How football clubs use accounting and amortization

THE UEFA Financial Fair Play Regulations

The UEFA Financial Fair Play Regulations require that football clubs don’t spend more money than they earn when trying to achieve success and getting their financial problems solved so their long term survival isn’t threatened. There are a few different penalties if a club doesn’t follow these financial regulations. The most extreme penalty is the disqualification from European competitions which means a loss of huge amount of money for a club. Smaller penalties are fines, withholding prize money or transfer bans. The Aim is to secure a long term balance in the fincances of European football clubs.

There are a few football club owners in Europe who have so much money that bankruptcy isn’t going to be a problem for them in the near future. The financial rules apply to all the European clubs.  However, if you have a billionaire behind your club who invests huge amounts of money in your club, your situation is different. These rich clubs have to use accounting and amortization in order to invest more money in new players.

Purchasing

Currently good players cost a huge amount of money and in order to balance the books of the clubs   when a player is bought, his transfer fee is capitalized on the balance sheet and is amortized over the length of his contract. So the whole transfer fee is spread over the length of the contract and amortization is made yearly. To give an example a player is bought for 50 million euros over a five year contract, the transfer value is amortized for 10 million euros every year. In the balance sheet there is a 50 million investment but in the income statement there is only 10 million amortization for the next five years. This will make net profit look more stable yearly.

Selling

Sometimes players don’t stay at their clubs to the end of their contracts and they will be sold to a different club. The player’s transfer fee is in the books as mentioned above. If we use the same example as above and let’s say that  the player worth EUR 50 million   with his five year contract has now played two years of his contract. The annual amortization of 10 million has been made so the cumulative amortization is 20 million in two years, leaving a value of 30 million in the books. After two years the player is sold for 35 million so the selling club can report a profit on sale of 5 million euros in the accounts (sold for 35 million minus remaining 30 million). Therefore the club will show an annual profit improvement of over 15 million after  the deal (5 million profit on sale plus 10 million lover amortization plus lower wages). As a result, the player who was bought two years ago for 50 million and now sold for 35 million can be made an accounting profit of 5 million on his transfer fee. However, if you  only look at the transfer fees it looks like the club made a 15 million euros loss. The club can put over 15 million profit improvement in their accounts after that.