As part of its activities, the European Securities and Markets Authority (ESMA) organizes a forum of enforcers from 38 different European jurisdictions, all of whom carry out monitoring and review programs similar to those carried out here by the Canadian Securities Administrators. ESMA recently published some extracts from its confidential database of enforcement decisions on financial statements, covering twelve cases arising in the period from December 2020 to January 2023, with the aim of “strengthening supervisory convergence and providing issuers and users of financial statements with relevant information on the appropriate application of IFRS.” There’s no way of knowing whether these are purely one-off issues or more widespread, but some of them certainly have some relevance to matters discussed within Canadian entities once in a while. Here’s one:

• The issuer is a football club. In June 2021, the issuer acquired registration rights for two players from Football Club A for 12 MEUR and 3 MEUR (15 MEUR in total) and recognized these rights as intangible assets under IAS 38. At the same time, the issuer sold registration rights for two other players to Football Club A, for 11 MEUR and 4 MEUR (15 MEUR in total). The transactions were executed on the basis of four separate legal contracts dated 30 June 2021.
• With the sale of registration rights, the issuer recognized net gains of 11 MEUR and 4 MEUR (15 MEUR in total) as the players, to whom the rights related, were “homegrown” in the issuer’s academy and their registration rights were measured at nil. This represented 20% of the total net gains on the disposal of registration rights and 43% of the issuer’s profit for the financial year.
• The registration rights acquired by the issuer were recognized in its financial statements at 15 MEUR, although, prior to their disposal, they were recognized at nil in the financial statements of Football Club A as they were also academy players.
• The issuer explained that the gains on the disposal of the registration rights were recognized in accordance with IFRS 15 as all risks and rewards inherent to the rights were substantially transferred. The issuer considered that each contract should be analyzed as a separate unit of account as the players were expected to have different impacts on the teams’ sporting performance and would, most likely, have different transfer values in the future.
• In the issuer’s opinion, the four transactions were independent from each other and therefore, did not constitute an exchange of assets. According to the issuer, the negotiations were conducted independently from each other, the agreed transaction values were independently determined and based on the valuation of the assets as deemed appropriate by the parties.
• In response to the enforcer’s request to provide rationale and supporting evidence for each player’s transaction value, the issuer presented an internal “scouting report” supporting the acquiring decision. The one-page report contained only a qualitative evaluation of the players, including a description of key sportive characteristics and a qualitative global score (e.g., “AB” or “AB+”). The issuer confirmed that the two acquired players are currently playing in the issuer’s second team (team B), similar to their previous situation in Football Club A.
• The enforcer understood that the gains recognized by the issuer were of particular importance to the issuer to comply with the UEFA regulations in relation to financial fair play, particularly taking into account its fragile financial situation, as its equity was negative as of June 30, 2021.

The enforcer (as ESMA likes to term it) concluded that the four separate legal contracts between the issuer and Football Club A should have been examined as a whole to ensure that the financial statements faithfully represented the substance of the transactions; it based this conclusion on the facts of the dates, counterparts and amounts involved all being the same, with no cash inflows or outflows. The enforcer also concluded that the fair value of the assets received by the issuer and the assets given up couldn’t be reliably measured: the issuer was unable to provide supporting evidence demonstrating the use of a structured methodology to calculate the fair value of the rights; neither the enforcer nor the issuer could identify registration rights transactions for players with similar characteristics within this range of amounts; and a website providing information on players’ transfer market commonly used by the industry didn’t support the issuer’s valuations (while also failing to provide evidence for any alternative reliable estimate). Taking all that into account, the issuer should have measured the acquired registration rights at the carrying amount of the assets given up (i.e., at nil), with no gain recognition in profit or loss.

For some perspective on this, I might come to you and suggest exchanging my two ancient cats, whom I acquired for nothing but nevertheless today assess as being worth half a million dollars each, for your old dog, which it therefore follows must be worth a million dollars, and can be entered on my personal balance sheet accordingly, along with a million dollar gain. Just tell me I’m wrong!

The opinions expressed are solely those of the author.