When Arsenal’s half-year financial report for 2011 was released, the thing that grabbed my attention was the column called “Profit on Player Sales”, and how it contained the number £63m. My initial thought was that it only referred to actual player sales, and that the initial transfer fees we received this summer (£59.95m) + the guaranteed £4.2m installments from the Fabregas transfer roughly represented the aforementioned £63m in profit. Close, but no cigar!
After a short chat with financial expert Swiss Ramble on Twitter, I started investigating what this ‘Profit on Player Sales’ meant. Apparently, football clubs operate in highly creative territories when it comes to accounting, and the “profit” is actually just something called ‘accounting profit’ – a figure arrived at after resourceful deconstruction of numbers connected to players.
As Swiss Ramble explains in this article regarding the extraordinary one-year transfer of Zlatan Ibrahimovic to Barcelona, clubs used to put initial transfer fees into the ‘expenditures’ column in the yearly accounting. So if Mikel Arteta’s initial transfer fee was £10m, Arsenal would put an extra £10m in the expenses for the 2011 fiscal year.
But in the early 2000′s, new standards for accounting were introduced, and clubs adapted the model of assets and amortisations. It allowed them to even out the books, and spread value over time. So in the case of Mikel Arteta – if we assume he’s on a four-year contract, his cost wasn’t £10m, it was £10m divided by four = £2.5m per year. Which means that Arsenal’s accountants won’t register an expense of £10m for Mikel Arteta to the 2011 books, they will register an expense of £2.5m for every year he’s still at the club until his contract runs out.
In essence, Mikel Arteta is treated as an asset with an expiry date. When that expiry date (contract) is up, he is worth £0, and until then his value decreases over time. Think of it like buying a bottle of milk: at the time of purchase it’s worth £1. But when it’s half-full, it’s only worth £0.50, and when it’s empty (or expired) it’s worth £0.
Speak English doc, we ain’t scientists!
From an accountant’s perspective, the term ‘profit’ in this case is creatively distorted. The term ‘Profit on Player Sales’ does not mean net transfer profit (as in: transfers in subtracted by transfers out), but rather means the following:
Let’s use Mikel Arteta as an example again – Arsenal purchased him from Everton in 2011 for a £10m initial fee. Since Arsenal view him as a milk bottle (an asset with an expiration date), this means he was worth £10m in the first year, £7.5m in the second year, £5m in the third year and £2.5m in his fourth year at the club. Now let’s say Everton wants him back this summer, and that we sell him for £9m. From here you’d assume we made a loss of £1m on the transfer, but no.
From an accountant’s perspective, we’ve actually made £1.5m profit on the transfer. How and why? Because the accountant values the asset (Arteta) at £7.5m, as he’s in his second year at the club. Selling him for £9m means selling him for £1.5m more than what he’s “worth”.
And that’s how Arsenal made £63m “profit” on player sales, even though Wenger bought players for almost £50m this summer. The “profit” comes from treating all transfer fees like buying a bottle of milk – if you bought it for £1 and you drink a quarter of it then sell it for 90p, you’ve made 15p “profit”, even though you’re left with 10p less than you had from the start.
Oh but it gets better. We haven’t even talked about wages, and how they affect expenditures. When a club signs a contract with a player, all future wages are reserved as a ‘commitment’. So let’s return to the example of Everton buying back Mikel Arteta for £9m, and let’s assume he signed a £50k/week contract over four years (worth £10.4m in total). When sold, Arsenal can now claim they saved £7.8m, since they won’t have to pay the next three years of Arteta’s contract.
Ah, the wonderful world of accounting. Stay tuned for more milk bottle analogies.
EDIT: I just want to point out that this article is supposed to be from a novice’s perspective, as it’s an attempt at simplifying very complex mechanics within accounting and economics. Hence the ‘for dummies’ in the title. We’re fully aware that the bulk of this article is cringeworthy for professional accountants, but the reason we wrote it is because we want Arsenal supporters to learn more about football economics, and they have to start somewhere if they’re clueless about finances. By keeping it fun and simple, we hope it will spark more interest so they want to learn more and move on to more in-depth material.