Transfers are a huge part of football clubs finances and compliance with Financial Fair Play (FFP). The way football transfers are accounted for aren’t a simple as taking profit/loss from a sale and adding/subtracting from the clubs profits. This article will take the world record Neymar transfer as an example and explain how this monumental deal can be within Financial Fair Play rules.

In the wonderful world of football accounting, players when purchased are capitalised such that their cost are spread over their ‘useful life’. A players useful life is essentially their contract length, so for a player on a 4 year contract, their transfer fee will be split over 4 seasons. The annual cost is known as the amortisation. For example, Neymar cost PSG £200m on a five-year contract so annual amortisation charge will be £40m, this will be included as an expense in the clubs financial statements. This costs does not include wages.

When the player is sold, the profit is not the transfer fee received less the transfer fee paid, it is instead the transfer fee received less the players remaining ‘value’. This value is the original transfer fee minus any amortisation to the date of sale. So, using the Neymar example again, in two years Neymar ‘value’ will be the £200m transfer fee minus two years of amortisation costs (£40m x2), £80m. This leaves Neymar with a value of £120m in two years.

So if Neymar is sold at this point for £150m, many would wrongly assume a loss of £50m when in fact, the club has made a ‘profit’ of £30m in their accounts. This amount will be added as income in their financial statements. They will also be saving costs on amortisation of £40m for each of the remaining 3 years and his wages.

This explains why the Neymar deal may be financially viable. PSG can sell players and record a ‘profit’ while also saving on their amortisation costs in the future. Lets look at their player sales.

Aurier

Aurier was signed for £9m on a four-year contract from Toulouse in July 2015. This leads to a yearly amortisation costs of only £2.25m a year. He was then sold to Tottenham for £22.5m in August 2017, just over two years worth of amortisation (we will stick to two years for mathematical simplicity). Two years of amortisation is then £4.5m (£2.25m x2) leaving him with a value of £4.5m. PSG therefore record a profit of £18m on this sale in their accounts, nearly half of Neymar’s amortisation costs, plus amortisation savings of £2.25m for each of the next two years and also saved wage costs.

Matuidi

Matuidi was signed for £7.2m on a three-year contract from Saint-Ettiene in July 2011. Since he stayed for six years, he obviously signed a few new contracts. This changes the treatment as his ‘value’ remains at the time of the new contract is then amortised over the new contract length. However due to this amount being negligible, for simplicity we will assume his contract has been fully amortised leaving him with a value of nil. PSG sold Matuidi for £18m, realising a profit on the full amount while also saving on his wages.

Jean-Kevin Augustin

A relatively unknown player, Augustin, 20, was an up and coming PSG youth player, signed as a boy in 2009 at the age of 12. He was signed by the ambitious German outfit RB Leipzig this summer for £14.4m. As he came through their youth system at negligible cost, he has a nil value and the full transfer fee is recognisable as a ‘profit’ in their accounts, another incentive to invest in youth.

Overall

From these 3 sales, PSG have recognised profits of £50.4m, more than covering the amortisation costs of Neymar, leaving room to help afford his lucrative wages. This does not include the saved wage costs of the players and Aurier’s amortisation costs.

This is obviously unsustainable to expect to sell 3 good players a season and not spend elsewhere also, however the quality of Neymar should help the club improve performance in the Champions League to increase prize money, while his star power will lead to increased commercial success through sponsorships, merchandising and TV earnings. Which has already been seen with the added interest in PSG this season and even at one point running out of Neymar shirts in their club store.

Since its announcement in September 2009, Financial Fair Play has divided opinion. The ever polarising Platini remarked “Fifty per cent of clubs are losing money and this is an increasing trend. We needed to stop this downward spiral. They have spent more than they have earned in the past and haven’t paid their debts. We don’t want to kill or hurt the clubs; on the contrary, we want to help them in the market. The teams who play in our tournaments have unanimously agreed to our principles…living within your means is the basis of accounting but it hasn’t been the basis of football for years now”. Financial Fair Play was aiming to change this.

Promoting sustainable spending was the aim, with excessive spending a thing of the past, this was the message Platini was sending. Fast forward to 2017 and PSG have spent around 200m on Neymar and effectively spent (when the loan becomes permanent) £160m on a break-out teenager with 1 year of first team football.

This series will explore what exactly Financial Fair Play aims to achieve, its rules and how they have been enacted and bypassed to date. We will first look into the rules to gain a better understanding into UEFA’s thinking behind this regime.

Financial Fair Play rules are fairly broad, the main financial requirement is the break even requirement. This is a requirement to limit losses incurred by clubs, it is based on a clubs income and expenses, with the aim of encouraging sustainable spending such that clubs ‘break-even’ and don’t over extend themselves.

All clubs in UEFA competition must comply with the rules, which are based over a rolling three-year period (e.g for 2017 it will be based on the 14/15, 15/16 and 16/17 seasons).

The break-even requirement is that relevant expenses must not exceed relevant income by more than EUR 5m over the rolling three-year period. This loss can be increased to EUR 30m if the excess (EUR 25m) is contributed by a related party.

Club must also avoid having overdue payments to other clubs for transfers, employees and Government.

As an example if the Break even results 14/15 was +10m, 15/16 was +5m and 16/17 was -20m the club would still be within the requirements as the net result would be -5m. The result could be anywhere up to -45m if and only if the extra above the -5m was covered by contributions from related parties.

Below is a breakdown of what is included in ‘relevant income’ and ‘relevant expenses’, which from now on we will just call income and expenses respectively:

The main technical area around this is profit on disposal of players, this is a bit more complex than just taking taking the difference between transfer fee paid and transfer received.

Players are (rightfully so) treated as assets for football clubs, they are therefore assumed to depreciate over the time they are at the football club (Not always true, look at Zlatlan!). The profit is then the transfer fee received minus the depreciated value of the player.

For more details on the technical side of this, check out this post explaining player disposals here.

This is an area that can be very useful in complying with Financial Fair Play. Players can sometimes be sold who have a low book value can be sold for a large fee due to their ability, making a large ‘profit’ on that player and potentially saving the company from breaking (pardon the pun) the break-even requirements.

Another area that causes controversy for Financial Fair Play is related party transactions. An obvious deceitful way to pass Financial Fair Play is to use a company that the mega-rich club owner owns and plug money into the club through a ‘sponsorship’ which will increase income and meet break-even requirements.

In an effort to stop that, UEFA have stated that related party transactions must be at their fair value, such that if they were not related the payment would be the same. This is difficult to prove however as what exactly is fair? Often comparisons will be made with other similar deals, however this is not always available and fair value is open to debate so as of now is still a grey area for Financial Fair Play.

The same scenario may play out with expenses, where the related party charges the club a lower fee than otherwise would be ‘fair’ for instance stadium maintenance costs or other services.

Expenditure on youth development, community development and women’s football are all taken off the expense figure to encourage spending in these areas. Youth development will aid sustainable growth for clubs and help bring through more youth players with more of a focus on homegrown talent. Community development will help keep clubs in touch with their local community and fans which is harder than ever with the growing money in the game. A focus on women’s football is essential to building the game to higher level and encouraging girls to take up the sport.

Clubs may also be proactive and choose to voluntarily sign up to Financial Fair Play and break-even requirements. You may wonder why clubs would risk the extra burden of these rules, clubs with aspirations to qualify for UEFA competition may want to be proactive in meeting the requirements to avoid a shock once qualifies. Clubs may also want to self-impose financial discipline in order to achieve sustainability.

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