Transfer Fees/Amortisation

[Superted]

Morning All.

I thought I'd post a thread to try and explain in simple terms my understanding of what happens in money terms when a player is signed or sold, what amortisation is and what it isn't. I think people are misunderstanding the process and what it is for. I'm not an accountant, but have run a business in the past and been involved in preparing many sets of annual accounts. This is not about FFP per sé but hopefully gives a bit of basic background for when we're all discussing potential transfer fees and what we think the available funds might be.

When a company buys something tangible (i.e. a physical thing, whether it's a vehicle, photocopier or whatever) they will generally pay for it. Once that thing is owned by the company it becomes an asset. Whatever the full purchase value of the thing was determines it's value. So if a company bought a car for £30k it then goes onto the books as a £30k asset.

If the car was bought for £30k cash outright (excluding tax), then in accounting terms there is no positive or negative effect on the accounts because the cash paid out is balanced by the fact that they have aquired £30k in assets. If that vehicle was bought using finance or a loan, then the up front payment/deposit paid goes in as a negative, the car comes in as a £30k asset, but the balance of the finance/loan is assigned to the company debt which is obviously a negative.

The problem is that the vehicle will not be worth £30k for long and, as most people know, most things lose value over their lifetime which is where 'depreciation' comes in. The idea is that you account for the loss of value of all the things or 'tangible assets' every year and this shows as a negative in the accounts.

Football players are somewhat different in that they don't 'depreciate' because they are not tangible assets. The club are not buying a player (a person), they are acquiring the right to register that player and to field that player in competition. This makes them 'intangible assets' i.e. not a physical object which is where amortisation is used. The total transfer fee paid determines the asset value of the player's registration on the day the contract is signed.

The basic principle is that a club will pay a transfer fee for the registration of a player on a fixed term contract. However at the end of that contract the player can walk away for nothing so their value at that point would be zero. In accounting terms though, you wouldn't want to write the entire transfer fee off in one go because that would put a huge dent in your figures for that year. The solution is to spread the cost over the length of the contract or 'useful life' which minimises the impact. This is not a cost that has to be paid in cash, it is simply shown as a negative in the accounts which comes off the final figure or 'bottom line' for that year and ideally has to be covered/balanced in some way.

So although there is a transfer fee paid which is a direct cost, this is balanced/offset in the accounts by the club acquiring an asset which has a value. However, the club still has to retain enough cash to operate. Asset value does not trump cash in the bank. "Cash is king" is the saying as without cash you can't do anything.

Let's take an example of a £20M player signing on a four year contract with a single up-front payment.

Year 0: Transfer fee paid -£20M, Asset value +£20M, Debt, £0M, Accounting cost £0M.
Year 1: Transfer fee paid £0M, Asset Value +£15M, Debt £0M, Accounting cost -£5M.
Year 2: Transfer fee paid £0M, Asset Value +£10M, Debt £0M, Accounting cost -£5M.
Year 3: Transfer fee paid £0M, Asset Value +£5M, Debt £0M, Accounting cost -£5M.
Year 4: Transfer fee paid £0M, Asset Value +£0M, Debt £0M, Accounting cost -£5M.

Now. Most high value transfer fees are not paid via a single payment but in installments. Let's assume that the club paid £10M up front, with £5M paid in two subsequent years. As you can see below, the basic cost is the same in the accounts but the difference is that there are cash payments required to service the remaining installments of the fee (i.e. the debt) plus any interest payments.

Year 0: Transfer fee paid -£10M, Asset value +£20M, Debt, -£10M, Accounting cost £0M.
Year 1: Transfer fee paid -£5M, Asset value +£15M, Debt, -£5M, Accounting cost -£5M.
Year 2: Transfer fee paid -£5M, Asset value +£10M, Debt, -£0M, Accounting cost -£5M.
Year 3: Transfer fee paid £0M, Asset value +£5M, Debt, £0M, Accounting cost -£5M.
Year 4: Transfer fee paid £0M, Asset value +£0M, Debt, £0M, Accounting cost -£5M.

When a player is sold, the club will most likely recieve some sort of transfer fee. This will be reflected in the accounts at whatever the selling price is. However, that player's registration still has a value to the selling club so the positive effect of that incoming transfer fee on the accounts is reduced by whatever the current asset value of their registration is.

Let's consider the same £20M player signed above but sold after 2 years for £15M.

We know that in year 2 his asset value was £10M, so you're gaining £15M cash but losing a £10M asset so the net gain is £15M minus £10M which is only actually £5M. If that same player were only sold for, say £5M, then there is actually a net loss of £5M.

The point of all the above is to highlight that amortisation is not a magic trick to be able to buy more expensive players that you could otherwise afford. It's simply a way to account for the fact that a player's registration has a fixed useful life and it is the least painful way to write off a transfer fee. If you don't have the cash, revenue or access to the required funds you won't be able to make the transfer, amortisation will not help you.

It's also not the case that the blow of transfer fees for new players can be softned using amortisation and the gain from incoming transfer fees are 100% positive because if you're accounting for asset value on incoming transfers you have to account for it in the outgoing transfers. This is why academies can be lucrative because the asset value of academy players is very low compared to the potential transfer fees making these players more profitable.

