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.
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?
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.
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.
The 2012 edition of the Forbes Soccer Club Valuations are out. You may recall that I am not a huge fan of them so I thought I’d take a post to cover more in depth why I am incredibly dismissive of this annual list.
Forbes does a number of lists which rank various aspects of the financial world, from the richest people in the world to the most valuable companies, this includes soccer clubs. To do this the magazine throws available financial data, its own research, and some expert opinions into a black box shakes it around and out come values for clubs. Simple enough right? When you look at the ranking the list is populated with familiar names and the order looks about right:
Culture matters, in business and in sport. The set of principles which guide the employees, managers and shareholders of a business are what produces results and culture plays a similar role at soccer clubs. Both clubs and corporations are organizations focused on accomplishing a set of goals, it follows that there are parallels in organizational style. Read on for the long lost corporate twins of your favorite clubs.
The Blues would find no better soulmate than in Fairfield, Connecticut at the offices of General Electric. GE and Chelsea are suffering a slump following the departure of charismatic leaders who arguably ushered in the Golden Age for their respective institutions. Jack Welch and Jose Mourinho transformed the operative culture of each company and brought massive success.
If there was ever fear that silly amounts of spending would leave the Premier League this past January has done wonders to push those fears into the future. Here are the spending totals for the recent window, percentages are of total spending in the league :
Manchester City’s place in the top 4 spenders is not surprise, Aston Villa owner Randy Lerner signals support for a new manager, and Liverpool are flush with cash to spend on striking options. Perhaps most surprising is Chelsea’s appearance on the transfer board, Abramovich has finally opened wide his wallet after several seasons of quiet and the smell of panic buying is in the air. Chelsea’s season has been disappointing, with a brilliant start fizzling out and threatening the Blues perennial access to the Champions League. A loss of Europe’s top competition would be disastrous both to Abramovich’s ambitions for a European Cup and to Chelsea’s finances.
Will the big money signings make the difference? No one will know until the season is over, but we certainly know that if they do not make the difference there will be serious fireworks at Stamford Bridge next year.