Superted
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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 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.