Amortisation and how it affects a football club’s profit figures
Posted on March 2nd, 2011 | 179 Comments |
I’ve noticed discussions in the comments on this ‘blog lately about players sold v players bought and the profit or loss that club makes as a result.
If, however, you try to tally this up with club accounts you have to bear in mind something called amortisation, which distorts things a bit.
I’ll demonstrate how it does so in possibly to most boring ‘blog article ever written.
Let’s say we buy a player for £12m in 2011 and he goes up in value playing for Newcastle (of course) and we sell him one year down the line for £24m. Without amortisation, it’s simple: we’d just record -£12m in 2011 and +£24m in 2012 against that player, giving us an over all profit on that player of £12m:
| 2011 | 2012 | Profit On Player |
| (£12m) | £24m | £12m |
However, in the real world – at least the one inhabited by accountants – it doesn’t work like that because of amortisation. If a player has signed a two year contract and is sold after one year, he is valued by his amortised book value, not by how much he cost in the first place.
So a player that cost £12m originally is only worth £6m after 1 year for the purposes of accounting, so if he’s sold for £24m the profit is recorded as £24m – £6m = £18m.
| 2011 | 2012 | Profit On Player |
| (£12m) | £24m | £18m |
Now let’s see what happens if the same player bought for £12m is signed up on a 4 year contract. That would see him amortised at 12/4 = £3m a year, so if he’s sold after one year his ‘book value’ is £12m – £3m = £9m, so the profit recorded is £24m – £9m = £15m.
| 2011 | 2012 | Profit On Player |
| (£12m) | £24m | £15m |
And if we look at the lengths of various contracts and how they affect the profit recorded if a player purchased for £12m is sold one, two and three years down the line for £24m, we get:
| Contract Length | Yrly Amort | Book Value After 1 Year | Profit On Player Sold At £24m after 1 year | Book Value After 2 Years | Profit On Player Sold At £24m after 2 years | Book Value After 3 Years | Profit On Player Sold At £24m after 3 years |
| 3 | £4m | £8m | £16m | £4m | £20m | £0m* | £0m* |
| 4 | £3m | £9m | £15m | £6m | £18m | £3m | £21m |
| 6 | £2m | £10m | £14m | £8m | £16m | £6m | £18m |
So the effect of signing players on longer contracts is that the recorded profit of a player sold somewhere down the line is less but, within that, the longer you hang onto a player in terms of his contract duration, the more the recorded profit.
There are a couple of asterisks above marked against a player signed on a 3 year contract who is then sold after 3 years. As you can see the flow of the maths is different in this case because the player will be out of contract and essentially a free agent, thus realising no money for the selling club.
Of course in reality it’s not even that simple because the linear approach I’ve used above may not be upheld. A club may not, for example, be able to demand so much for a player close to the end of his contract because a buying club will know that the selling club needs to take some money before the player disappears on a free at the end of the contract.
That is possibly the least interesting post I’ve ever written and I almost didn’t bother publishing it, but spare a thought for me: if you thought it was boring to read, imagine how tedious it was to actually write!
I should point out that I’m not an accountant (and as such I expect fair criticism in the comments) and none, some or all of this article may be completely wrong, although it looks okay based on what I’ve read. NUFCBlog.org is not responsible for errors. Well, actually I suppose it is responsible for the errors as I wrote this; what I mean is that if you amortise your shoes based on my description here, then NUFCBlog.org accepts no responsibility for any losses you might suffer and will not be buying you a new pair of Hush Puppies.
NUFCBlog Author: Hugh de Payen
I'm a baby-boomer of the punk rock persuasion, currently exiled in Somerset for crimes committed in a previous life where locals keep trying to poison me with something called 'scrumpy'. Hates sprouts, coat-hangers, Cilla Black, ornaments, Steven Seagull movies and 50 Cent (he's not worth 10).
Hugh de Payen has written 634 articles on this blog.
You’re absolutely right.
It WAS tedious !