Football amortisation: Chelsea’s large Luiz profitDaniel Geey
How Purchasing Clubs Account for their Spending
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
“[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
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 wages1 + £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.
This work was written for and first published on LawInSport.com (unless otherwise stated) and the copyright is owned by LawInSport Ltd. Permission to make digital or hard copies of this work (or part, or abstracts, of it) for personal use provided copies are not made or distributed for profit or commercial advantage, and provided that all copies bear this notice and full citation on the first page (which should include the URL, company name (LawInSport), article title, author name, date of the publication and date of use) of any copies made. Copyright for components of this work owned by parties other than LawInSport must be honoured.
- Tags: Amortisation | FIFA | Financial Fair Play | Governance | Player Transfers | Regulation | United Kingdom (UK)
- Financial Fair Play in Football with Daniel Geey and Trevor Birch - Episode 20
- The football law basics: Making sense of football phrases
- UEFA’s new Financial Fair Play settlement provisions
- Your guide to FIFA's Transfer Matching System
About the Author
Daniel is a Partner in the Sport Group.
Daniel’s practice focuses on helping clients in the sports sector, including rights holders, leagues, governing bodies, clubs, agencies, athletes, sports technology companies, broadcasters and financial institutions.