The most common topic within football finance is the accounting of football transfers. Let's start by defining some terms as accountants love jargon; it makes us sound smart. After that, we will dig into the numbers.
- Amortisation; Spreading of the cost of the player over life of the contract
- Intangible asset; Something that cannot be touched that has value and can be traded,
- Players registration; This is the thing that is actually getting amortised not that actual player.
- Depreciation; Similar to Amortisation but with physical assets (More common than Amortisation so more people are aware of it).
- P&L; Over a time period this is how the company has been performing financially. Difficult to see just from looking at cash if the month/year has been good or bad so we use the P&L to make sense of how a company is doing financially. This isn’t what is happening with the bank account and the treasury function will monitor that.
- Balance sheet; A snapshot of Assets and Liabilities of the company.
- Net book value; Asset value on the balance sheet after amortisation/depreciation.
- Journal; How accountants move numbers on the accounts. Must always balance to zero
This makes more sense when looking at an example. Let's look at Wan Bissaka as it has some excellent round numbers and interesting elements.
Initial Transfer
The transfer was made at the end of June 2019. The transfer was finished in June so that it would be reported in Palace’s accounts for 18/19 season. It was reported that was a £45 million transfer with £5 million in add-ons. With £22.5 million upfront and rest installments. So Palace accounts in 2019 have £45 million in the “Profit on disposal” P&L line. As AWB was a youth player his net book value would be almost zero. Palace would receive £22.5 million into their bank account. So Man Utd would owe £22.5 million. That would be accounted for in their accounts receivable. This is assuming that the payment terms are zero-days and united make payment at the same time as the transfer.
Palace Accounts transfer Journal
Account | Debit (£m) | Credit (£m) |
Cash (Bank account) [BS] | 22.5 |
|
Accounts Receivable (Man U) [BS] | 22.5 |
|
Profit on Disposal [P&L] |
| 44.5 |
VAT
I am not VAT specialist. These transfers will include VAT 20%. The club will collect that cash on the government’s behalf. Football clubs I think can reclaim transfer fee VAT. So Palace would pay the VAT to HMRC and Manchester would be able to reclaim the VAT (by reducing the amount they owe to HMRC). As this business-related service, they are not the final customer so they don't bear the cost. People-watching in the stand and on TV is the actual customer they take the cost. VAT should be business neutral.
Side note; It's likely that if Palace buys a player from the EU they will have to pay the reverse charge VAT. Which they can reclaim but protects the British market. As if couldn't reclaim the VAT then it not save the club money by buying aboard to a country that didn't charge VAT compared to buying a player from the UK where VAT would be applied. If you buy from outside the UK they do not charge VAT. Not all foreign transfers will have to have a reverse charge VAT. This is why companies use VAT specialists as if this isn't your day-to-day then it can become very complex.
Manchester Utd Accounts
Still in 18/19 season. They would need to add the transfer fee and other costs (Like agent fees, bonuses, and other costs to get the deal done) onto intangible assets. They will not need to amortise until the next season. As AWB only arrived at the end of the last month of the accounts. Let's just say that £45 million-plus £5 million for agent fees and AWB sign-off bonus (as it's keeping the numbers easy). The real-life figure could be higher or lower. So at this point, it’s £50 million on the balance sheet currently. That leaves the below journal.
Account | Debit (£m) | Credit (£m) |
Cash (Bank account) [BS] |
| 22.5 |
Cash (Bank account) [BS] |
| 5.0 |
Accounts Payable (Palace) [BS] |
| 22.5 |
Cost Intangible [BS] | 50 |
|
Add on fee
Now the add-on fee. There is a judgment call. If Manchester Utd think those clauses are probable. If that's the case the add-ons need to be included in the intangible cost and amortisation calculation. It's possible that after season 1 it looks probable and then after season 2, it is less likely. Then that cost should be removed from intangible cost.
From Palace's point of view. As its income, the probability needs to be higher. It needs to be certain. It's better to overstate cost than to overstate income so that’s why the rules have different probability levels. In Palace 19/20 accounts there was a note for expected to earn £5 million in addons for players that left. It’s most likely that note was referring to AWB. So I would assume that milestone was reached in 20-21. If that was true then Palace would recognise that fee in profit from disposals in 20-21.
Amortisation
So let's keep it simple and say add-ons are probable all the way through. So we have £55 million to spread over five years. That's £11 million per season. That’s 9% of their amortisation from the 20/21 season. Sounds expensive but if he was a hit and renewed his contract for another five years. You’re looking at £5.5 million-plus tenth renewal bonuses and agent fees if you're looking at the value of the deal per season. But that's not how renewal works for amortisation. I will come back to that later.
