Edit - thanks to the person who correctly pointed out ENIC haven't actually taken any dividends in 10 years. I hate to say it but Tottenham is a very well run and self sufficient business.
I'm an accountant and can shed some light on transfer fees and what they really mean.
A player is an asset. To be precise, an intangible asset because the item that makes a human being who is a player technically an asset by accounting standards as opposed to your regular joe is the way their contract is written - it allows the criteria of useful economic life and others to be met and so the contract is what the club is actually buying. When you purchase an asset you recognise what you paid for it on the Balance Sheet as an Asset. This DOES NOT show on your profit and loss (which is where net profit is). From an accounting perspective it's just moving money around the balance sheet - you shift value from one asset (cash) to another (intangible assets). Don't get confused here by the term contract, even if the salary of the player over a 5 year contract is £10m a year, if you pay £100m you capitalise £100m. The wages and salaries will come through later as costs on the profit on loss and are independent of the capitalised intangible asset - remember, the whole value to the club of the contract is it ties the player to the club for the duration (i.e. has genuine value with measurable economic benefit, hence an asset in laymans terms) and the club has valued that at whatever they paid for it hence that's assumed to be fair value paid for the intangible right to hold the player for that period. The wages and salaries will be executed under a personal services contract (generally, some cases may be simple employer/ee relationship but becoming less common albeit IR35 could bring it back into vogue) which is a separate agreement and similar to what average joes have - therefore, the wages will hit the P and L as costs under whatever is agreed in the services contract which is not the same as the capitalised contract (right to own) which is an asset. Note, the club has a duty to recognise fair value for all assets just like any company and so annual revaluations based on market are permitted. Any change to value is recognised by debiting (increase) or crediting (decrease) the asset and the same amount is then recognised in a revluation reserve which is in the equity section of the balance sheet and conveniently for owners is defined as part of distributable reserves and can therefore be paid out directly to owners as a dividend.
Assets must be depreciated over their "useful economic life". For intangible football contracts that's really easy, it's whatever the term is. Every year, the value paid at the beginning (purchase value) is reduced straight line over the UEL until it's worth nothing. i.e.if I have a 5 year contract then in year 1, I have £100m on my balance sheet for the player, year 2, I reduce this 20% (5 years) so it's now worth £80m on the balance sheet. Worth £20m in year 5, and zero by end of year 5. Where does the depreciation expense (the 20% go)? It goes on the P and L as a cost - yes guys, accounting is weird, that made up number really is an accounting cost and it reduces your net profit each year until end of Year 5 (fully depreciated). The value of the asset net of depreciation in any one year is called the Net Book Value. The really interesting thing about this, is if after 5 years the player recontracts - well, there is no transfer fee involved so, apart from signing on fees and agents fees that can be capitalised, nothing else is there to be capitalised. So thereafter, the player's Net Book Value is close to zero or at most very low (even at a generous agent/signing on fee, unless a Raiola player). This means, bids that the media may call a bargain may actually be decent whack. Example below
Say a player is bought for $60m on a 5 year deal. By Year 4 the NBV is $12m (depreciated 5 years). Bid comes in $15m - that's $3m of accounting profit. The sale looks like this.
Action 1) reduce assets by $12m (crebit)
Acton 2) increase Cash by $15m (debit)
Notice something? Doesn't balance. Where does the $3m go? It goes to the P and L per IFRS, that's a free $3m.
On the other hand, If I sold the same player for $45m in Year 4 (where he is worth $48m NBV) I made a $3m loss. That also goes to the P and L, a $3m cost reducing my Net Profit. That's a $6m difference in net cash terms to the scenario where I sold him for $12m! But the media will still call the latter a bargin (fans to). Examples of "bargains" where simple fag packet maths tells me ENIC actually did a great deal include the Tripper sale - probably pure Net Profit.
The reason this also matters is that legally the amount you can pay out as a dividend is capped at a maximum of what's in Distributable Reserves, a legal concept arrived at by combining certain pots on your balance sheet including the largest - which is retained earnings. End of every year, your net profit from the P and L is transferred here. Yes, even though the P and L contains made up costs like depreciation, they still reduce the amount I can pay as a dividend. That's why these Trippier sales are great for ENIC, $20m of pure dividend. And what's Eriksen's NBV in last year of his contract? Again, pure NBV. Dividends though, are paid out of Cash, and so will impact future transfers and may require sales of other players to finance.
