Capitalizing for Financial Fair Play

I thought I would take this blog to answer one of the questions I receive most often. How is it possible for Premier League clubs to spend exorbitant amounts on new players and still remain compliant with the Financial Fair Play rules now in effect? Don’t the millions they spend violate the rules on maintaining breakeven incomes? There are a number of reasons the clubs expect to remain FFP compliant, but the most vital one is based on a core accounting principle.

Accounting 101

Source: Wikipedia

When a club incurs a cost it is treated one of two ways depending on the source. If the cost is related to a benefit that is only applicable to the current year (ex. buying medical tape for the squad) it is treated as an expense . If the cost is incurred for a benefit that is realized over multiple years (ex. improving the stadium) it is capitalized. A cost incurred for a benefit never realized is called a ‘Bebe‘. I kid because I love.

A capitalized cost is then divided over the usable lifetime of the asset. In the case of a player the usable lifetime is the length of his contract. For example, Chelsea have signed André Schürrle to a 5 year contract for £18m. The cash cost is likely to be £18m paid out immediately to Bayer Leverkusen, however the cost of the transfer for accounting/FFP purposes is £3.6m per year.

What about multiple players?

A fan of capitalization (Source: Manchester Evening News)

That puts big transfer price tags in the perspective of a FFP-conscious club. The annual cost does increase as you stack up more transfer in a single year but it makes it more plausible that a club that has spent millions over the past 5 years could actually be compliant. Let’s take a look at Manchester City (shockingly one of the clubs most often linked to this question in my mail).

Below is a schedule that lays out the amortized costs of ManCity’s transfer spending over the last 5 years.

ManCity Amortization Schedule

At the peak in 2012-13, the annual cost of the spending spree totals €94m. The actual number is less important than seeing how the headline grabbing sums are actually spread out for FFP matters.

Capitalizing for Financial Fair Play