False profits. Revealed: how Tottenham cooked the books and conned us all

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

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55 Replies to “False profits. Revealed: how Tottenham cooked the books and conned us all”

  1. I’m a bit confused; from an accounting perspective amortising the purchase price of a player over the length of the contract is the right thing to do.

    Sticking to your example of the £10million player who sold after two years for £6million: this is indeed a 1 million profit in the accounts in the year he is sold. Don’t forget that in each of the 2 years previously he P&L had to take 2 write offs, or ‘losses’, of 2.5 p.a.

    Am I missing something?

  2. I really want to thank Phil for researching and writing this piece for two very specific reasons.

    First, I asked him to do a piece on Tottenham, because I have had more emails asking for an article on their accounts than on any other subject, ever. And I have always failed to put up a piece myself, because I have never understood the accounts at all. Everything always points to them making a loss through excessive turnover of players and managers, but they keep turning in a profit.

    Second, I know how long Phil has taken to do the research, and how much trouble he has gone to, to get this article – and the one that follows tomorrow – done.

    To the best of my knowledge, no one has previously revealed exactly what Tottenham has been up to. As I put in the blurb on the home page, there is nothing illegal here – it is just what I personally would call “somewhat misleading”.

    I am of course not at all privy to Tottenham’s tax returns but I feel sure that when it comes to those the profit magically disappears to be replaced with the loss that we would all expect from this sort of activity.

    Again, many thanks Phil – and I am really pleased Untold had the chance to be (probably) the first to unravel this situation.


  3. Bart – my understanding is that this is not how many other clubs do it, and in terms of “common sense” accounting it gives a false picture. And as I said above, I cannot believe Tottenham do this on their tax return.

  4. Well tbh “creative accounting” has taken down the taxbill for many a company. We should not be suprised that a footballing buisness is run in the same ways. Someone is at the top and wants profit.

  5. @Phil,

    I agree with Bart. I examined the Spurs accounts in detail for my own review of their financials back in March and, as far as I can see, the way that Spurs handle the accounting for player amortisation and profit on player sales is in line with accounting standards and no different from the way that any other football club does it.

  6. Well that is just odd.
    Excuse me if I’m being dumb but what exactly is the point of this apart from saving face – For example, if you buy a player for £10 million and sell him for £8 million 3 years later and call it a profit, you still have a net loss (on the cost of the player alone) of £2 million. It’s not like just because you report it as a profit that you actually have more money in your bank account.

  7. hahaha are we surprised by this?? Harry ‘Del Boy’ Redknapp must have something to do with this!! Every club he touches seems to do something to the books that eventually leaves them in a massive hole!! Pompey, West Ham and Southhampton all suffered finacally after Harry, can’t be coincidence, can it??

  8. It’s a timing issue; when are you taking the losses. The way Phil describes it, Tottenham is amortising over the contract period, which is something any (most?) commercial companies would do. I’d be really amazed if other clubs are doing it in another way.

    But like I said, maybe I’m missing something.

  9. I just see that Swiss Rambler has replied and confirmed what I thought.

    I probably have to declare here that am a Chartered Accountant (or Register Accountant in Dutch) by training.

  10. Does this mean that a free player like Chamakh is not considerred an asset and has no accounting value?

  11. If indeed their matchday revenues were £28m and if they played something like 28 home games then the average would be £1m per game. With a capacity of 36000 this means that the average ticket price (ignoring programme sales and catering) was only £28 per head. Does that look right?
    What we do know is that Spurs are desperate to look successful to potential buyers and to lenders of money to build their new stadium.
    Not a very convincing story is it?

  12. At no point do I claim that what Spurs do is incorrect – indeed when Arsenal calculate player trading figures, the same calculations are made – what I am arguing is that to claim a “profit” on player trading is wrong, as the value of the player by the accounts (calculated by the standard amortisation) is clearly way, way out of whack with any market valuation of the player.

    hence a profit is claimed, as £10million is recieved for a player whose accounts-value is only say £5 million. Yet his market valuation is substantially higher than the accounting value, hence the magic profits.

    So as Tony says in his comments it is misleading, but not illegal. When they talk of a “player trading profit” of 56.5million what they really mean if they have recieved more money than the accounts value of the players. My criticism is that the accounts value of the players significantly undervalues players.

