Amortisation
Basically, it’s a technical accounting word for spreading a cost of an intangible asset (non-physical asset). In Palace’s case will be the overall cost of signing a player. This will be the total of the transfer fee, signing fees (player bonus), and agent fees. On a simple example if Eze fee was £17 million, £1.5 million signing on fee, and £1.5 million agent fee (all made up numbers to make it simple); The cost of Eze on the per season is £4 million (Based on a 5-year contract).
Impairment
So the amount of the Balance sheet has to be the lower market value or net book value (original total cost minus the cost that has already been reported). The netbook is the amount left to go into the profit and loss. So after two season’s Eze would have £8 million already hit P&L. The net book value would be £12 million. His market value would most likely be more than this. So you would use the £12 million figure but let's say Palace get relegated and caused his value to drop below £12 million to £10 million. Then the Palace would move £2 million to P&L as impairment. Large Impairment charges are common for relegated teams. Back in 18-19 season Palace had £2.8 Million in impairment.
Big Spenders!
Do you remember when Palace was the 5th biggest net spend in UEFA for a season? Not kidding back in 17-18 Palace’s net spend was only smaller than Manchester Utd, Manchester City, Bayern, and AC Milan. Also ranked 12th on the 5-year net spend from 12-13 to 17-18 seasons. Not a massive fan of net spend as it only shows half of the picture. But the other half is wages and they were large as well. That same season Palace was 20th in UEFA for wages just below Monaco, Leicester, and AC Milan. One of just five that had 70% of turnover was spent on wages. Palace turnover was just 27th in UEFA just above Sevilla. But wages were 78% of turnover and amortisation charge was 31%. So just on wages and amortisation, it was 109% of turnover. That season Palace made a £33 million loss. This was Hodgson’s first season in charge. Below is a graph of the split of amortisation from the season afterward.
In the next season Roy’s first full season. The amortisation charge increased to £49.5 million. The below pie chart shows when that money was spent. Just a reminder that 16-17 was the season Pardew invested Benteke, Townsend and Allardyce needed Milivojevic, Schlupp, Tomkins, and Van Aanholt to come to the rescue. This creates a large hole in the finances. Those two transfer windows cost £104 million. Yet Palace made a profit of £10 million that season due to the sale of Yannick Bolasie that brought in £34 million. This created the amortisation hangover.
It’s not just amortisation that was the problem. It’s the high wages as well. In 18-19 season excluding relegated teams Palace was 5th on wages plus amortisation over turnover (109%). With the teams above being Bournemouth (112%), Southampton (114%), Leicester City (120%), and top Everton (136%). The average was 93% with Wages 65% and Amortisation 28%.
Rest of the Premier League
Club licensing Benchmarking report was released last month; It mentioned that at the end of 18/19, the Premier League had EUR3,975 million on the net book value. That’s the highest total in Europe and 2nd highest percentage of revenue just behind Seria A. With half the league having amortisation of over 25% of revenue. This was a common problem within the league.
Ways out!
So what are the amortisation hangover cures? Well, the most simple way is to sell players. This is what Chelsea does. In 18-19 they had the £167 million amortisation charge that was 40% of turnover. They load up on good players and sell to push the amortisation into further seasons. This is a bit like the hair of the dog. They are still buying players and adding to the overall cost so the problem will still be there next season. So if Palace sold Zaha for £40 million and replaced him with a player for £50 million on a five-year deal. The impact on the P&L in the first season would be £40 million income and £10 million costs. This example is creating a bigger hangover next season. Where they will have to find another player to sell. This might be why so many Chelsea players are linked with permanent moves away from this summer as currently there are fewer looking to buy expensive players.
Palace's problem with using this method is having the player that teams are willing to part with large fees to purchase. Only had two seasons where the profit from selling players was larger than 10 million (Bolasie and Wan-Bissaka). Often the misconception that Wan-Bissaka transfer deal has left a large amount of profit. The season that he was sold the profit was £5 million but the loss the season before was £33 million. While selling players has helped there is still a problem.