Another thing to note is that when a player is given a new contract (which extends their 'useful life') the remaining asset value is further amortised over the length of the new contract so in the example above, if the player's asset value were £10M in year 2 and he were awarded a new 5-year contract, his annual amortisation cost would reduce to £2M. This is probably why you see clubs trying tohand out new contracts to their previous high value signings before a spending spree.

 

[JohnB]

Thanks Superted,

That is great.

So there are a few pointers for our transfer.

1) We are limited by FFP - specifically the UEFA impact of reaching Europe too quickly and the requirements to reach an "aggregate break even for years 2019, 20 and 21" - where aggregate break even is no worse than a 30m Euro loss over the 3 years.

2) Transfers-in are spread (so we are not fully hit in year 1, but continue to be hit throughout contract i.e. some costs in year 2, 3, 4 etc). Each big purchase is therefore effectively borrowing and spending some of the following years' transfer budgets - as we start each new year with a negative from prior years' transfers which have yet to be fully amortised.

3) Transfers-out are tackled in year the agreement is made (even if payments are spread by the buying club). Whether that is an overall boost for our accounts or not depends on the value of the payment vs what we are accounting for that person. So, if we bought someone for £50m on a 5 year contract - he would be worth £40m after 1 year and £0m after 5 years. If we sold him for £50m we make no cash profit but the impact on our accounts will depend on when sold (as we will be losing £10m each year he stays with us which is reversed out when sold). So if sold at end of year 4 for £50m we will have had 4 years of -£10m and the year of sale will be +£40m.

4) Speculating - we could theoretically in the above example spend £200m on players in year 4 once the player has been sold for a £40m profit and still be break even (assuming the new players have 5 year contracts). The problem is that the following 4 years we'd start each year with a -£40m deficit due to the amortisation which would limit additional acquisitions or require us to sell.

5) We cannot simply look at net spend in this window as we need to take into account not just our aggregate loss for 2019 and 2020 but also prior year transfers still amortising.

6) Unless someone is keeping tally with prior years transfers to know how they are amortising - we don't have a scooby doo what is available to spend. Would we like to know? Sure. Would other football clubs like to know and may impact our negotiation strategy? Absolutely.

We know that FFP is tight, we also know that some cash has been borrowed against future revenue to allow for transfers we've already had. FFP remains a blessing and a curse (blessing in that it stops Villa blowing £100ms - curse in that it is very hard to break through the top 6 ceiling) - personally given Barca fallout I can see further changes to FFP/European Super League.

 

[wwbug]

I suppose a lot does come down to intent and discretion.
FFP.. Provides the upper limit.
Americans owners want to make profit , Chelsea and Man City and Leicester owners seem to see it as a pastime, or have a pride in ownership.

 

[Superted]

Thanks Superted,

That is great.

So there are a few pointers for our transfer.

1) We are limited by FFP - specifically the UEFA impact of reaching Europe too quickly and the requirements to reach an "aggregate break even for years 2019, 20 and 21" - where aggregate break even is no worse than a 30m Euro loss over the 3 years.

2) Transfers-in are spread (so we are not fully hit in year 1, but continue to be hit throughout contract i.e. some costs in year 2, 3, 4 etc). Each big purchase is therefore effectively borrowing and spending some of the following years' transfer budgets - as we start each new year with a negative from prior years' transfers which have yet to be fully amortised.

3) Transfers-out are tackled in year the agreement is made (even if payments are spread by the buying club). Whether that is an overall boost for our accounts or not depends on the value of the payment vs what we are accounting for that person. So, if we bought someone for £50m on a 5 year contract - he would be worth £40m after 1 year and £0m after 5 years. If we sold him for £50m we make no cash profit but the impact on our accounts will depend on when sold (as we will be losing £10m each year he stays with us which is reversed out when sold). So if sold at end of year 4 for £50m we will have had 4 years of -£10m and the year of sale will be +£40m.

4) Speculating - we could theoretically in the above example spend £200m on players in year 4 once the player has been sold for a £40m profit and still be break even (assuming the new players have 5 year contracts). The problem is that the following 4 years we'd start each year with a -£40m deficit due to the amortisation which would limit additional acquisitions or require us to sell.

5) We cannot simply look at net spend in this window as we need to take into account not just our aggregate loss for 2019 and 2020 but also prior year transfers still amortising.

6) Unless someone is keeping tally with prior years transfers to know how they are amortising - we don't have a scooby doo what is available to spend. Would we like to know? Sure. Would other football clubs like to know and may impact our negotiation strategy? Absolutely.

We know that FFP is tight, we also know that some cash has been borrowed against future revenue to allow for transfers we've already had. FFP remains a blessing and a curse (blessing in that it stops Villa blowing £100ms - curse in that it is very hard to break through the top 6 ceiling) - personally given Barca fallout I can see further changes to FFP/European Super League.

In a nutshell that's not far off. The first year is not the issue, it's subsequent years when you're loading more new signings and subsequent amortisation on top of existing amortisation costs.

I guess the takeaway should be, don't confuse accounting for transfer fees with paying for transfer fees. How you account for them is irrelevant if you don't have the cash flow/revenue to pay for them in the first place.

In a hamfisted way, that is what FFP/Profit and Sustainability rules were brought in for, to stop clubs overcommitting in the short term with no way of paying in the long term.

 

[JohnB]

In a nutshell that's not far off. The first year is not the issue, it's subsequent years when you're loading more new signings and subsequent amortisation on top of existing amortisation costs.

