（a) Emcee, a public limited company, is a sports organisation which owns several football

(a) Emcee, a public limited company, is a sports organisation which owns several football and basketball teams. It has a financial year end of 31 May 2016. Emcee needs a new stadium to host sporting events which will be included as part of Emcee’s property, plant and equipment. Emcee therefore commenced construction on a new stadium on 1 February 2016, and this continued until its completion which was after the year end of 31 May 2016. The direct costs were $20 million in February 2016 and then $50 million in each month until the year end. Emcee has not taken out any specific borrowings to finance the construction of the stadium, but it has incurred finance costs on its general borrowings during the period, which could have been avoided if the stadium had not been constructed. Emcee has calculated that the weighted average cost of borrowings for the period 1 February–31 May 2016 on an annualised basis amounted to 9% per annum. Emcee needs advice on how to treat the borrowing costs in its financial statements for the year ending 31 May 2016. (6 marks)

(b) Emcee purchases and sells players’ registrations on a regular basis. Emcee must purchase registrations for that player to play for the club. Player registrations are contractual obligations between the player and Emcee. The costs of acquiring player registrations include transfer fees, league levy fees, and player agents’ fees incurred by the club. Often players’ former clubs are paid amounts which are contingent upon the performance of the player whilst they play for Emcee. For example, if a contracted basketball player scores an average of more than 20 points per game in a season, then an additional $5 million may become payable to his former club. Also, players’ contracts can be extended and this incurs additional costs for Emcee.

At the end of every season, which also is the financial year end of Emcee, the club reviews its playing staff and makes decisions as to whether they wish to sell any players’ registrations. These registrations are actively marketed by circulating other clubs with a list of players’ registrations and their estimated selling price. Players’ registrations are also sold during the season, often with performance conditions attached. Occasionally, it becomes clear that a player will not play for the club again because of, for example, a player sustaining a career threatening injury or being permanently removed from the playing squad for another reason. The playing registrations of certain players were sold after the year end, for total proceeds, net of associated costs, of $25 million. These registrations had a net book value of $7 million.

Emcee would like to know the financial reporting treatment of the acquisition, extension, review and sale of players’ registrations in the circumstances outlined above. (10 marks)

(c) Emcee uses the revaluation model to measure its stadiums. The directors have been offered $100 million from an airline for the property naming rights of all the stadiums for three years. There are two directors who are on the management boards of Emcee and the airline. Additionally, there are regulations in place by both the football and basketball leagues which regulate the financing of the clubs. These regulations prevent capital contributions from a related party which ‘increases equity without repayment in return’. The aim of these regulations is to promote sustainable business models. Sanctions imposed by the regulator include fines and withholding of prize monies. Emcee wishes to know how to take account of the naming rights in the valuation of the stadium and the potential implications of the financial regulations imposed by the leagues. (7 marks)

Required:

Discuss how the above events would be shown in the financial statements of Emcee under International Financial Reporting Standards.

Note: The split of the mark allocation is shown against each of the three issues above.

Professional marks will be awarded in question 3 for clarity and quality of presentation. (2 marks)