Companies may enter into sponsorship agreements for World Cup events or Olympic games as a means of building their brands or advertising their products. Consider a scenario, where an entity enters into an arrangement with the owners of the Cricket World Cup event to use the World Cup brand in its products or activities for one year ending one month after the event is concluded. To gain that right, the entity pays INR 100 million.
Question 1
On Day 1, Should the entity account for this amount as an intangible asset or advance against future sales promotion expenses?
Question 2
Assume that the entity shall exploit the brand for the entire year starting from the date of acquisition and ending one month after the event is concluded. How will the INR 100 million be debited to profit and loss, when the amount is capitalised as an intangible asset and when it is presented as an advance? Will the P&L charge differ under either approach?
Accounting Standard References from Ind AS 38 Intangible Assets
Paragraph 8
An intangible asset is an identifiable non-monetary asset without physical substance.
An asset is a resource: (a) controlled by an entity as a result of past events; and (b) from which future economic benefits are expected to flow to the entity.
Paragraph 29
“Examples of expenditures that are not part of the cost of an intangible asset are:
(a) costs of introducing a new product or service (including costs of advertising and promotional activities);
(b)…….
(c)………..”
Paragraph 69
“……Other examples of expenditure that is recognised as an expense when it is incurred include:
(a) ………
(b) …..
(c) expenditure on advertising and promotional activities (including mail order catalogues).
(d) …………….”
Paragraph 70
Paragraph 68 does not preclude an entity from recognising a prepayment as an asset when payment for goods has been made in advance of the entity obtaining a right to access those goods. Similarly, paragraph 68 does not preclude an entity from recognising a prepayment as an asset when payment for services has been made in advance of the entity receiving those services.
Paragraph 97
The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. ……….The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used.
Response to Question 1
View A: INR 100 million should be recognised as an intangible asset
The sponsorship arrangement can be accounted for as an acquisition of a right to use the World Cup brand, and therefore can be recognized as an asset. The right to use the Cricket World Cup Brand represents a license to use a brand for a defined period, in this case, one year.
The definition of an intangible asset requires that the asset is identifiable, controlled by the entity, and that future economic benefits are expected to flow to the entity from the use of the asset. These requirements are met, as the asset is identifiable through a contractual right, the entity has control over the licence and future economic benefits will flow to the entity from that licence.
View B: INR 100 million should be recognised as an advance for future services to be received
Paragraph 29 of Ind AS 38, provides examples of costs that do not form part of the cost of an intangible asset. One of the examples is the cost of introducing a new product or service including cost of advertising and sales promotion expenses. This requirement seems to suggest that sales promotion activities are expenditure and are not capitalised as intangible asset. The benefit of the sales promotion activity is to enhance the value of the brand and the customer relationship of the entity, which in turn generates revenue. As the brand and customer relationship of the entity are internally generated brands, and are not recognised as assets of the company, expenses to enhance those internally generated intangibles should not be recognised as an intangible asset. Additionally, the Cricket World Cup brand will not be used in isolation but will be used in conjunction with the entity’s brand, and therefore the arrangement is a co-branding arrangement.
In substance, the right to use the World Cup Brand is no different from an advertising activity, that enhances the value of the entity’s brand value. This is an internally generated brand and should not be capitalised as an intangible asset. Till such time the services are received; INR 100 million should be presented as an advance (or prepaid expense) in accordance with paragraph 70.
Response to Question 2
Basis paragraph 97 the intangible asset is amortized from the date the asset is available for use till the date the license is used, i.e., amortisation ends one month after the event is concluded. The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used. The pattern of consumption will be significant when the actual event is unfolding; however, because it cannot be estimated reliably, the amortisation will happen on a straight-line basis, over the one-year period of the licence.
When INR 100 million is presented as an advance, the expensing will not be different from the one that is undertaken with respect to amortisation of intangible assets. Typically, for a supply of services, an expense is recognised when the entity receives the services. Services are received when they are performed by a supplier in accordance with a contract which is equally over the contractual period of one year, as the World Cup brand is utilised over that period.
CONCLUSIONThe question raised in this article is a very interesting question with respect to whether a payment for future services constitutes an advance for a service or an intangible asset. Under the present case, the author believes that the argument to capitalize the INR 100 million as an intangible asset is much stronger, because the payment represents a payment for acquiring a licence to use the World Cup Brand. Additionally, it may be noted that many global companies have capitalised such payments under IFRS as intangible assets. However, the other view of presenting the payment as an advance, cannot be ruled out.
With regards to the expensing in the profit or loss, the charge will generally be agnostic to whether the payment is capitalised as an intangible asset or presented as an advance. If presented as an advance, the cash outflow will be classified as operating, and if presented as intangible asset, the cash outflow will be classified as investing. As regards EBITDA, it will be higher (favourable) when the payment is treated as an intangible compared to when presented as an advance, because EBITDA will not include the amortisation charge, but expensing of the advance will be included in the EBITDA.