I guess the takeaway should be, don't confuse accounting for transfer fees with paying for transfer fees. How you account for them is irrelevant if you don't have the cash flow/revenue to pay for them in the first place.

In a hamfisted way, that is what FFP/Profit and Sustainability rules were brought in for, to stop clubs overcommitting in the short term with no way of paying in the long term.

I’ve never really understood why the owners cannot put equity into the club and spend as and when they wish - so long as no risk of going bust (eg if buying players worth £200m then equity for the full £200m goes in to cover cash now and accounting over the 5 years not £40m and then whistle for the next 4 years).

Answer is presumably that big clubs are worried about State owned teams taking their places….but could tackle that by limiting number of players in squad/club at any one time.

 

[Chris H]

Morning All.

I thought I'd post a thread to try and explain in simple terms my understanding of what happens in money terms when a player is signed or sold, what amortisation is and what it isn't. I think people are misunderstanding the process and what it is for. I'm not an accountant, but have run a business in the past and been involved in preparing many sets of annual accounts. This is not about FFP per sé but hopefully gives a bit of basic background for when we're all discussing potential transfer fees and what we think the available funds might be.

When a company buys something tangible (i.e. a physical thing, whether it's a vehicle, photocopier or whatever) they will generally pay for it. Once that thing is owned by the company it becomes an asset. Whatever the full purchase value of the thing was determines it's value. So if a company bought a car for £30k it then goes onto the books as a £30k asset.

If the car was bought for £30k cash outright (excluding tax), then in accounting terms there is no positive or negative effect on the accounts because the cash paid out is balanced by the fact that they have aquired £30k in assets. If that vehicle was bought using finance or a loan, then the up front payment/deposit paid goes in as a negative, the car comes in as a £30k asset, but the balance of the finance/loan is assigned to the company debt which is obviously a negative.

The problem is that the vehicle will not be worth £30k for long and, as most people know, most things lose value over their lifetime which is where 'depreciation' comes in. The idea is that you account for the loss of value of all the things or 'tangible assets' every year and this shows as a negative in the accounts.

Football players are somewhat different in that they don't 'depreciate' because they are not tangible assets. The club are not buying a player (a person), they are acquiring the right to register that player and to field that player in competition. This makes them 'intangible assets' i.e. not a physical object which is where amortisation is used. The total transfer fee paid determines the asset value of the player's registration on the day the contract is signed.

The basic principle is that a club will pay a transfer fee for the registration of a player on a fixed term contract. However at the end of that contract the player can walk away for nothing so their value at that point would be zero. In accounting terms though, you wouldn't want to write the entire transfer fee off in one go because that would put a huge dent in your figures for that year. The solution is to spread the cost over the length of the contract or 'useful life' which minimises the impact. This is not a cost that has to be paid in cash, it is simply shown as a negative in the accounts which comes off the final figure or 'bottom line' for that year and ideally has to be covered/balanced in some way.

So although there is a transfer fee paid which is a direct cost, this is balanced/offset in the accounts by the club acquiring an asset which has a value. However, the club still has to retain enough cash to operate. Asset value does not trump cash in the bank. "Cash is king" is the saying as without cash you can't do anything.

Let's take an example of a £20M player signing on a four year contract with a single up-front payment.

Year 0: Transfer fee paid -£20M, Asset value +£20M, Debt, £0M, Accounting cost £0M.
Year 1: Transfer fee paid £0M, Asset Value +£15M, Debt £0M, Accounting cost -£5M.
Year 2: Transfer fee paid £0M, Asset Value +£10M, Debt £0M, Accounting cost -£5M.
Year 3: Transfer fee paid £0M, Asset Value +£5M, Debt £0M, Accounting cost -£5M.
Year 4: Transfer fee paid £0M, Asset Value +£0M, Debt £0M, Accounting cost -£5M.

Now. Most high value transfer fees are not paid via a single payment but in installments. Let's assume that the club paid £10M up front, with £5M paid in two subsequent years. As you can see below, the basic cost is the same in the accounts but the difference is that there are cash payments required to service the remaining installments of the fee (i.e. the debt) plus any interest payments.

Year 0: Transfer fee paid -£10M, Asset value +£20M, Debt, -£10M, Accounting cost £0M.
Year 1: Transfer fee paid -£5M, Asset value +£15M, Debt, -£5M, Accounting cost -£5M.
Year 2: Transfer fee paid -£5M, Asset value +£10M, Debt, -£0M, Accounting cost -£5M.
Year 3: Transfer fee paid £0M, Asset value +£5M, Debt, £0M, Accounting cost -£5M.
Year 4: Transfer fee paid £0M, Asset value +£0M, Debt, £0M, Accounting cost -£5M.

When a player is sold, the club will most likely recieve some sort of transfer fee. This will be reflected in the accounts at whatever the selling price is. However, that player's registration still has a value to the selling club so the positive effect of that incoming transfer fee on the accounts is reduced by whatever the current asset value of their registration is.

Let's consider the same £20M player signed above but sold after 2 years for £15M.

We know that in year 2 his asset value was £10M, so you're gaining £15M cash but losing a £10M asset so the net gain is £15M minus £10M which is only actually £5M. If that same player were only sold for, say £5M, then there is actually a net loss of £5M.

