£133 million, or €159.6 million, or $220 million, it really makes no difference which currency you do business in, the amount of money that Chelsea Football Club has raised selling four of its highest profile players since this past January is staggering. That should mean Chelsea have a $220 million war chest to spend, they’d have to, to be able to sign Diego Costa, Filipe Luis, AND Cesc Fabregas right?
If only it were really that simple. While Chelsea has been the most active in the transfer market this summer by far, that $220 million, or whichever currency conversion you prefer to look at, should have an asterisk at its corner because while it may be the sum of the club’s transfer sales figures, it by no means represents what goes down on the club’s books, especially in regards to Financial Fair Play (FFP).
The three main considerations when looking at that number include, accounting periods and practices, new signings, and the biggest profit killer, wages.
The primary accounting practice, used by clubs worldwide and accepted by UEFA and Financial Fair Play, is the amortization of player transfer fees, there will be much more on that later. The accounting period though is simple and quite important. A fiscal year for European professional soccer clubs are not calendar years. Matching their competition season, their fiscal year ends around when their season ends. In Chelsea’s case, it ends June 30th. The significance is that a player could be sold on June 28th and another player could be sold on July 3rd, and the two sales would be on different annual financial reports.
New signings have a direct impact on profits from player sales but they do so two-fold, both in transfer fees and their resulting amortization payments, but also with new wages. Simply looking at player names, it would be difficult to tell who gets paid more per week so when one player leaves and a new player comes in, more often than not, their wages will not be the same and the difference needs to be addressed.
All three considerations are important, especially for FFP. To start it should be understood that FFP operates on monitoring periods as shown below.
It is understood that Chelsea, was FFP compliant over the first monitoring period since they were not among the 76 clubs investigated by UEFA back in February regarding FFP. Maintaining the debt under the $62 million threshold is only the first step because now, as the monitoring period shows, while the threshold remains the same, the monitoring period now increases to three seasons. In 2011/12 the club showed a profit of $2.3 million while posting a $77 million loss in 2012/13**. Under FFP regulations Youth Development costs do not count towards FFP calculations and it is estimated that almost $2o million a year is spent on all the youth set up and academy operating costs which likely reduces the net reported loss over the monitoring period by an additional $40 million. Still, 2013/14 will soon be assessed by UEFA and Chelsea’s player movements will be very important.
Player Sale Impact
With 2011/12 and 2012/13 accounted for, 2013/14 becomes the most significant. Total revenue and other key financial figures are unknown at the moment but that’s where the player sales mentioned above come in. Player sales, their immediate profits, and the wages that no longer need to be accounted for all contribute positively to club bottom lines.
It’s more than that though. The accounting practice of transfer fee amortizations, as mentioned earlier, play a large part in FFP and balance sheets. When a player signs for a club, their whole transfer fee is not written down all at once on the club’s expenditure for that year. The transfer fee cost is spread out evenly over the life of that players’ contract. For example, Player A signs for Club B for a transfer fee of $25 million on a 5-year contract. On their books, the club pays an amortization of $5 million per year for five years rather than showing $25 million up front in that one year.
Additionally, If a player A is then sold for $15 million with two years left on his contract (meaning three annual $5 mil amortization payments have been posted on the books), then the final two amortization payments ($10 million total) are due immediately, with the club showing a $5 million profit (fee – remaining amortization due) on a player even though he was sold for $10 million less than what they paid for him.
To clarify, this does not mean that clubs do not pay full up front for transfer fees, they do, rather this is simply the accounting practice shown on their books when they calculate annual financial figures.
This is what the four major Chelsea player sales look like form that accounting perspective.
Instinctively it seems easy to say that the clubs profit is the final sales figures – initial transfer fees, roughly a $93 million (£56.2 million) profit. As we already know that is incorrect. First because Romelu Lukaku was sold after June 30th, his sale will likely not go on Chelsea’s 2013/14 books. Taking the remaining amortization amounts, all of which go on the books immediately and subtracting them from the sale figures and the new profit become $181.21 million (£109.43 million). Additionally with Mata and Kevin De Bruyne sold in January, roughly half of their annual wages can be removed as well and added to profit showing a new total profit of $184.39 million (£111.95 million)
Not quite $220 million, but significantly more than $93 million. To really get a better picture of Chelsea’s 2014 transfer activity impact, player signings as well as player sales must be taken into account.
Player Purchase Impact
We don’t know exactly when an amortization payment is due beyond that one is due annually, despite this,to be safe we will operate under the assumption that since every player officially signed before June 30th, then one amortization payment will be on the 2013/14 books. Additionally since Matic and Salah signed in January, half of their annual wages need to be added as well (Zouma went immediately on loan after signing so the assumption is his wages were covered by that club). This totals out to $47.3 million in costs (£28.58 million)
Net profit from player sales after taking into account player purchases now puts Chelsea FC showing a $137.1 million profit. Again, not quite $220 million but a fair bit more than $93 million. The club has shown shrewd player purchases and an Arsenal-esque skill of selling players on their upswing and they appear to have done so without damaging the overall quality of the squad.
In the age of FFP these practices are more and more important and it’s no longer acceptable to simply look at transfer fees and compare them to previous ones to discern profit margins. It appears evident that clubs are still able to buy big if they’re shrewd enough in their player sales, but they have to be equally shrewd in their accounting because everything needs to add up when UEFA comes looking.
*These numbers are not a total revenue calculation for the club for the year, nor are they official numbers that will likely be found in their books, rather they should be taken as estimations using publicly available and known figures and practices. FFP and accounting practice explanations found at Law In Sport & FinancialFairPlay.co.uk
**All Chelsea FC Club financial data from www.thechels.co.uk club financial database
***All Chelsea FC player financial data from www.weaintgotnohistory.com Player Wage Database
****Currency conversions taken from ESPN numbers when discussing FFP and player sales over past 6 months (GBP to EUR = 1.2, EUR to USD = 1.38)