Arsenal Finances for Dummies, part one: The £63m ‘Profit on Player Sales’

by 3 years ago · 2 minute read

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.

Player Amortisation

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.

Eh…that’s “innovative”

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.

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  • http://twitter.com/#!/benjamindockter Benjamin Dockter

    Very nice. You’ve done well..

  • Kizo

    Very helpful, thank you.

  • http://twitter.com/SCSoccer Kyle Heise

    I think that is the best ‘analysis’ of the transfer market that I have ever read. Thank you!

  • Mani Kashmiri

    From a finance student’s perspective, your “dumbing down” is right on the money. Pun not intended. 

  • Anonymous

    First of all, The more I come here for the analysis, the more I want to visit the page :) Brilliant way to explain it.

    I understood how a new transfer is accounted for in our books. I was wondering if you could point out how does the accounting work for a player like Fabregas who is on a new contract. He doesnt have any transfer value attached since it is already written off considering the years he has put in. His wages are a commitment but when he is sold, we save an ‘xyz’ amount of wages plus make money on the transfer. That sounds a bit dodgy to me.

  • http://www.arsenalreport.com/ Ix Techau

    If we’re only talking profit on player sales, I would assume Fabregas was “worth” £0 in that department when Barcelona bought him in the summer, as he’d already been at the club for many contract extensions and renewals since his £2.8m move in 2003. Which means Arsenal made a massive profit of the kind I’m talking about in the article;

    Initial Fee: £25.3m
    The transfer fee was split up over two payments. Arsenal received £12.65m in August 2011, and the other £12.65m a month later, in September 2011. 

    Instalments: £4.3m
    £860k every year, spread over five years. This is taken from Fabregas’ salary in a £16.8k/week “wage cut” from €80k/week to €60k/week. Barcelona can improve his contract at any time, so the “wage cut” is a goodwill smoke screen.

    Performance: £4.3m
    £1.72m for every La Liga title and £860k for a Champions League title during his first five years, capping out at £4.3m.

    In total, the transfer was a guaranteed £29.6m over the next five years, possibly rising to about £34m in total. So my guess is that Arsenal viewed the Fabregas transfer as a player profit of £29.6m – almost half of the reported £63m.

  • http://twitter.com/1988critic Anup

    Ix ur explanation to this comment is pure speculation isn’t it? 29.6 million for fabregase? u must be joking.

  • http://www.arsenalreport.com/ Ix Techau

    No Anup, the figures are correct, and confirmed by Sandro Rosell the day after the transfer was made. They are, however, converted from Euro’s at the currency rate in August 2011, and I’ve rounded the figures up to make it easier. But they are accurate nonetheless.

  • Abhishek Varma

    This is a very good way to explain the amortization of players in an emperical manner. However, I did feel that you editorialized it a bit by giving the impression that the accountants are creating a smokescreen to help the books look better. However, one should realize that it makes perfect sense. In your Arteta example, if we sell him back to Everton after a year for 9 million, it would be corect to say that we have made a profit. This is because we need to account for the services of Arteta for this season, beyond his wages. This is standard accounting practice, and there is nothing shad about it at all. Its simply a case of a 28 year old Arteta being worth more than a 29 year old Arteta.

    Of course, one could argue that the “straight line method” of depreciation of a players value may be to simplistic. For example, a players value doesn’t drop from 26 to 27 as much as it does from 30 to 31. There are other methods, but I think this method might get very subjective (how does one quantify experience?).

  • http://www.arsenalreport.com/ Ix Techau

    I understand what you mean – from an accountant’s perspective they’re not really players, they’re assets and numbers. But from a footballing perspective I hope that in the future we’ll move more towards true player value, as the transfer market is a bubble economy that doesn’t have to consist of the same mechanics as other economies.

    I don’t want to come across as conspiratory, that wasn’t my intention at all.

  • amahgfur

    This is by far the best explanation for the Arsenal financial report. I
    only studied accounting briefly during my high school time, which
    actually didn’t give me anything important about the real world of accounting.

    So, how much is the actual ‘net’ profit of Arsenal? Is there anyway to know that just by looking at the report?

  • http://www.facebook.com/sham.dan.313 Sham Dan

    I hope they don’t buy RVP back

  • ELIJAH ATAMBO

    I JUST LOVE THE SIMPLIFIED ANALYSIS

  • DeeG

    It is easier to manipulate profit. Prefer looking at revenue…. and boy Arsenal sold all the best players so it looks good too.

    Not so sure how it affects jersey sales, ticket sales and of course any impairment to the brand name.

    Definitely the likes of Chelsea and Man City are catching up or overtaking Arsenal as a global brand. Nobody likes losers or wimps for sure.

  • Rafi

    My god, the new animations are sublime. I can’t even imagine on how the code looks like and I don’t even want to since it would frighten me.

    To who ever did this, well done!