The point of all the above is to highlight that amortisation is not a magic trick to be able to buy more expensive players that you could otherwise afford. It's simply a way to account for the fact that a player's registration has a fixed useful life and it is the least painful way to write off a transfer fee. If you don't have the cash, revenue or access to the required funds you won't be able to make the transfer, amortisation will not help you.

It's also not the case that the blow of transfer fees for new players can be softned using amortisation and the gain from incoming transfer fees are 100% positive because if you're accounting for asset value on incoming transfers you have to account for it in the outgoing transfers. This is why academies can be lucrative because the asset value of academy players is very low compared to the potential transfer fees making these players more profitable.

Another thing to note is that when a player is given a new contract (which extends their 'useful life') the remaining asset value is further amortised over the length of the new contract so in the example above, if the player's asset value were £10M in year 2 and he were awarded a new 5-year contract, his annual amortisation cost would reduce to £2M. This is probably why you see clubs trying tohand out new contracts to their previous high value signings before a spending spree.

I am an accountant, and this is a good explanation and summary of how it works without complicating things too much. Good work @Superted!

 

[Chris H]

I’ve never really understood why the owners cannot put equity into the club and spend as and when they wish - so long as no risk of going bust (eg if buying players worth £200m then equity for the full £200m goes in to cover cash now and accounting over the 5 years not £40m and then whistle for the next 4 years).

Answer is presumably that big clubs are worried about State owned teams taking their places….but could tackle that by limiting number of players in squad/club at any one time.

I presume it’s to stop owners tying clubs in the contracts they’d no longer be able to afford to pay if the owner turns off the tap.

For instance, if they choose to throw £200m at new signings then yeah I’d agree with you, but if they also tie several players in to long expensive contracts that the club can only afford as long as the owner continues to put the money in, what happens if/when he gets bored and stops bank rolling the club?

 

[Nige100]

Where’s the transfer thread gone??

 

[JohnB]

I presume it’s to stop owners tying clubs in the contracts they’d no longer be able to afford to pay if the owner turns off the tap.

For instance, if they choose to throw £200m at new signings then yeah I’d agree with you, but if they also tie several players in to long expensive contracts that the club can only afford as long as the owner continues to put the money in, what happens if/when he gets bored and stops bank rolling the club?

Understood completely.

I guess my view would be why couldn’t the owner put a higher, say, £300m of equity in to cover purchases and salaries (or £250m to cover purchases/salaries less expected revenue) etc

For most Private Companies there is no restriction from hiring talent if owner wants to spend it and has put the money in.

If we really were Sovereign backed with owners who wanted to reach the top then we are hamstrung by the “old order” which is “past revenue based”.

Will be interesting to see what happens to the likes of Barca and Inter given the losses/issues they are facing. My suspicion is a reduction in European squad size and nominal fine but also a change in FFP or local league wealth distribution to enable them to remain at the top table.

 

[S G Wolves]

Morning All.

I thought I'd post a thread to try and explain in simple terms my understanding of what happens in money terms when a player is signed or sold, what amortisation is and what it isn't. I think people are misunderstanding the process and what it is for. I'm not an accountant, but have run a business in the past and been involved in preparing many sets of annual accounts. This is not about FFP per sé but hopefully gives a bit of basic background for when we're all discussing potential transfer fees and what we think the available funds might be.

When a company buys something tangible (i.e. a physical thing, whether it's a vehicle, photocopier or whatever) they will generally pay for it. Once that thing is owned by the company it becomes an asset. Whatever the full purchase value of the thing was determines it's value. So if a company bought a car for £30k it then goes onto the books as a £30k asset.

If the car was bought for £30k cash outright (excluding tax), then in accounting terms there is no positive or negative effect on the accounts because the cash paid out is balanced by the fact that they have aquired £30k in assets. If that vehicle was bought using finance or a loan, then the up front payment/deposit paid goes in as a negative, the car comes in as a £30k asset, but the balance of the finance/loan is assigned to the company debt which is obviously a negative.

The problem is that the vehicle will not be worth £30k for long and, as most people know, most things lose value over their lifetime which is where 'depreciation' comes in. The idea is that you account for the loss of value of all the things or 'tangible assets' every year and this shows as a negative in the accounts.

Football players are somewhat different in that they don't 'depreciate' because they are not tangible assets. The club are not buying a player (a person), they are acquiring the right to register that player and to field that player in competition. This makes them 'intangible assets' i.e. not a physical object which is where amortisation is used. The total transfer fee paid determines the asset value of the player's registration on the day the contract is signed.

The basic principle is that a club will pay a transfer fee for the registration of a player on a fixed term contract. However at the end of that contract the player can walk away for nothing so their value at that point would be zero. In accounting terms though, you wouldn't want to write the entire transfer fee off in one go because that would put a huge dent in your figures for that year. The solution is to spread the cost over the length of the contract or 'useful life' which minimises the impact. This is not a cost that has to be paid in cash, it is simply shown as a negative in the accounts which comes off the final figure or 'bottom line' for that year and ideally has to be covered/balanced in some way.

So although there is a transfer fee paid which is a direct cost, this is balanced/offset in the accounts by the club acquiring an asset which has a value. However, the club still has to retain enough cash to operate. Asset value does not trump cash in the bank. "Cash is king" is the saying as without cash you can't do anything.

Let's take an example of a £20M player signing on a four year contract with a single up-front payment.

