False profits – a look at the finances and spin of the Spurs
This is the first of a two part report on one of the most bent and disreputable forms of accounting ever seen in English football.
by Phil Gregory
Next up in the Premier League financial review is Tottenham Hotspur. Given they are our close rivals I’ve given our figures next to theirs for ease of comparison, though if you haven’t already read it, I’d advise you to read the Arsenal finance review
Spurs’ turnover stood at £113 million at the end of 2009, against Arsenal’s of £225million. Part of the reason for this difference is as a result of matchday revenues (ours of £100million are almost four times theirs at £27.9million).
There is also the difference in TV money. Our £73 million from broadcasting includes a Champions League semi-final and a 4th placed league finish, whereas they come in at only £45 million, partly due to an average performance in the Europa League (which doesn’t pay much anyway) and coming 8th in the league. They perform quite well in commercial terms, with a figure of £34million not a million miles away from our figure of £48million.
Their wage bill is roughly 60% of ours, £60.4 million against our £104 million, though their wages are higher as a percentage of turnover at 53.5% (we stand at 46.2%). Both of those percentages are well within recommended limits of 60%, and Spurs are very healthy at the operating level, with profits reported for the last five years totalling over £104 million against our £142million.
This perhaps doesn’t tell the whole story, given their January spending on Defoe, Palacios and Keane will mean their wages have only been considered in the accounts for half the season. Whether there will be a substantial “top four” bonus payment included in the wages for 09-10 remains to be seen, but it seems a likely cost. For 09-10, expect wages to have grown considerably, though they will still be lower than ours.
Firing Ramos and co only cost them £2.1 million according to the accounts, much less than I would’ve expected. I didn’t see any figures for compensation to Pompey for Redknapp.
All that is straightforward. But then…
It starts to get ropey when you consider what they call “football trading”. In their accounts, they don’t list a separate figure for each of player trading and amortisation, they bundle them together. This makes it hard to directly compare the data they give for transfer spending to another club, but we can look at how it has changed for the club themselves.
They define football trading as “representing the amortisation, impairment, and the profit/loss on disposal intangible assets [players] and other football related income and expenditure”.
We’ll ignore how vague and ambiguous those last few words are though they could bung almost anything in there under “football related income and expenditure” to massage the figures. Let’s trust it is a fairly reliably measure.
In 2005, football trading was at £12.8million. Now it is £38.1million, and the total for the last five years is nearly £120million. That’s a substantial amount of money, and more than they can afford as their total operating profit over the same period was only £94.8million. So there is already a shortfall there, and we aren’t even taking into account depreciation, taxation, interest etc.
But with football trading, the most important thing is to understand what they mean by “profit/loss on disposal of intangible fixed assets”. I won’t bore you with the accounting nonsense, but the idea of profit in this regard is not related to profit in terms of the transfer fee the player was bought for and the transfer fee received upon the sale. To you or I, if a player is bought for £10 million, and then sold for £20 million, the profit on the transfer fee is quite obviously £10million. Of course, this doesn’t take into account wage costs, agents fees, signing on fees etc, but it is probably a decent enough indicator for how a manager is doing in terms of player transfers if it is used as a rough guide only.
Here, however things are different. If a £10million player is signed on a four year contract, as per amortisation, that player will lose £2.5million of his value every year of his contract (10m/4 years = 2.5m per year). Hence in the accounts, in the 2nd year of that contract, the player has a value of £5million.
This is vaguely logical, as you’d assumed a player with three years left on his contract will cost more to buy than one with two years left due to bosman transfers coming into the mind of the selling party (indeed a player is deemed to have no value at the moment his contract expires, as he can leave without a fee).
Back to the example, if our £10million player was sold after two years for £6million, in the accounts that would be considered a profit of £1million (as his value was only five million, apparently). To everyone else it would be considered a loss of £4million (that’s where Rafa’s mystery profits on transfer dealings were coming from!).
To paraphrase the accounts the profit is thought to be the value of the receivable fee (with any transaction costs subtracted) minus the remaining value of the player after amortisation has been done. If a player was to be sold for a considerable fee in the last year of his contract, the “profit” would be substantial, and when considered against the substantial outgoings on player purchases, it reduces the “football trading”. With Tottenham having a bit of a rotating door transfer policy in the last few years, they are likely to have made quite a “profit” on player trading in the last few years.
