How Should Sponsorship Fees Paid For Sporting Events be Accounted For by Companies?

A. Introduction

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.

B. Questions

• (On Day 1) Should the entity account for this amount as an intangible asset or advance against future sales promotion expenses?
• 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 or loss, when the amount is capitalized as an intangible asset and when it is presented as an advance? Will the P&L charge differ under either approach?

C. Views

• 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 as per Ind AS-38 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.
• 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. It means 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.

D. Conclusion

Under the present case, the argument to capitalize the INR 100 million as an intangible asset is much stronger, because the payment represents a payment for acquiring a license to use the World Cup brand. Additionally, it may be noted that many global companies have capitalized such payments under IFRS as intangible assets. However, the other views of presenting the payment as an advance cannot be ruled out.

With regards to the expensing to Profit & Loss, the charge will generally depend upon whether the payment is capitalized 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.

Bijhon Bordoloi, Audit Associate, SW India