Ultimate analysis of Yaroslav Susov.

We are used to looking at transfers as an instant deal. Bought one club, sold another. On the way we paid the agent or someone else. Everything is very simple.

But in the world of documents, things are much more complicated. Each club maintains financial records, transfers are accounted for in a special way and sometimes become loopholes for fulfilling the requirements of financial fair play.

This is proved by the latest examples of Juventus and Chelsea. Juventus, due to a cunning accounting system and plusvalets (we will tell you everything below), colluded with other clubs, changed players for money and thus covered huge losses. Chelsea have bought almost €500m this season, but are not afraid of financial fair play because they have, in fact, taken the players in installments.

It’s time to figure out how accounting tricks work in the world of transfers.

The problem of accounting for transfers: this is not just income, but a special accounting category

The reporting of football clubs is not the same as that of ordinary companies. It’s not that football doesn’t count money, it’s just that it’s counted differently. The specifics of the sports economy are to blame: clubs report not for the calendar year, but for the seasonal one (from July 1 to June 30), and the players are not only employees, but also a source of income (an extremely unusual situation).

Transfers are the most unusual part of the football economy. In fact, this is the transition of a person from company to company for money. But people are not things, and football is not a slave trade.

A person cannot be a unit of balance in an accounting report. In the report of any company, people appear as employees, they cannot be bought or sold. They can be paid salaries and create working conditions, and they bring some result. This is how it works in football – with managers, marketers, administrators, press officers. But not with the players.They can be bought and sold, that is, they are both employees and assets that generate income.

So we come to an important conclusion: in the financial statements, sales of football players are not treated as standard income such as ticket sales or sponsorship rights – contracts with players are considered intangible assets. According to Russian law, these include objects that do not have a material form, but which can generate income: patents, intellectual property, copyrights for works, trademarks and goodwill. In football reporting, contracts are often referred to as player registration rights.

Since the players and their contracts are intangible assets, then transfers are the sale of intangible assets. There are two types of income: from core activities (revenue – just like ticket sales, and so on) and non-operating, that is, related to the sale of intangible assets (in the case of football, these are transfers of football players).

They are reflected in different parts of the reporting. And from here – all potential loopholes.

UEFA looks at transfer money due to licensing and FFP, but they are not counted in the rankings of the richest clubs

Transfers, along with income from matchday, TV rights, prize money and commercial contracts, are included in the financial statements submitted to UEFA and national federations. Based on this data, financial fair play, licensing works, all suspensions and deductions of points take place. Therefore, clear financial reporting is the most important point of the season for any club.

But this is the official level. And the unofficial ratings of the richest clubs and the reports of major auditors Deloitte, KPMG and PwC take into account only income from core activities, that is, without transfers. The clubs are sorted by:

• revenue from matchdays

• sponsorship

• TV rights

This is a simplified system. In fact, even clubs have more sources of operating income. But this is the most universal and understandable version for a wide audience.

With transfers, it’s not that easy.

The player’s purchase and sale are entered into the papers in different ways: the sale is immediately, the purchase is smeared for years

Let’s look at the example of the transfer of Mykhailo Mudryk to Chelsea from Shakhtar.

The sale of a player is recorded in the balance sheet as we are used to – one tranche per year of sale. That is, Shakhtar will receive 70 million euros in the 2022/23 season. Mudryk is a graduate of the club, so he cost Shakhtar nothing and is valued at 0 euros as an intangible asset.

From the side of Chelsea, the deal will look different. In fact, Mudrik will be paid 70 million in 2023, but in the balance sheet the amount will be divided over the entire duration of the contract. “Chelsea will immediately record 70 million new assets, and then eight and a half years will write off money for Mudrik in equal parts – 8.24 million euros per year (this is without salary, bonuses and additional expenses).

The most important term in football is depreciation. According to the papers, the club writes off the cost of the transfer in small pieces every year, and not tens of millions at once

Accountingtransfer of a football player – the purchase of an asset that is no different from a patent for an invention. The principle of depreciation works with assets. Over time, the asset wears out and needs to be replaced.The company saves money to painlessly change outdated equipment, a factory, a machine tool or a football player.

Because of this, the transfer amount is considered an amortization payment and is split up for the duration of the contract. Usually – linearly (in equal shares). If the contract is for 4 years, the transfer amount is divided into 4 years at 25 percent, if for 5 years, then 20 percent is written off every year. Although some clubs do it differently. For example, Napoli calculated depreciation on a five-year contract in the following proportions: 40% in the first year, 30% in the second, 20% in the third, 7% in the fourth, 3% in the fifth.

Again:the club can transfer money for a new player right away, but on paper the intangible asset section that affects profit/loss, the write-offs will run for the entire duration of the contract.

Counting transfers on the example of Morata. Bought for 66 million, sold for 35, and accounting losses in a particular season – 4.6 million. How so?

Let’s analyze how transfers are indicated in the balance, using the example of two transfers by Alvaro Morata.

The Spanish striker moved to Chelsea from Real Madrid for 66 million euros. In fact, Chelsea paid for the transfer immediately, but in the financial statements the amount was spread over five years – so that the club would write off 13.2 million euros each year and pay off the depreciation cost by the end of the contract.

Every year the accrued depreciation increases. In three seasons, Chelsea depreciated 39.6 out of 66 million. In parallel, Morata’s book value was falling.

A footballer’s contract, like any other asset, has a value. And it decreases every year. Three years later, Morata for Chelsea was no longer worth 66, but 26.4 million euros. And when, in the 2019/20 season, Atlético bought Morata for 35 million euros, Chelsea, in terms of balance, should seem to be satisfied:

 35>26.4.

