We’re in the heat of the summer mercato, and with that comes a lot of player transfers. In order to sort through the financial minutia of the transfer market, I break down a few accounting aspects that affect a club’s business.
Accounting treatment of transfer fees
We’ll start with defining a few terms and concepts. For accounting purposes, the transfer of a player is considered acquiring their registration rights. This constitutes an intangible asset, as the club reaps all the economic benefits of controlling said rights. As such, if there is a transfer fee associated with acquiring the player it is considered a capital cost, and can be expensed over the term of the contract.
Let’s say the club acquired a player for $25 million and agreed to a five year contract. The following schedule outlines the net book value (NBV) of the player rights over the life of the contract:
Year | Opening NBV | Amortization Expense | Accumulated Amortization | Closing NBV |
1 | 25 million | 5 million | 5 million | 20 million |
2 | 20 million | 5 million | 10 million | 15 million |
3 | 15 million | 5 million | 15 million | 10 million |
4 | 10 million | 5 million | 20 million | 5 million |
6 | 5 million | 5 million | 25 million | —— |
Player costs per year
When planning player acquisitions, management has to think of the player’s salary but also the affect of the transfer fee each year, as outlined above.
Using the same example above, with an annual salary of $2.5 million, the annual cost of the player to the club would be:
Salary | 2,500,000 |
Amortization | 5,000,000 |
Annual cost of player | 7,500,000 |
Another aspect of transfers that is rarely talked about is agent fees. Any agent fees associated with a transfer also get added to the capital cost of the transfer. So, if we re-evaluate the example above, with $3 million in agent fees, we get the following annual cost per player:
Salary | 2,500,000 |
Amortization | 5,000,000 |
Agent fees | 600,000 |
Annual cost of player | 8,100,000 |
It’s clear to see that out of contract acquisitions are hardly free transfers.
Player sales
A common myth is that the profit to be derived from a player sale is the “net spend” or the proceeds of the sale less the original cost. That is not how it works for accounting. Let’s revisit our original example with a $25 million transfer fee and a $3 million agent fee:
Year | Opening NBV | Amortization Expense | Accumulated Amortization | Closing NBV |
1 | 28 million | 5.6 million | 5.6 million | 22.4 million |
2 | 22.4 million | 5.6 million | 11.2 million | 16.8 million |
3 | 16.8 million | 5.6 million | 16.8 million | 11.2 million |
4 | 11.2 million | 5.6 million | 22.4 million | 5.6 million |
5 | 5.6 million | 5.6 million | 28 million | —— |
If the player was sold after year 3 for $15 million, those who believe in net spend would say that the club lost $10 million since the transfer fee was $25 million and the sale was for $15 million, however that is not the case. By accounting standards, the club actually had a capital gain of $3.8 million, shown below:
Original Cost | 28,000,000 |
Less: Accumulated Amortization | 16,800,000 |
Net book value | 11,200,000 |
Less: proceeds of disposition | 15,000,000 |
(Gain)/Loss on sale | 3,800,000 |
Repeating the same exercise but with a home-grown player, or a player with a fully amortized transfer fee, we can see that the selling price is 100% profit:
Original Cost | 28,000,000 |
Less: Accumulated Amortization | – 28,000,000 |
Net book value | — |
Less: proceeds of disposition | -15,000,000 |
(Gain)/Loss on sale | -15,000,000 |
Understanding the accounting principles behind transfers is becoming increasingly important in modern football since the introduction of UEFA Financial Fair Play regulations. As a fan, it might be frustrating to see your club make moves that don’t appear to make the most sporting sense, but never forget, there is always a business aspect to transfers.
Source: PWC
This blog post originally appeared on Calcio Crazy.