In a nutshell, some accounting jiggery-pokery can create a profit where there isn’t really one, and hence use the profits to reduce the size of the net spend in football trading. This football trading figure is then used as a “look! We only spent £30million, not sixty!” kind of approach, or just the accounting profit is quoted, as you will see at the end of the article.
Imagine someone like Henry, who had been with us a long time, so his value on the books will have been very, very low due to amortisation. When he was sold for £16million, almost all of that would be considered to be profit and would improve the player trading statistics somewhat falsely in my opinion.
My main concern is that they consider the profit to be the difference between the value the accounts give for a player, and the amount of money paid for them by a buying club.
But quite frankly the accounting value is almost always out of kilter with reality, hence the figures are distorted. Since discovering this, I’ve stopped even looking at “player trading” figures in my analysis as because of this they understate the actual amount of money spent on players. This problem isn’t solely something done by Tottenham, but due to their substantial sales and purchases over the last few years, it has allowed their numbers to look better than they should.
Part two of this article is here
Meanwhile you might also enjoy
Barca on the edge of defaulting over their debts
Woolwich Arsenal: the first great heroes of the club emerge
Historical fiction on acid: how the modern Arsenal was formed 100 years ago.
SomeRandomGunner: I’d never falsely portray anything in order to prove a point, however I have taken on board some of the points made my commenters and will be taking them on board for a third article in the coming days.
terrible English in the above comment, you’d never guess I’ve just woken up!
If a club acquires a player then he becomes an asset of the club. How should that asset be reflected in the accounts? Possibly at market value, in which case the club would have to re-value all purchased players every year. How do you value a player? Ask every club they they will give you a different valuation. Barcelona think Cesc is worth £25-30m less than we do. It’s a recipe for disaster and fraud. Need to bump up the balance sheet a bit? Let’s increase the valuations. Dennilson must be worth say ….£20m. No auditor could sign off any set of accounts.
The alternative is therefore cost, or depreciated/amortised cost (net book value is the technical term).
If a player is purchased for £16m on a 4 year deal, then the most prudent way of dealing with that cost is to write it off over the length of the contract (ie £4m/year). That way in 4 years time, if the player leaves on a Bosman then the cost has been spread evenly over the contract and a completely misleading loss of £16m is not incurred in year 4. Overall the cost to the club is the same. By writing it off over 4 years the club incurs an annual P&L charge of £4m (totalling £16m). Which not suprisingly equals the loss at the end of year 4 if you don’t do anything.
Using the example in the article where a £10m player is sold after 2 years for £6m, leading to a profit of £1m. There is no “jiggery pokery”. The overall loss is clearly £4m. But under the standard accounting treatment, the clubs results will show P&L charges in year 1 & year 2 of £2.5m each, totalling £5m. In the year of sale there is a profit of £1m. The total charge is therefore £4m! Exactly the same, except the £4m cost has been spread over the term of the player’s contract at the club.
I appreciate that this can make accounts difficult to understand and virtually impossible to break down in terms of individual players, but it is the most sensible and prudent accounting treatment.
I disagree that this is the best way forward, because it can and does result in players who get serious injuries and never play again, or only play to a much lower standard, and indeed players who lose their form, being valued far too high.
You buy a player for £20m, he gets Shawcrossed in his second year, and his value might drop to £2, but on your books he is showing at £10m, which is crazy.
I don’t work in football – but I have worked for much of my life in publishing and writing, and in publishing we have a similar problem. A book is written and we the publisher retain the right to publish it forever, as long as we don’t let it go out of print or stop marketing it for a six month period. We spend money up front (equivalent to the purchase of the player, or the guess value of a Bosman player) on paying the author an advance, on getting the book printed, doing the marketing and advertising and so on.
In fact my publishing company has the rights to some 500 such books. How do we value them? Some of those books have a value of next to zero because we are going to sell very few more copies. Some can have a huge value if they are titles that we will sell lots of each year for years to come.
The simple solution is that we value all of them at zero and Revenue are quite happy with that.
What’s the cash flow look like?
P+L’s a dodgy guide to health when there’s lots of depreciation, capex etc.