Exorbitant transfer fees in the age of Financial Fair Play

Paul Pogba for €105 million, Romelu Lukaku for €85 million and Alvaro Morata for €65 million are just a few recent instances of clubs not being afraid to splash the cash in order to get the players they want. Football fans have often wondered that despite UEFA’s introduction of the Financial Fair Play from the 2011/12 season, how are clubs still able to spend so much every year and still comply with the Financial Fair Play regulations. We take a look at what exactly is the Financial Fair Play and how do clubs still spend so much on transfers.

What is Financial Fair Play?

Financial Fair Play is a concept that was approved by Union of European Football Associations’ Executive Committee in 2009 and was implemented from the 2011/12 season. It is basically a concept that requires clubs to balance their books, i.e, not have losses more than a certain amount. The FFP is also said to be a concept that would improve the overall health of football in Europe with one of their primary objectives focusing on youth development.

How does Financial Fair Play work?

UEFA has set assessment periods of 2-3 years during which a club cannot exceed a certain amount of loss. For the assessment period of 2013/14 and 2014/15, the maximum loss a club could have was €45 million. However, they have reduced this amount to €30 million for the assessment period of 2015/16, 2016/17 and 2017/18 to ensure that all the clubs are financially stable. As already mentioned, one of their main objectives for Financial Fair Play was to promote youth development and for that, they have excluded the cost of youth development from the break-even calculations. Apart from youth development, UEFA also encourages clubs to invest in their stadiums, training facilities and women’s football and as an incentive, they have also excluded any cost related to these investments from the break-even calculation.

So how do clubs complete big-money signings and still comply with the FFP regulations?

All the clubs use a method called the ‘player amortization’ method. In this method, clubs don’t show the entire transfer fee as an expense in one year, but they spread it out over the contract of the player. For example, Arsenal sign Marco Reus for a transfer sum of €50 million and they give him a contract of 5 years. Now instead of showing an expense of €50 million for the accounting year 2016/17, Arsenal would divide the transfer sum by the contract length and write the expense incurred each year in their books of accounts.

Accounting Years Written Down Value for each year
2016/17 €10 million
2017/18 €10 million
2018/19 €10 million
2019/20 €10 million
2020/21 €10 million

Even though Arsenal have paid €50 million for Reus but they would be just incurring an expense of €10 million per season. This method is only done to write down the transfer fee and not the wages because wages are only accounted for when they are incurred.

How is the amortization affected in case a player signs a new contract?

When a club gives a contract extension to a particular player, the new contract length divides the remaining book value equally among the duration of the contract. Continuing with the example of Arsenal signing Reus for better clarity, let’s assume that Arsenal decide to offer him a new contract for 4 years when he has 2 years left on his current 5 year deal. The value in the books at the end of the third year  would now be equally divided into new contract length, i.e, 4 years.

Purchased Price Annual amortization rate
€50 million €10 million €40 million Book Value at the end of 2016/17
€30 million Book Value at the end of 2017/18
€20 million Book Value at the end of 2018/19
New contract duration Annual amortization rate
4 years €5 million €15 million Book Value at the end of 2019/20
€10 million Book Value at the end of 2020/21
€5 million Book Value at the end of 2021/22
€0 million Book Value at the end of 2022/23

Therefore, the remaining book value of €20 million would now be amortized at €5 million per season instead of the original amortization rate of €10 million.

Finally, what effect does player amortization have on player sales?

When a player is sold after a few years, it is usually for a value less than that for which he was bought for. It is often considered to be a loss for a particular club since the net spend is usually negative. However, it all depends on the book value of the player. Once again, taking the example of Marco Reus, if he was to be sold by Arsenal after let’s say 3 years, his value would have reduced owing to depreciation. Hence, Arsenal would equate the selling price with the remaining book value in order to determine whether they made a profit or a loss on Marco Reus.

Purchased Price Annual amortization rate
€50 million €10 million €40 million Book Value at the end of 2016/17
€30 million Book Value at the end of 2017/18
€20 million Book Value at the end of 2018/19

 

Selling Price Current Book Value Profit/Loss
€30 million €20 million €10 million profit

 

Selling Price Current Book Value Profit/Loss
€10 million €20 million €10 million loss

If Arsenal sell Reus for  €30 million, they would making be a profit of €10 million as opposed to a loss, which many people would believe considering the fact that he was signed for a sum of €50 million.

Thus, with clubs using the method of player amortization, clubs are able to sign players for large sums and still not fall on the wrong side of the Financial Fair Play.

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