The other cure is Premier League inflation. When the premier league deal goes up then all the other costs go up as the players, agents and other clubs know that Premier League clubs have more money available. A side effect of this is that players bought before the inflation are considered to be of great value compared to the more recent market value. But the deals are done long in advance and so it's possible the inflation kicks in before the clubs get the money as agents know the increase is coming soon. Also, there will be more pressure to stay the division and clubs will pay more for the promise of the next season with more money. So this theory is that Palace in 2017 expected the domestic TV to continue to increase as before it was increasing around 30% each contract. So they thought stocking up on talent at 2017 prices would be cheap on the P&L in 2019 as the new domestic tv deal would come in. But in actual fact the TV was slightly less in 2019. I don’t think that actually stacks up due to the fact; I don’t think that expenditure was planned in the expensive 16-17. After Pardew’s sacking Allyerdice needed reinforcements to balance an unbalanced squad. According to transfermark over half of the transfer spend was in the winter window. I think it was a case of Palace needing to stay up at almost all cost and deal with the consequences later.
P&L not cash
It’s worth noting that I am just looking at the P&L impact which is used for FFP. Profit isn’t cash. The majority of the transfer payments will happen upfront. For example, the Wan Bissaka deal was £22.5 million in the first year and the second year it was the other £22.5 million. So from a cash point of view, they have fully paid for Wan Bissaka after two years. But the P&L spreads the cost over the 5-year contract. The club will still need to either load up debt or have investment from ownership.
Consequences
So I think due to the high amortisation this had lead to Palace not investing huge amounts in the Roy Hodgson era. If you're excluding the first season as that included the signing of Sakho. The season Palace invested £54 million and the season after was £18.9 million. For the last two, I don’t have official figures but I have estimated £8.3 million and £34.9 million. Last season might be an overestimation it includes 11.5 million for Ferguson due to the compensation. Based on this the transfer spend for the last three seasons is a similar amount to the amount when Hodgson joined.
The club hasn’t been looking to sell on the highly paid players and not adding more highly paid players. Look at the recent free agent signing that doesn’t affect the amortisation as much with Guaita, Meyer, Cahill, and Clyne. So these players will only have sign-on fees and agent fees but higher on the wage bill. With a high wage bill as a percent of earnings at 76.8%, Which is 5th highest in the Premier League in the last season not affected by covid. With only Southampton 77.0%, Leicester City 83.8%, Bournemouth 83.8%, and Everton 84.9% having higher ratio.
Forecast
Now going forwards there is space in the P&L to add more amortisation. Before this summer window, I have got the next season's amortisation at 19.6 million. This will definitely go up after this summer's transfer window but this would be a similar level to 5 seasons ago. This means that the hangover is manageable. That doesn’t mean the board will spend. They now have the headroom to spend.
If the board doesn’t spend. Then next season they will be assuming that crowds return to normal they will make a loss of £9 million roughly (assuming 12th finish & 12 domestic TV games) but that’s if the wages and other cost doesn't change. The cost will change. It's hard to predict in the current market. So to make a profit the club would still need to sell players.
Now this season is the interesting point. If the board is looking to run the club more sustainably or is the aim to finish higher. Or we could say is the reason for the owner about the pleasures of owning a club rather than investing the Premier League. Then the board will only put down money to secure the premier league status. It’s worth adding at this point before COVID in the last 4 seasons the owners put in £45 million. In the winter interview, Parish mentioned they had added more funds.
Speculation
One option for the board is to heavily invest again like the 16-17 season as the football transfer market is depressed across the world. They do this and speculate that in two or three years the world markets and football markets have returned or in better shape than pre covid. If that's the case if Palace buys an average premier league standard player and then sells them for average premier league price in three years time they would have made money as the market value would have increased even if the players' worth is the same.
The risk here is that prices do not go up in the next couple of years. As the academy system in the UK has been doing very well and lots of teams taking up the buy them young and sell them to the big clubs model. This would lead to a lot of good players with a lot of teams looking to sell. So market price would decrease as if selling club ask too much the buying club could just find a comparable player for less. There is a chance Palace wouldn't have anyone to sell these players to and be stuck in this amortisation hangover again.
Method (For those interested this how I got the figures)
I am going to estimate the cost per player each season then use that to calculate the split of amortisation charge. To show when the money was spent and how it was impacting the P&L for the last couple of seasons. I have taken the transfer fee per player on transfermarkt, then the original contract length. Then took the additional amortisation from the year from the accounts. Used the ratio from transfermarket to create an adjusted transfer cost and split it by the length of the contract. In most seasons this creates close to the actual amortisation charge but it’s quite far out on 18/19. I reckon that's due to contract renewals. These complicate the process. Once a player renews their contract the cost of the transfer can be spread over more years. This may include bonus payments to the player, agent, former agent, or former club for getting the new contract at the club that will be added to the amortisation. In the figures, I have ignored contract renewals as it complicates it too much and Palace doesn’t announce when players get new deals.