Year 0: Transfer fee paid -£20M, Asset value +£20M, Debt, £0M, Accounting cost £0M.
Year 1: Transfer fee paid £0M, Asset Value +£15M, Debt £0M, Accounting cost -£5M.
Year 2: Transfer fee paid £0M, Asset Value +£10M, Debt £0M, Accounting cost -£5M.
Year 3: Transfer fee paid £0M, Asset Value +£5M, Debt £0M, Accounting cost -£5M.
Year 4: Transfer fee paid £0M, Asset Value +£0M, Debt £0M, Accounting cost -£5M.

Now. Most high value transfer fees are not paid via a single payment but in installments. Let's assume that the club paid £10M up front, with £5M paid in two subsequent years. As you can see below, the basic cost is the same in the accounts but the difference is that there are cash payments required to service the remaining installments of the fee (i.e. the debt) plus any interest payments.

Year 0: Transfer fee paid -£10M, Asset value +£20M, Debt, -£10M, Accounting cost £0M.
Year 1: Transfer fee paid -£5M, Asset value +£15M, Debt, -£5M, Accounting cost -£5M.
Year 2: Transfer fee paid -£5M, Asset value +£10M, Debt, -£0M, Accounting cost -£5M.
Year 3: Transfer fee paid £0M, Asset value +£5M, Debt, £0M, Accounting cost -£5M.
Year 4: Transfer fee paid £0M, Asset value +£0M, Debt, £0M, Accounting cost -£5M.

When a player is sold, the club will most likely recieve some sort of transfer fee. This will be reflected in the accounts at whatever the selling price is. However, that player's registration still has a value to the selling club so the positive effect of that incoming transfer fee on the accounts is reduced by whatever the current asset value of their registration is.

Let's consider the same £20M player signed above but sold after 2 years for £15M.

We know that in year 2 his asset value was £10M, so you're gaining £15M cash but losing a £10M asset so the net gain is £15M minus £10M which is only actually £5M. If that same player were only sold for, say £5M, then there is actually a net loss of £5M.

The point of all the above is to highlight that amortisation is not a magic trick to be able to buy more expensive players that you could otherwise afford. It's simply a way to account for the fact that a player's registration has a fixed useful life and it is the least painful way to write off a transfer fee. If you don't have the cash, revenue or access to the required funds you won't be able to make the transfer, amortisation will not help you.

It's also not the case that the blow of transfer fees for new players can be softned using amortisation and the gain from incoming transfer fees are 100% positive because if you're accounting for asset value on incoming transfers you have to account for it in the outgoing transfers. This is why academies can be lucrative because the asset value of academy players is very low compared to the potential transfer fees making these players more profitable.

Another thing to note is that when a player is given a new contract (which extends their 'useful life') the remaining asset value is further amortised over the length of the new contract so in the example above, if the player's asset value were £10M in year 2 and he were awarded a new 5-year contract, his annual amortisation cost would reduce to £2M. This is probably why you see clubs trying tohand out new contracts to their previous high value signings before a spending spree.

Have an accounts background, but been in business for over 20 years...

Perversely enjoyed reading that, well explained.

 

[Chris H]

Understood completely.

I guess my view would be why couldn’t the owner put a higher, say, £300m of equity in to cover purchases and salaries (or £250m to cover purchases/salaries less expected revenue) etc

For most Private Companies there is no restriction from hiring talent if owner wants to spend it and has put the money in.

If we really were Sovereign backed with owners who wanted to reach the top then we are hamstrung by the “old order” which is “past revenue based”.

Will be interesting to see what happens to the likes of Barca and Inter given the losses/issues they are facing. My suspicion is a reduction in European squad size and nominal fine but also a change in FFP or local league wealth distribution to enable them to remain at the top table.

I’ve said similar myself. If an owner wants to bring players in for a value of say £250m in transfer value and salaries over the length of their contract they should be made to either deposit the money before hand, or personally guarantee the amounts same as SME directors have to personally guarantee loans and finance for instance.

I guess they’d argue that the allowable losses per year, which can be extended as long as the owner underwrites the difference by releasing equity via share purchase, are an equivalent of this without letting things get out of hand.

I sort of get that, but then maybe they should just make it a season on season thing rather than looking at prior years where there may be mitigating circumstances (like us being promoted with additional losses around promotion bonuses for instance).

I don’t know the answer really. I feel the current iteration of FFP is a halfway house that is a blanket fix that doesn’t fully do what it’s supposed to.

I still feel their original idea of basing it around debts was a better idea. But then clubs like Man Utd, Barca and Real Madrid who are sustained by obscene levels of debt didn’t like that. And the fact they just so happened to be the biggest commercial clubs in Europe coincidentally meant UEFA didn’t go for that route on FFP…

 

[Sussex Wolf]

I’ve said similar myself. If an owner wants to bring players in for a value of say £250m in transfer value and salaries over the length of their contract they should be made to either deposit the money before hand, or personally guarantee the amounts same as SME directors have to personally guarantee loans and finance for instance.

I guess they’d argue that the allowable losses per year, which can be extended as long as the owner underwrites the difference by releasing equity via share purchase, are an equivalent of this without letting things get out of hand.

I sort of get that, but then maybe they should just make it a season on season thing rather than looking at prior years where there may be mitigating circumstances (like us being promoted with additional losses around promotion bonuses for instance).