Derby
The above is amortising by straight-line bases. Derby tried a different method to move costs into the future so they could pass FFP. It’s a temporary solution but if they got a promotion then could report bigger losses as the Premier League has less strict rules. So they used a residual basis. Which is used normally when the asset has scrap or resale value at the end of the useful life. So if a company buys a car for 20k and it will be worth 2k when they finish with it. They can depreciate (similar to amortise but for tangible assets) 18k over the life of the asset. Derby tried using this but it’s not giving a fair reflection on the P&L as players' costs were spread unevenly. Especially as they were not selling the players before the end of the contract. So that was creating large costs in the final year of the contract for Derby. In the days before Bosman's ruling, this would make sense as player registration change would still require a fee even when the contract was expired.
Loan
Palace was due £22.5 million on 1st July 2020 from Manchester Utd. So South London club paid off their debt and used a specialist to loan against the owed funds from Utd as security. This means that debt from Manchester Utd for transfer fee has a lower interest rate than general debt to Palace. I would expect Manchester Utd to have a better credit rating as little chance of relegation or administration due to a drop in income. Also, it’s possible this debt would count as football debt. In an administration, all football debt must be paid in full but the normal debt would be majority written off so this loan might be more secure to the lender so they are willing to lower the interest rate.
Future
Currently, Aaron seems to be on the way out and treated like a scapegoat. Which I do think is a bit unfair. He’s not a bad player. During his time in Manchester, he was runner-up Europa League, Premier League runner-up, and UEFA Europa League Squad of the Season. He was the first choice right-back for all of that. I do think that Manchester United got worst when they dropped him. But that’s not to say they would be wrong to replace him with a right-back more suited to an attacking role.
Palace Transfer
There are rumors that Palace is interested in bringing AWB back to SE25. (That said it's gone quiet since Clyne renewed his contract). Paper talk has Manchester Utd wanting around £20-30 million. I don’t see Palace wanting to spend that right away. In November he will be 25 and I don’t think there will be much sell-on value. That if he signs for Palace that’s it he will be here for the rest of his career unless Palace gets relegated. Might be a bit harsh but currently, top-end teams want very attacking full-backs.
Loan Deal
What’s more likely than an outright transfer is a loan deal maybe with a fee agreed that would let Palace make it permanent if the loan goes well. This could be good for all parties. Palace gets a better right back, Manchester Utd reduces the wage bill with an unwanted player and Aaron gets a chance to regain his form without committing to another team that would require a larger fee than this summer.
Contract
He’s only got two years left on his contract. This could throw a spanner in the works of a loan deal. They could use the Chelsea model of only accepting the loan if there is a one-year extension. If they don’t extend the contract then Aaron would return next June with one year on his contract. That’s when the value drops and he could sit a year to become a free agent in 2024. At that point, he commands a large signing-on fee. But there is a rumor he is on big money and part of the issue of him signing at Palace would be his wages. So maybe clubs would be put off by contract size.
If he renews a contract this summer to add an extra year to protect United's resale cost and for him, it's a bit more security. Then take the net book value which cannot have adjustments to prior years. So we cannot just say it should be 55 (total cost) divided by 6 (total years under contract). That means we take the current net book value. Then add any agent fee or related bonus and divide it by the new number of years left. So that would take the amortisation from £11 million per season down to £7.3 million. As the cost will be spread over a longer time.
Impairment
Right now his net book value is around £22 million. When Manchester United look at their accounts they need to make a judgment call. If they were to sell Aaron this summer could they get £22 million? From an objective point of view this difficult valuation. I know that the Transfermrkt website has its value at 22.5 million but that website is not scientific. They could put any number. So you have to use your club's experience to check if any of the net book values need to be lowered. That said it would look bad if you sold the player in August for much less than the net book value you thought was ok in June.
Manchester United Accounts if Sold
Let's pretend he was sold for £26 million upfront. United would receive 26 million in cash and need to dispose of the asset on their books. First, United needs to remove the intangible asset and accumulated amortisation from the balance sheet as players' registration is no longer their asset. The balancing figure would be the profit or loss on disposal that would be reported on the P&L. In this example, it's £26 million minus £22 million net book value. The profit on disposal is £4 million. But don’t forget that they reported £33 million cost before that and none of this includes wages cost. While it is a profit on disposal it is a loss overall.
Account | Debit (£m) | Credit (£m) |
Cash (Bank account) [BS] | 26 |
|
Accumulated Amortisation [BS] | 33 |
|
Cost Intangible Disposal [BS] |
| 55 |
Profit on Disposal [P&L] |
| 4 |
Any questions let me know in the comments...
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