The football transfer market is one of the most exciting features of club football. It is a spectacle that occurs every summer and winter, and allows football clubs around the world to purchase the rights to players in other clubs and give us some of the great player switches over the years that have had some of us jumping out of our seats, and some others (majorly Arsenal fans) kissing their teeth. The transfer window is huge business though, and is actually the means by which many clubs (e.g Monaco or Southampton) make the great bulk of their profit.
Beyond getting fans excited for a new season, or giving us a reason to purchase a new copy of FIFA20® or giving journalists something to report on; the transfer window does have a some “downside”.
Clubs such as Chelsea, PSG, Fenerbache, AC Milan etc. with “new money”, have been acquired by billionaire owners, and have abused the transfer window, by simply pumping money into their newly acquired teams, and purchased whoever they want, with the knock on effect of causing an inflation in the transfer market and killing the competitiveness amongst clubs. In addition, it led to corporate mismanagement of clubs, and eventually led to so many clubs such as Blackburn Rovers or Leeds United, falling into great debt. Some clubs have had to go into administration or be wound up. In purchasing some football clubs, certain owners also carried out a “leveraged buyout”, which plunges the football clubs into even greater debt.
The Union of European Football Associations (“UEFA”) introduced Financial Fair Play Regulations (FFP) which were established to curtail the spending by football clubs. FFP are regulations to ensure that clubs do not spend more than the income they have actually earned. The FFP as stated by UEFA seeks to:
- to improve the economic and financial capability of the clubs, increasing their transparency and credibility:
- to place the necessary importance on the protection of creditors and to ensure that clubs settle their liabilities with employees, social/tax authorities and other clubs punctually;
- to introduce more discipline and rationality in club football finances;
- to encourage clubs to operate on the basis of their own revenues;
- to encourage responsible spending for the long-term benefit of football;
- to protect the long-term viability and sustainability of European club football
The consequences of violating FFP are numerous, but the gravest of the consequences are of course: Fines, Points deductions and exclusion from UEFA competitions (e.g. the Champions League and the Europa League).
The question does arise, how then are clubs able to still make huge transfers for ridiculous amounts, yet still be able to comply with FFP? Well there are many means by which clubs do this, but the primary one is by something called “player amortization”.
In order to illustrate, let us use Manchester United (“MUFC”) (a club who has spent huge sums of money on transfers, but has not violated FFP) as an example. According Statista, here’s a breakdown of MUFC’s profits between 2015-2018:
2015- £-0.9 Million
2016- £36.37 Million
2017- £ 39.18 Million
2018- £ 37.27 Million
This gives a total of £111.92 Million profit from 2015 to 2018
However, between 2015-2018, here’s just a selection of MUFC transfers:
- Paul Pogba from Juventus to MUFC for £93,250,000
- Romelu Lukaku from Everton to MUFC for £75,000,000
- Fred from Shakhtar Dontesk to MUFC for £61,200,000
- Aaron Wan-Bissaka from Crystal Palace to MUFC for £49,500,000
- Nemanja Matic from Chelsea to MUFC for £40,230,000
- Eric Baily from Villareal to MUFC for £34,200,000
- Henrikh Mkhitaryan from BvB to MUFC for £30,000,000
Clearly, the player transfers greatly outweigh the amount gotten as actual profit. So how do they offset this and balance the books? Well this could be done by a variety of means – loans, lucrative sponsorship deals, player sales etc., but the focus of this article is on a critical accounting practice called “amortization” which is utilized by practically all football clubs.
As defined by Investopedia.com, – “Amortisation is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time.” It is a process of paying off a debt through regular instalments. Thus spreading out the liability over the timespan of the player’s contract.
It is important to note that amortisation does not refer to the actual payment structure or facilities used in acquiring the player. In instances where the transfer fee is negligible, or where the paying club is financially able to pay the entire fee at once, the buying club would pay the entire transfer sum in one lump sum.