I don’t know the answer really. I feel the current iteration of FFP is a halfway house that is a blanket fix that doesn’t fully do what it’s supposed to.

I still feel their original idea of basing it around debts was a better idea. But then clubs like Man Utd, Barca and Real Madrid who are sustained by obscene levels of debt didn’t like that. And the fact they just so happened to be the biggest commercial clubs in Europe coincidentally meant UEFA didn’t go for that route on FFP…

I think the term “Financial Fair Play” explains exactly what the intent was, and it’s not to stop clubs from overspending. The word “fair” is used because some clubs (Man City and Chelsea to name two key examples) used their owners wealth to “unfairly” compete with the established clubs. Hardly the first time in football that the establishment have tried to stop upstarts from challenging their cosy world. The original movers behind FFP were pretty transparent about this in private, but have recast it publicly to stress the objective of stopping owners from overspending and leaving clubs in the lurch. Trouble is, as implemented, it achieves the original private goal, and not the latter public goal.

 

[Chris H]

I think the term “Financial Fair Play” explains exactly what the intent was, and it’s not to stop clubs from overspending. The word “fair” is used because some clubs (Man City and Chelsea to name two key examples) used their owners wealth to “unfairly” compete with the established clubs. Hardly the first time in football that the establishment have tried to stop upstarts from challenging their cosy world. The original movers behind FFP were pretty transparent about this in private, but have recast it publicly to stress the objective of stopping owners from overspending and leaving clubs in the lurch. Trouble is, as implemented, it achieves the original private goal, and not the latter public goal.

Oh I agree completely. But this is the issue of clubs having too much power.

An independent body should be making those decisions, not people with vested interests. In theory an independent body - FIFA/UEFA/PL/ whoever else - do make those decisions, problem is they’re controlled by the big clubs as money talks.

 

[Flump]

I’ve never really understood why the owners cannot put equity into the club and spend as and when they wish - so long as no risk of going bust (eg if buying players worth £200m then equity for the full £200m goes in to cover cash now and accounting over the 5 years not £40m and then whistle for the next 4 years).

Answer is presumably that big clubs are worried about State owned teams taking their places….but could tackle that by limiting number of players in squad/club at any one time.

The idea is that if this is allowed, then if one club (City, or PSG) does this, then all others will either over-stretch themselves to compete, or have to lose out to them for every transfer.

 

[JohnB]

The idea is that if this is allowed, then if one club (City, or PSG) does this, then all others will either over-stretch themselves to compete, or have to lose out to them for every transfer.

Or they are scared of new money/losing place.

I agree - although the first can be tackled by a new FFP requiring the money to be set aside before spending it and the second by limiting number of players on books (so a side cannot practically have Mbappe, Kane, Grealish, Messi, Neymar and Ronaldo in the same team so there is always choice to pick other Galaticos).

 

[Flump]

Or they are scared of new money/losing place.

I agree - although the first can be tackled by a new FFP requiring the money to be set aside before spending it and the second by limiting number of players on books (so a side cannot practically have Mbappe, Kane, Grealish, Messi, Neymar and Ronaldo in the same team so there is always choice to pick other Galaticos).

Oh yeah, there's definitely self-interest as well. But that is the official line/stated reason.

 

[Glass ankles]

Not sure if this has been asked but what's the punishment for sticking 2 fingers up to FFP? Domestic and European equivalents of it?

 

[Joshwolf218]

Not sure if this has been asked but what's the punishment for sticking 2 fingers up to FFP? Domestic and European equivalents of it?

Uefa

) Are clubs automatically excluded if they are not in line with FFP?

If a club is not in line with the regulations, it will be UEFA's Club Financial Control Body that decides on measures and sanctions.

Non-compliance with the regulations does not mean that a club will be excluded automatically, but there will be no exceptions. Depending on various factors (e.g. the trend of the break-even result) different disciplinary measures may be imposed against a club. There is a catalogue of measures:
a) warning
b) reprimand
c) fine
d) deduction of points
e) withholding of revenues from a UEFA competition
f) prohibition on registering new players in UEFA competitions
g) restriction on the number of players that a club may register for participation in UEFA competitions, including a financial limit on the overall aggregate cost of the employee benefits expenses of players registered on the A-list for the purposes of UEFA club competitions
h) disqualification from competitions in progress and/or exclusion from future competitions
i) withdrawal of a title or award

In addition the CFCB have decided in numerous cases that the objectives of FFP can be best achieved by taking a rehabilitative approach rather than a punitive approach. This has led to the conclusion of settlement agreements between a club and the CFCB, combining certain financial contributions with numerous restrictive conditions, which provide a roadmap for clubs to reach break-even in the foreseeable future (see further detail in points 11–16).

Domestic I think it's 105 mil Loss over 3 seasons

Points deductions, transfer bans, fines etc I think you can be excluded from the league and cups as well making you a non league team but I think that's like the worst punishment

 

[YouGottaRaulWithIt]

Morning All.

I thought I'd post a thread to try and explain in simple terms my understanding of what happens in money terms when a player is signed or sold, what amortisation is and what it isn't. I think people are misunderstanding the process and what it is for. I'm not an accountant, but have run a business in the past and been involved in preparing many sets of annual accounts. This is not about FFP per sé but hopefully gives a bit of basic background for when we're all discussing potential transfer fees and what we think the available funds might be.