And in terms of transfer spend, FFP limits are based on accounting net profit. But large wages and salaries will push this down.
It's important to understand, that the main gist of the above is a transfer has surprisingly little effect in year. I see many posts here comparing transfer spend and net profit from the same year but they are totally unrelated to each other.
Summarised example. And the reason for ignoring wages, which are likely costing £10m a year with NIC for a $150k a week player, is these are an operating cost and should be evaluated against operating profits (i.e profits ignoring stuff like deprecation) i.e. prize money, TV money, and provided all player wages are less than those revenues then operating profit (which is just a management figure, not important in terms of FFP, dividends etc but a good approximation for cash) is positive which means we are in business. But this is why wages and transfer fees should never be mixed up, wage bills are evaluated against operating performance, transfer fees are just an accounting funny which has almost nothing to do with net profit, but the transfer fee when I sell a player needs to exceed the NBV or I reduce my NP and then it starts to matter becuase that means less FFP envelope, less dividend or in the case of ENIC same dividend to pay for Joe's new yacht and less cash for next season! This is why even though lay people think of company finances as one thing, there is a huge distinction between operating and investment cash flows - huge. If you're talking about "this year NP was x but spend was only y" then you're conflating two things that are not connected.
I'm an accountant and can shed some light on transfer fees and what they really mean.
A player is an asset. To be precise, an intangible asset because the item that makes a human being who is a player technically an asset by accounting standards as opposed to your regular joe is the way their contract is written - it allows the criteria of useful economic life and others to be met and so the contract is what the club is actually buying. When you purchase an asset you recognise what you paid for it on the Balance Sheet as an Asset. This DOES NOT show on your profit and loss (which is where net profit is). From an accounting perspective it's just moving money around the balance sheet - you shift value from one asset (cash) to another (intangible assets). Don't get confused here by the term contract, even if the salary of the player over a 5 year contract is £10m a year, if you pay £100m you capitalise £100m. The wages and salaries will come through later as costs on the profit on loss and are independent of the capitalised intangible asset - remember, the whole value to the club of the contract is it ties the player to the club for the duration (i.e. has genuine value with measurable economic benefit, hence an asset in laymans terms) and the club has valued that at whatever they paid for it hence that's assumed to be fair value paid for the intangible right to hold the player for that period. The wages and salaries will be executed under a personal services contract (generally, some cases may be simple employer/ee relationship but becoming less common albeit IR35 could bring it back into vogue) which is a separate agreement and similar to what average joes have - therefore, the wages will hit the P and L as costs under whatever is agreed in the services contract which is not the same as the capitalised contract (right to own) which is an asset. Note, the club has a duty to recognise fair value for all assets just like any company and so annual revaluations based on market are permitted. Any change to value is recognised by debiting (increase) or crediting (decrease) the asset and the same amount is then recognised in a revluation reserve which is in the equity section of the balance sheet and conveniently for owners is defined as part of distributable reserves and can therefore be paid out directly to owners as a dividend.
Assets must be depreciated over their "useful economic life". For intangible football contracts that's really easy, it's whatever the term is. Every year, the value paid at the beginning (purchase value) is reduced straight line over the UEL until it's worth nothing. i.e.if I have a 5 year contract then in year 1, I have £100m on my balance sheet for the player, year 2, I reduce this 20% (5 years) so it's now worth £80m on the balance sheet. Worth £20m in year 5, and zero by end of year 5. Where does the depreciation expense (the 20% go)? It goes on the P and L as a cost - yes guys, accounting is weird, that made up number really is an accounting cost and it reduces your net profit each year until end of Year 5 (fully depreciated). The value of the asset net of depreciation in any one year is called the Net Book Value. The really interesting thing about this, is if after 5 years the player recontracts - well, there is no transfer fee involved so, apart from signing on fees and agents fees that can be capitalised, nothing else is there to be capitalised. So thereafter, the player's Net Book Value is close to zero or at most very low (even at a generous agent/signing on fee, unless a Raiola player). This means, bids that the media may call a bargain may actually be decent whack. Example below
Say a player is bought for $60m on a 5 year deal. By Year 4 the NBV is $12m (depreciated 5 years). Bid comes in $15m - that's $3m of accounting profit. The sale looks like this.
Action 1) reduce assets by $12m (crebit)
Acton 2) increase Cash by $15m (debit)
Notice something? Doesn't balance. Where does the $3m go? It goes to the P and L per IFRS, that's a free $3m.