In the seasons I don’t have additional amortisation. I increased the transfermarkt figure by 28% as that’s what has happened on average in the last four seasons.
I have included free transfers. As Palace can amortise the agent fees and player’s sign-on bonus. In Juventus accounts, they paid €3.7 million for Aaron Ramsey, €1.4 million for Adrien Rabiot, and nothing for Buffon. In my estimate, I am going for £1 million per transfer.
| Season | Players | Transfer value (transfermarkt) | Adjusted for accounts | Contract length (intial only) | |
| 20-21 | Eberechi Eze | 16.02 | 20.51 | 5 | 3.20 |
| 20-21 | Jack Butland | 0.99 | 1.27 | 2 | 0.50 |
| 20-21 | Nathan Ferguson | 9.00 | 11.52 | 3 | 3.00 |
| 20-21 | Nathaniel Clyne | 1.00 | 1.28 | 1 | 1.00 |
| Total 20-21 | | 27.01 | 34.57 | *average | |
| 19-20 | James McCarthy | 2.97 | 3.80 | 2 | 1.90 |
| 19-20 | Jordan Ayew | 2.52 | 3.23 | 3 | 1.08 |
| 19-20 | Gary Cahill | 1.00 | 1.28 | 2 | 0.64 |
| Total 19-20 | | 6.49 | 8.31 | *average | 3.62 |
| 18-19 | Cheikhou Kouyaté | 9.63 | 14.43 | 4 | 3.61 |
| 18-19 | Bakary Sako | 1.00 | 1.50 | 3 | 0.50 |
| 18-19 | Vicente Guaita | 1.00 | 1.50 | 3 | 0.50 |
| 18-19 | Max Meyer | 1.00 | 1.50 | 3 | 0.50 |
| Total 18-19 | | 12.63 | 18.93 | *Actual | 5.11 |
| 17-18 | Mamadou Sakho | 25.38 | 31.24 | 5 | 6.25 |
| 17-18 | Jairo Riedewald | 8.10 | 9.97 | 5 | 1.99 |
| 17-18 | Alexander Sörloth | 8.10 | 9.97 | 5 | 2.22 |
| 17-18 | Jaroslaw Jach | 2.48 | 3.05 | 4 | 0.87 |
| total 17-18 | | 44.06 | 54.24 | *Actual | 2.83 |
| 16-17 | Christian Benteke | 28.08 | 33.24 | 4 | 8.31 |
| 16-17 | Andros Townsend | 14.04 | 16.62 | 5 | 3.32 |
| 16-17 | Luka Milivojevic | 13.59 | 16.09 | 4 | 4.60 |
| 16-17 | Jeffrey Schlupp | 12.42 | 14.70 | 5 | 3.27 |
| 16-17 | James Tomkins | 10.53 | 12.47 | 5 | 2.49 |
| 16-17 | Patrick van Aanholt | 9.45 | 11.19 | 5 | 2.49 |
| total 16-17 | | 88.11 | 104.31 | *Actual | 4.08 |
| 15-16 | Yohan Cabaye | 12.51 | 15.14 | 3 | 5.05 |
| 15-16 | Connor Wickham | 9.00 | 10.90 | 5 | 2.18 |
| 15-16 | Alex McCarthy | 4.41 | 5.34 | 4 | 1.33 |
| total 15-16 | | 25.92 | 31.38 | *Actual | 2.85 |
| 14-15 | James McArthur | 7.92 | 8.39 | 3 | 2.80 |
| 14-15 | Jordon Mutch | 5.71 | 6.05 | 5 | 1.34 |
| 14-15 | Pape Souaré | 4.80 | 5.09 | 4 | 1.45 |
| 14-15 | Wilfried Zaha | 3.45 | 3.66 | 6 | 0.66 |
| 14-15 | Zeki Fryers | 3.42 | 3.62 | 3 | 1.21 |
| 14-15 | Martin Kelly | 1.80 | 1.91 | 3 | 0.64 |
| 14-15 | Fraizer Campbell | 1.03 | 1.09 | 3 | 0.36 |
| 14-15 | Chung-yong Lee | 0.75 | 0.79 | 4 | 0.23 |
| Total 14-15 | | 28.88 | 30.60 | *Actual | 1.09 |
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