In the media, it is common to hear terms such as “net spend” or “transfer budget” or “war chest” when referring to a club’s business for a given transfer window. However, these terms to a large extent are actually irrelevant to how most big clubs do business. Football clubs use the concept of amortization to record their transfer business.
Let’s use the transfer of Matthijs De Ligt from Ajax to Juventus in 2019. De Ligt was purchased for a reported transfer fee of £67,000,000. The general view amongst football fans is that Juventus would pay the entire sum, and that is the full and final settlement on their books for the year 2019. However, on Juventus’ books, the sum would be amortised over the course of the duration of the player’s contract. Thus, it would be £13,400,000 every year for 5 years, rather than £67,000,000 in just 2019.
However, it is also important to note that when amortising player’s contracts on their books, Clubs also take into consideration the player’s wages. Thus, if Matthis De Ligt cost £67,000,000, was signed on a 5year contract and would earn a reported salary of £21,600,000 per annum (£416,000 per week) the amortised amount would be £67,000,000 + £108,000,000 (£21,600,000 annual salary x 5 years) = £175,000,000, which would amortised at £35,000,000 per year.
Illustrated in the table below:
Player- Matthijs De Ligt
Transfer Fee – £67,000,000
Contract length- 5 years
Annual Salary – £21,600,000
Total Salary – £108,000,000
TOTAL liability to Juventus – £175,000,000
YEAR AMORTSED AMOUNT
2019 – £35,000,000
2020 – £35,000,000
2021 – £35,000,000
2022 – £35,000,000
2023 – £35,000,000
TOTAL – £175,000,000
Thus “Net Spend” at the end of the day, means little to most clubs, as the annual expenditure does not reflect what would be reported as the lump sum in the media. This important, as the effect of this (that many fans may not realise when talking about transfer funds spent) is that ultimately, a free agent may cost a team far more than an “expensive” signing.
Let’s take two players for example Aaron Ramsey and Cristian Romero (both of whom were signed by Juventus in 2019. Whilst Cristian Romero cost Juventus a reported £23,700,000; Aaron Ramsey was signed for £0(as in “Zero”) (no transfer fee was paid, as he was signed by Juventus as a free agent). Aaron Ramsey is reportedly earning £20,800,000 (£400,000per week) per annum and is on a 4year contract, hence this cost to Juventus is £83,200,000. When amortised, this will come to £20,800,000 per year. Cristian Romero on the other hand has a reported earnings of £1,000,000 (approx. £19,000 per week) per annum, hence his total cost to Juventus is £28,700,000. When amortised, this will come to £5,740,000 per annum. Thus, despite the fact that Ramsey’s transfer would be reported as a “free transfer”, he is costing Juventus £15,060,000 more per annum than Cristian Romero. Ultimately, the player’s wages can be a far greater deciding factor in whether or not a player can be afforded, and whether or not a club has really “spent” a lot of money.
Another effect of the concept of amortisation for football clubs is profit. A player may be bought for a reportedly high fee one year, and sold in another year for a higher fee. This would be reported in the media as a profit by simply subtracting the two sums, however, this may not necessarily be the case.
If a player were purchased for £20,000,000 (on a 4 or 5-year contract) and is sold one, two or three years down the line for £40,000,000, we get:
|Contract Length||Yearly Amortisation||Book Value After 1 Year||Profit On Player Sold at £40m
|Book Value After 2 Years||Profit On Player Sold At £40m after 2 years||Book Value After 3 Years||Profit On Player Sold At £40m after 3 years|
From the table above, you can see that from the accounting practice applied, the margin of profit a club records are not just dictated by how much the player was bought and sold for, but also by how long of a contract the player is on, as well as how long down the line the player was sold. Bear in mind that in order to keep the sums simple, we did not factor in wages in the table above.
In addition, it is important to note that especially in high end deals, factors such as image rights, sponsorship deals, third party ownership structures etc. are factored in when amortising player’s total value (hence, it can be quite complex).
Accountants can have a crack any holes that may exist in the piece above, but yea that’s player amortization in a nutshell.
photo credit: schools-training.com