When a company buys something tangible (i.e. a physical thing, whether it's a vehicle, photocopier or whatever) they will generally pay for it. Once that thing is owned by the company it becomes an asset. Whatever the full purchase value of the thing was determines it's value. So if a company bought a car for £30k it then goes onto the books as a £30k asset.

If the car was bought for £30k cash outright (excluding tax), then in accounting terms there is no positive or negative effect on the accounts because the cash paid out is balanced by the fact that they have aquired £30k in assets. If that vehicle was bought using finance or a loan, then the up front payment/deposit paid goes in as a negative, the car comes in as a £30k asset, but the balance of the finance/loan is assigned to the company debt which is obviously a negative.

The problem is that the vehicle will not be worth £30k for long and, as most people know, most things lose value over their lifetime which is where 'depreciation' comes in. The idea is that you account for the loss of value of all the things or 'tangible assets' every year and this shows as a negative in the accounts.

Football players are somewhat different in that they don't 'depreciate' because they are not tangible assets. The club are not buying a player (a person), they are acquiring the right to register that player and to field that player in competition. This makes them 'intangible assets' i.e. not a physical object which is where amortisation is used. The total transfer fee paid determines the asset value of the player's registration on the day the contract is signed.

The basic principle is that a club will pay a transfer fee for the registration of a player on a fixed term contract. However at the end of that contract the player can walk away for nothing so their value at that point would be zero. In accounting terms though, you wouldn't want to write the entire transfer fee off in one go because that would put a huge dent in your figures for that year. The solution is to spread the cost over the length of the contract or 'useful life' which minimises the impact. This is not a cost that has to be paid in cash, it is simply shown as a negative in the accounts which comes off the final figure or 'bottom line' for that year and ideally has to be covered/balanced in some way.

So although there is a transfer fee paid which is a direct cost, this is balanced/offset in the accounts by the club acquiring an asset which has a value. However, the club still has to retain enough cash to operate. Asset value does not trump cash in the bank. "Cash is king" is the saying as without cash you can't do anything.

Let's take an example of a £20M player signing on a four year contract with a single up-front payment.

Year 0: Transfer fee paid -£20M, Asset value +£20M, Debt, £0M, Accounting cost £0M.
Year 1: Transfer fee paid £0M, Asset Value +£15M, Debt £0M, Accounting cost -£5M.
Year 2: Transfer fee paid £0M, Asset Value +£10M, Debt £0M, Accounting cost -£5M.
Year 3: Transfer fee paid £0M, Asset Value +£5M, Debt £0M, Accounting cost -£5M.
Year 4: Transfer fee paid £0M, Asset Value +£0M, Debt £0M, Accounting cost -£5M.

Now. Most high value transfer fees are not paid via a single payment but in installments. Let's assume that the club paid £10M up front, with £5M paid in two subsequent years. As you can see below, the basic cost is the same in the accounts but the difference is that there are cash payments required to service the remaining installments of the fee (i.e. the debt) plus any interest payments.

Year 0: Transfer fee paid -£10M, Asset value +£20M, Debt, -£10M, Accounting cost £0M.
Year 1: Transfer fee paid -£5M, Asset value +£15M, Debt, -£5M, Accounting cost -£5M.
Year 2: Transfer fee paid -£5M, Asset value +£10M, Debt, -£0M, Accounting cost -£5M.
Year 3: Transfer fee paid £0M, Asset value +£5M, Debt, £0M, Accounting cost -£5M.
Year 4: Transfer fee paid £0M, Asset value +£0M, Debt, £0M, Accounting cost -£5M.

When a player is sold, the club will most likely recieve some sort of transfer fee. This will be reflected in the accounts at whatever the selling price is. However, that player's registration still has a value to the selling club so the positive effect of that incoming transfer fee on the accounts is reduced by whatever the current asset value of their registration is.

Let's consider the same £20M player signed above but sold after 2 years for £15M.

We know that in year 2 his asset value was £10M, so you're gaining £15M cash but losing a £10M asset so the net gain is £15M minus £10M which is only actually £5M. If that same player were only sold for, say £5M, then there is actually a net loss of £5M.

The point of all the above is to highlight that amortisation is not a magic trick to be able to buy more expensive players that you could otherwise afford. It's simply a way to account for the fact that a player's registration has a fixed useful life and it is the least painful way to write off a transfer fee. If you don't have the cash, revenue or access to the required funds you won't be able to make the transfer, amortisation will not help you.

It's also not the case that the blow of transfer fees for new players can be softned using amortisation and the gain from incoming transfer fees are 100% positive because if you're accounting for asset value on incoming transfers you have to account for it in the outgoing transfers. This is why academies can be lucrative because the asset value of academy players is very low compared to the potential transfer fees making these players more profitable.

Another thing to note is that when a player is given a new contract (which extends their 'useful life') the remaining asset value is further amortised over the length of the new contract so in the example above, if the player's asset value were £10M in year 2 and he were awarded a new 5-year contract, his annual amortisation cost would reduce to £2M. This is probably why you see clubs trying tohand out new contracts to their previous high value signings before a spending spree.

Thank goodness it was explained in simple terms!

 

[YouGottaRaulWithIt]

Not sure if this has been asked but what's the punishment for sticking 2 fingers up to FFP? Domestic and European equivalents of it?

