How football teams account for the millions they spend on players

The 2013/2014 season is rapidly approaching. Teams are rushing around trying to bring in their target players before the transfer window slams shut on September 1st.

Like many football fans, I too believe that the current level of transfer fees are absurdly inflated. However, knowing how teams account for transfer fees in their books, I do understand how Real Madrid, who seem to always make yearly losses in their accounts, are willing to pay up to €100m for Gareth Bale.

If we consider the fundamental structure of a business it becomes obvious that players are assets and we must account for these assets in our financial disclosures.

When we account for fixed assets, we must amortise (depreciate) the asset over a number of years. In football, this is determined by the length of the player's contract. At the end of a player's contract (assuming that he isn't sold prior and a new contract isn't agreed) they are allowed to leave for free - so the asset will be considered worthless.

Now, lets imagine RM pay €100m to Tottenham and Bale signs a 5-year contract, we will amortise this asset by €20m each year (€100m divided by 5 years). So at the end of the first year we will book the asset value at €80m (€100m minus €20m). At the end of the second year, we will change this book value to €60m. And so on. I think you get it now.

If a player is sold whilst under contract, the selling club will have to quantify their profit / loss surrounding the transaction. If we now hypothesise that Bale is sold to Man Utd in 2 years for the price of €45m, Real Madrid will experience a book loss of €15m, not €55m. The €15m figure is simply obtained by €45m (sales revenue from Man Utd) minus €60m (his book value at the end of year 2).

This accounting structure incentivises clubs to secure new signings to longer contract agreements. By doing so, the player's annual amortisation value will fall as it is spread over a longer duration.

Furthermore, teams will be keen to negotiate a contract extension with their players. Not only will this secure players to the club for a longer duration, they can also adjust the annual amortisation figure by adjusting the asset according to the new terms.

For example, if in the 3rd year RM negotiate and agree to a 3 year contract extension (so 6 years total) they will reduce the annual amortisation to €13.3m (year 3 book value of €40m divided by new 3 year contract).