Seejoy is a famous football club but has significant cash flow problems. The directors and shareholders wish to take steps to improve the clubâ€™s financial position. The following proposal was drafted in an attempt to improve the cash flow of the club. However, the directors need advice about its implications.
The club capitalises the unconditional amounts (transfer fees) paid to acquire players.
The club proposes to amortise the cost of the transfer fees over 10 years instead of the current practice, which is to amortise the cost over the duration of the playerâ€™s contract. The club has sold most of its valuable players during the current financial year but still has two valuable players under contract.
If Seejoy wins the national football league, then a further $5 million will be payable to the two playersâ€™ former clubs. Seejoy is currently performing very poorly in the league.
Discuss how the above proposal would be dealt with in the financial statements of Seejoy for the year ending 31 December 2007, setting out their accounting treatment and appropriateness in helping the football clubâ€™s cash flow problems.
(No knowledge of the football finance sector is required to answer this case study.)