Depends if you are PSV, Man City or Wanderers.

 

[Glass ankles]

Uefa

) Are clubs automatically excluded if they are not in line with FFP?

If a club is not in line with the regulations, it will be UEFA's Club Financial Control Body that decides on measures and sanctions.

Non-compliance with the regulations does not mean that a club will be excluded automatically, but there will be no exceptions. Depending on various factors (e.g. the trend of the break-even result) different disciplinary measures may be imposed against a club. There is a catalogue of measures:
a) warning
b) reprimand
c) fine
d) deduction of points
e) withholding of revenues from a UEFA competition
f) prohibition on registering new players in UEFA competitions
g) restriction on the number of players that a club may register for participation in UEFA competitions, including a financial limit on the overall aggregate cost of the employee benefits expenses of players registered on the A-list for the purposes of UEFA club competitions
h) disqualification from competitions in progress and/or exclusion from future competitions
i) withdrawal of a title or award

In addition the CFCB have decided in numerous cases that the objectives of FFP can be best achieved by taking a rehabilitative approach rather than a punitive approach. This has led to the conclusion of settlement agreements between a club and the CFCB, combining certain financial contributions with numerous restrictive conditions, which provide a roadmap for clubs to reach break-even in the foreseeable future (see further detail in points 11–16).

Domestic I think it's 105 mil Loss over 3 seasons

Points deductions, transfer bans, fines etc I think you can be excluded from the league and cups as well making you a non league team but I think that's like the worst punishment

Thanks for taking time to write that. It feels like there's lots of uncertainty around the severity of the action they could take. Surely some clubs are well beyond this and taking the risk?

 

[AndyWolves]

I'm struggling to figure out why we have to sell to buy due to FFP. We're allowed a loss of £30m over 3 seasons.

2018/2019 - 19.5m profit
2019/2020 - 40m loss due to Covid, mainly deferred TV money which would have given us a profit. Would think this money will be reflect in the next year's accounts.
2020/2021 - unless we've made a loss of £50m then we're well clear of the £30m loss figure.

I'd assume 2020/2021 would be around break-even.

 

[northnorfolkwolf]

I appreciate SuperTed taking the time to 'explain' FFP but the more I think about it all the more disheartened I become. How 1 team can have a forward line of Mbappe, Messi and Neymar and City may spend £250 million on 2 players while we have to scratch around having to sell Otasowie or Mir to raise a few pounds having, as I understand it, overspent by £400k?! It's all a ****ing joke. I'm starting to wish those super 6 had ****ed off to Europe and we could have enjoyed a Prem season where all teams would have started in a reasonably similar situation. As it is it's likely the other 14 will be battling for 7th at best. As the seasons roll on the gap will only get bigger and bigger and I wonder if fans may start to lose interest and drift away?

 

[Darvo]

I appreciate SuperTed taking the time to 'explain' FFP but the more I think about it all the more disheartened I become. How 1 team can have a forward line of Mbappe, Messi and Neymar and City may spend £250 million on 2 players while we have to scratch around having to sell Otasowie or Mir to raise a few pounds having, as I understand it, overspent by £400k?! It's all a ****ing joke. I'm starting to wish those super 6 had ****ed off to Europe and we could have enjoyed a Prem season where all teams would have started in a reasonably similar situation. As it is it's likely the other 14 will be battling for 7th at best. As the seasons roll on the gap will only get bigger and bigger and I wonder if fans may start to lose interest and drift away?

Yes ... it’s not helping the game. It’s becoming too predictable (more or less the same teams each season finishing top 6).

I’m surprised that nobody has challenged FFP as an infringement on the freedom to invest in and to grow a business.

 

[Fenrir_]

I appreciate SuperTed taking the time to 'explain' FFP but the more I think about it all the more disheartened I become. How 1 team can have a forward line of Mbappe, Messi and Neymar and City may spend £250 million on 2 players while we have to scratch around having to sell Otasowie or Mir to raise a few pounds having, as I understand it, overspent by £400k?! It's all a ****ing joke. I'm starting to wish those super 6 had ****ed off to Europe and we could have enjoyed a Prem season where all teams would have started in a reasonably similar situation. As it is it's likely the other 14 will be battling for 7th at best. As the seasons roll on the gap will only get bigger and bigger and I wonder if fans may start to lose interest and drift away?

The £400k is the fine from UEFA, reduced to £200k (I think). Our main problem was a massive loss in the promotion season of £57m and (sounds daft to say) almost instant qualification for Europe which meant we failed UEFA FFP before we could get anywhere near its restrictions

It's just another tool to keep the 'upstarts' at arm's length

 

[Joshwolf218]

Thanks for taking time to write that. It feels like there's lots of uncertainty around the severity of the action they could take. Surely some clubs are well beyond this and taking the risk?

Well I think the fines sorta put clubs off

Our fine was little compared to two teams who broke it the same year think one was Istanbul B something or other

 

[northnorfolkwolf]

Yes ... it’s not helping the game. It’s becoming too predictable (more or less the same teams each season finishing top 6).

I’m surprised that nobody has challenged FFP as an infringement on the freedom to invest in and to grow a business.

Regarding your 1st sentence I heard on the radio that of the past 60 sides in the Charity Shield something like 54 were the Big 6 (not sure the figures were exactly that but close) which goes to show they not only win the League but the Cup too!!!!!!