On the other hand, If I sold the same player for $45m in Year 4 (where he is worth $48m NBV) I made a $3m loss. That also goes to the P and L, a $3m cost reducing my Net Profit. That's a $6m difference in net cash terms to the scenario where I sold him for $12m! But the media will still call the latter a bargin (fans to). Examples of "bargains" where simple fag packet maths tells me ENIC actually did a great deal include the Tripper sale - probably pure Net Profit.
The reason this also matters is that legally the amount you can pay out as a dividend is capped at a maximum of what's in Distributable Reserves, a legal concept arrived at by combining certain pots on your balance sheet including the largest - which is retained earnings. End of every year, your net profit from the P and L is transferred here. Yes, even though the P and L contains made up costs like depreciation, they still reduce the amount I can pay as a dividend. That's why these Trippier sales are great for ENIC, $20m of pure dividend. And what's Eriksen's NBV in last year of his contract? Again, pure NBV. Dividends though, are paid out of Cash, and so will impact future transfers and may require sales of other players to finance.
And in terms of transfer spend, FFP limits are based on accounting net profit. But large wages and salaries will push this down.
It's important to understand, that the main gist of the above is a transfer has surprisingly little effect in year. I see many posts here comparing transfer spend and net profit from the same year but they are totally unrelated to each other.
Summarised example. And the reason for ignoring wages, which are likely costing £10m a year with NIC for a $150k a week player, is these are an operating cost and should be evaluated against operating profits (i.e profits ignoring stuff like deprecation) i.e. prize money, TV money, and provided all player wages are less than those revenues then operating profit (which is just a management figure, not important in terms of FFP, dividends etc but a good approximation for cash) is positive which means we are in business. But this is why wages and transfer fees should never be mixed up, wage bills are evaluated against operating performance, transfer fees are just an accounting funny which has almost nothing to do with net profit, but the transfer fee when I sell a player needs to exceed the NBV or I reduce my NP and then it starts to matter becuase that means less FFP envelope, less dividend or in the case of ENIC same dividend to pay for Joe's new yacht and less cash for next season! This is why even though lay people think of company finances as one thing, there is a huge distinction between operating and investment cash flows - huge. If you're talking about "this year NP was x but spend was only y" then you're conflating two things that are not connected.
| Joe Smith | |
| Purchase Price | £90m |
| Agent fees | £1m |
| Signing On fee | £9m |
| Intangible Asset | £100m |
| Contract term | 5 years |
| Year 1 | |
| Balance Sheet | |
| Increase to Assets | £100m |
| Reduction to Cash | (£100m) |
| Net Impact | £0m |
| Impact to P and L | £0m |
| Net Profit Unaffected by transfer. No impact on ability of ENIC to pay itself dividend of next year's FFP envelope |
| Year 2 | |
| Balance Sheet | |
| Opening NBV of Contract | £100.0m |
| Depreciated | (£20.0m) |
| New NBV of contract | £80.0m |
| P and L | |
| Depreciation | (£20.0m) |
| Net P and L impact | (£20.0m) |
| Now we start to see an impact. But if I sell 1 Tripper, I've made it all back |
| So, carrying forward the Year 2 impact to Year 4, then assume sell the player - what do I need? Clubs will know what they need each year ongoing before they sign the player. It's called a business case. I am concentrating on the P and L only here as this drives the FFP parameters. Assumes the club always keeps enough cash in the business to service these operations (standard) | ||||
| P and L impact | NBV of contract | Required transfer fee for neutral P and L | ||
| Year 1 | £0.0m | £100.0m | £100.0m | |
| Year 2 | (£20.0m) | £80.0m | £100.0m | |
| Year 3 | (£20.0m) | £60.0m | £80.0m | |
| Year 4 | (£20.0m) | £40.0m | £60.0m | |
| Year 5 | (£20.0m) | £20.0m | £40.0m | |
| Year 6 | (£20.0m) | £0.0m | £20.0m | |
| Assuming the TV, prize revenues of the club/company exceed the wage bills (which is not evaluted when considering a transfer fee) then all we need to care about it meeting the number in right hand column when we sell the player because if we do not we have a P and L hit per accounting rules on asset sales as discussed above. By the time I get to end of contract, It's pretty easy for me to make a decent buck, get a P and L credit and increase my FFP envelope for the next year. |
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