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Football Amortisation: Chelsea’s large Luiz Profit


May 30, 2014

Transfer Accounting

With David Luiz moving to PSG, many have asked how PSG can afford the reported €40-50m fee with their FFP spending restrictions. As such, the basis of this blog is to shed light on how clubs account for the sale and purchase of players and why it is important for FFP compliance.

How Purchasing Clubs Account for their Spending

In sexy accounting speak “when a player is purchased, his cost is capitalised on the balance sheet and is written-down (amortised) over the length of his contract.” In laymen’s terms, transfer fees for accounting purposes are spread over the length of a players’ contract. If we take PSG’s purchase of Luiz as a recent example, €50m over a five year contract is amortised by a club in its accounts to the value of €10m per season.

Although PSG have agreed to spending restrictions due their FFP settlement agreement with UEFA, they are permitted to invest in their squad under the terms of the agreement. Of more concern to PSG will be their 14-15 wage freeze restriction. If Luiz is on large wages, they will need to reduce their wage bill. Reduction will be possible with out of contract or contracted players leaving the club.

A transfer occurring in the 2013-14 season (depending on PSG’s accounting year end) will have an impact on a club trying to break-even in subsequent seasons. As noted above, PSG will amortise Luiz’s transfer fee over the length of his contract. If we assume a 5 year contract, PSG will have four further €10m amortisation charges in their 14-15, 15-16, 16-17 and 17-18 accounts. All of those amortization costs will have FFP significance.

How Selling Clubs Account for their Income

The other important amortisation issue is the accounting procedure when a player is sold. On this topic I defer to the Swiss Ramble who uses the ex-Manchester City player Robinho as an example:

“[H]e was bought for £32.5 million in September 2008 on a four-year contract, so annual amortisation was £8.1 million. He was sold after two years, so cumulative amortisation was £16.2 million, leaving a value of £16.3m in the books. Sale price to Milan is reported as £18 million, so City will report a profit on sale of £1.7 million in the 2010/11 accounts. Therefore, City will show an annual profit improvement of £18.1 million after this deal: £8.3 million lower wages + £8.1 million lower amortisation + £1.7 million profit on sale.”

This demonstrates how clubs write-off the transfer value of a player over the life-time of their contract and also illuminates that because Robinho was worth £16.3m two years into his four year deal, Manchester City actually made an accounting profit on his transfer of £1.7m. Fans would see the sale of a player for £18m bought two years previously for £32.5m as bad business. The club in their accounts will class it as a £18.1m profit improvement.

 Luiz Profit for Chelsea

In taking the Luiz transfer to PSG, I am grateful to Jake Cohen for doing the hard calculation yards in his blog post, which I use as the basis for the Luiz transfer profit for Chelsea. Chelsea originally purchased Luiz from Benfica in the January 2011 transfer window for a reported £21.4m (plus Nemanja Matic, valued at a £5m). Luiz’s transfer fee was amortised to around £4.8m annually (£26.4m over 5.5 years).

Luiz then signed a new five-year contract in September 2012. The remaining book value of the transfer fee at the time of the new five-year deal was £19.2m as 1.5 years of the original transfer fee (£7.2m) had been amortised. This meant a re-amortised annual figure of £3.84m.

As Luiz had three years remaining on his contract, the remaining ‘unamortised’ value was around £11.5m. Depending on the exact figures that PSG have paid for Luiz, an initial conservative £40m fee minus the remaining £11.5m gives Chelsea total accounting profit on the Luiz sale of £28.5m. Therefore, Chelsea may show an annual profit improvement of £36.1m after this deal: £3.8m lower wages[1] + £3.8m lower amortisation costs + £28.5m million profit on sale.

Such profit will no doubt put Chelsea in a stronger position to comply with FFP in the coming seasons.

 

[1] Assuming £80k a week equalling around £3.8m

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