players should be carried at the historical cost less any accumulated amortization. But it does not check for annual impairment losses which are not stated in the notes to financial statements, while it is a mandatory requirement according to IAS 38. For instance, the acquisition of a renowned and young player such as Wayne Rooney might show a different pattern during its contract period. Initially, he might be given the time to develop his skills early in the contract and his skill level may diminish during the end of his career due to the age factor. So we can infer that the net benefit obtained will be lesser during the earlier and later part of the career while it will be greater during the mid period. Therefore the organization might not be presenting the true value of the player during its lifetime which will impair the value of financial report. Secondly, if they are using the revaluation model to account for the player’s value they should constantly revalue the players according to his demand in the soccer market. For this it is presumed that an active market exists where the value of players can be reviewed as buyers and sellers are readily available to the clubs. However, since the accounting standard implemented by relates to US GAAP it may be accurate according to that standard but as far as IASB (International Accounting Standard Board” is concerned the statement seems a bit vague and it needs further assessment. BLOG The course provided me an excellent opportunity to learn about the pivotal importance of financial reporting and how corporations are using it in the practical domain. According to my understanding, the fundamental purpose of any financial reporting is to provide a clear, accurate and fair view of the organization at a particular point of time or during a time period. Good financial reporting is connected with accountability and corporate governance and stakeholders are always concerned about their vested interests which can be protected by making the individuals accountable. The great corporate scandals such as of Enron resulted in serious economic and social costs since financial statements can be manipulated to fool the customers or investors for the short term advantages, but it can spoil the reputation of a company for a number of years which will in turn affect the brand image of the company. Financial reporting is also connected with ethics and as a socially responsible individual I believe that ethics is one of the integral elements of success in one’s career. Furthermore, I also believe that high quality financial reporting is correlated with economic prosperity since it can reduce the risk of serious financial crisis which can damage the economy. REFERENCES Amir, E. and Livne, G. 2005, Accounting, Valuation and Duration of Football Player Contracts, Journal of Business Finance & Accounting, 32(3), pp-549-85 Arsenal Holdings Plc, 2010. Investor Relations., Available at: [Accessed 20 December 2010]. International Accounting Standard Board (IASB), 2010. Framework, Available at: [Accessed 20 December 2010]. Morrow, S., 1995, Recording the Human Resource of Football Players as Accounting Assets: Establishing a Methodology, The Irish Accounting Review, 2(1), pp-115-13 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 Morrow, S., 1997. Accounting for Football Players. Financial and Accounting Implications of Royal Club Liégois and Others V Bosnian for Football in the United Kingdom, Journal of Human Resource Costing and Accounting, (2) 1, pp-55-71 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 20 December 2010]. Read More