For the average person, Morata’s transfers are two deals: a $66m buy and a $35m sell. For UEFA and Chelsea it’s different.

 In terms of reporting: • Chelsea recorded an asset worth €66m in 2017/18 and immediately started depreciating it at a rate of €13.2m per year.

• In the 2019/20 season, Chelsea again wrote off the traditional €13.2m, removed Morata’s contract as an asset during the transfer (another minus €26.4m; the remaining book value must be written off when the player leaves), and then received 35 million from Atlético

• Total for the 2019/20 season Chelsea did not earn 35m and did not lose 31 (66-35), but went into the red by 4.6m (€39.6m written off due to depreciation, received 35) .

Depreciation allows you to stay within financial fair play even with bulk purchases in one transfer window and plan income and expenses for years to come. The tricks of this system have been famously mastered by Juventus and Chelsea. Even though they are used differently. Now let’s explain.

Juventus performed an accounting miracle by trading players at inflated prices

Using the example of Morata and Chelsea, we have analyzed how the accounting calculation of transfers works. Chelsea smeared expenses, but did not go into plus.

Sometimes it turns out that clubs do not cover the transfer fee of the purchase, but go into profit in the year the player is sold. This accounting miracle is called plusvalenza: when the price of the actual sale of a player is higher than the residual cost on the balance sheet.

This system is often used by Italian clubs. The most famous deal is the exchange of Miralem Pjanic for Artur between Juventus and Barcelona.

In the 2020/21 season, Juventus sold Pjanic to Barcelona for 60 million euros and bought Arthur from Barcelona for 76 million euros (contract for 5 years). At first glance, Juventus went negative by 16 million, but on paper they earned 60 million and spent 15.2 million on the amortization of Arthur’s contract in the first year (total +44.8 million euros).

Such artificial profits do not improve the position of Juventus in the long run, but helped to avoid fair play problems during the covid season with falling revenues.

A similar situation was in January 2021. Juve have exchanged pupils with Marseille. The French paid €8m for Franco Tonja, while Juventus paid €8m for Marly Ake. At the time of the transfer, Tonca did not have a valuation from Transfermarkt at all (now he costs 1 million euros and plays for Odense), and Ake was worth 2.5 million (now also 2.5, he plays in Serie C). For such a deal, Juventus received +8 million euros on paper in the 2020/21 season, it amortizes expenses for the entire duration of Ake’s contract.

Chelsea extend baseball contracts to buy more players

Transfers are especially important in Chelsea’s economy. The club is deeply unprofitable. From the 2013/14 season to the 2019/20 season, Chelsea had an operating loss of £494m. But no transfer ban! Why?

Because operating losses were covered by transfers! In six years during this period, Chelsea earned £398m from transfers. Therefore, Chelsea’s loss over the same period is not 494 million pounds, but 108. It’s not so scary anymore.

Chelsea spend huge sums on players: Swiss Ramble calculates £890m from 2013/14 to 2019/20. But this money is evenly stretched over the entire term of the contract of the players. So it turns out that Chelsea did not buy two times 300 million in securities, but smoothly writes off 168 million a year due to depreciation. In order not to go into a wild minus, Chelsea sells players (it must be admitted: the club does it extremely well), and sales are recorded in the balance sheet in the year of the transaction. So Chelsea does not violate financial fair play, and repays the remaining gaps with shareholders’ money. According to Swiss Ramble, from 2004 to 2019, Roman Abramovich gave the club 1.35 billion pounds.

Under Todd Bowley, Chelsea’s politics have been transformed. No, the club has not gone from bulk purchases and will not stop covering operating losses with transfers. But Chelsea still sets new trends.

The main thing right now is baseball contracts as a response to the new financial fair play.

Previously, teams could spend no more than they earned, or compensate for losses with the owner’s investments (and there were limits on amounts). The latter was used by Chelsea.

From the 2023/24 season, a radically different financial fair play will work. Clubs are now required to spend no more than 90 percent of their income on transfers, agency commissions and salaries. In 2024 – no more than 80 percent, in 2025 – no more than 70.

As we remember, transfers are taken into account in the fair play balance not during the buying season, but smoothly throughout the contract. This means that the longer the contract, the less you depreciate on average per year.

Chelsea understood this trick, and also took Bowley’s work from baseball. The Chelsea owner owns a 20% stake in the Los Angeles Dodgers, and in baseball they often use long-term contracts, sometimes for 10-15 years, to squeeze under the salary cap and keep the bright player as long as possible.

Therefore, the purchase of 460 million euros according to Transfermarkt is not as scary as it seems. After all, Chelsea took all the players, in fact, by installments (the plan is – someone will take off and give a result, and someone out of habit will be profitably sold):

Not 80 million euros for Wesley Fofan, but 11.5 million a year for 7 years

Not 70 million euros for Mikhail Mudrik, but 8.2 million per year for 8.5 years

Not 38 million euros for Benoit Badiashile, but 5 million a year for 7.5 years

Not 12 million euros for David Fofan, but 2 million a year for 6 years

And so 200 million euros turn into 26.7 per year. Magic!

Of course, these are not all expenses for newcomers, salaries and agency payments are taken into account separately. But for Chelsea, which earns 550 million euros a year without transfers, these are not extremely scary figures during the construction of a new team for 5-7 years in advance (another question is that it will be very expensive to sell not the most needed players).

Another factor playing in favor of such long contracts is the impact on the value of the club. As we already know, contracts with players are considered assets of the club. The longer the contract, the slower the value of the asset falls and the more the club is worth.