    John: that’s pretty much my point. If you look at Spurs’s accounts they have in whopping great print “player trading profit of £56.5million”. That’s the figure that gets seen adn reprinted by the media, despite not really being very true.

    This problem pervades the entire of the game, it is the convention of how things are done. It’s not illegal, but to me it’s bloody stupid and very misleading for the average Joe.

  13. Richard B: such analyses are generally flawed, as we don’t know what goes under the heading of “matchday revenue”. I’ve seen a club who included a compensation fee for a manager that got poached by another side included under “commercial revenue”. It’s madness, there’s no actual regulation saying what has to go under each heading, so in regards to matchday revenue it may or may not include corporate hospitality too. If one team includes corporate hospitality under commercial, and the other puts it under matchday, the figures are distorted.

  14. Phil, given that amoritization figures are dependent on the buy-price and initial value of the contract, how are they affected by signing a player to an extension?

  15. Thanks for this article Phil, it’s very interesting. I once tried to work out how much Spuds paid to dig themselves out of the relegation zone a few seasons ago. I was shocked that they continue to report profits when things didn’t stack up when you consider the manager, players purchased and wages involved over ther past couple of years. I knew something was amiss in their accounts.

    I wonder how the Spuds can afford to build a new stadium if they are struggling to get shirt sponsorship, something in their finances just don’t add up.

  16. Dead easy Rusty, just amortise the value that they had over the contract length extension.

    So a £10m signing, four year contract. After three years, his “value” is 2.5m and he’s given an extension so thr contract is once again four years long. Now he loses £.75m each year.

    Apply that thinking to someone loike Thierry: his value on the books would have been next to nothing, and yet we sold him for £16m. Was the £15m profit that we made compared to the book value really profit? I think not. Spurs benefit from this due to the amount of sales they’ve made over the last few years, and they happily use it to water down their player spending figures.

  17. @ Tony, why am I suddenly moderated?

    @Phil, sorry but you’re wrong. The way Spurs is claiming profits on player trade is the right way to do it. The alternative would be to value the player at market price in the accounts which would lead to claiming profits in the P&L before they are realised. This goes against every accounting regulation. No disrespect but I suggest you rewrite this article.

  18. Nice work Phil

    spuds have been a feeder club for man u recently, but man u are drying up so who is going to buy spurs players?

    I think they could really struggle with growing pains now that they are stepping up to the big boys

    I could see spurs going for wembley,or some other type of ground share

  19. Stephen, I think, if I may say so, you have a little problem here.

    In all my life (which as you can see from my photo at the top of the site has been a fairly long one) I have never been called a closet spud before.

    I have set up this site, it is totally pro-Wenger, it analyses players, our rivals, covers the ladies team, highlights the youth team and its progresses, was one of only two sites (as far as I know) to make a big deal over the fact that we were the first ever to retain the youth league championship, it has covered the Arry legal case, was one of the first to point out that Arry’s record is WHU (bust) Portsmouth (bust) Southampton (bust)…

    I regularly comment on the view from my season ticket seats in block 99… I even go so far as to write a book on the activities of Arsenal 100 years ago (“Making the Arsenal” – you can buy it from Amazon), and run a site of Woolwich Arsenal – the only club site anywhere that is 100% devoted to the long term history of the club… (www.blog.woolwicharsenal.co.uk)

    and you call me a closet spud.

    May I politely ask, sir, which planet you are on?

  20. Bart: I’m not saying what they’re doing is wrong, they and every other club follow this system. But what it does do is distort the accounts in regards to player trading figures, and thus undermines the figures as a means of understanding what is really going on.

    I can understand if you disagree with what I’ve said if you think I’m trying to argue what they are doing is incorrect and/or dodgy (I’m not) but I can’t see how you can deny that it distorts the final figures.

  21. Phil, please read what you’ve just said: “I’m not saying what they’re doing is wrong, they and every other club follow this system”.

    Your article is about Spurs cooking the books, when clearly they don’t do this, at least not with regards to player transfers. They follow the accounting rules, what else do you want them (and other football clubs!) to do?

    You clearly don’t agree, fine by me, but if you leave this article as it is you’ll be losing a lot of credibility with anyone who has any financial insight.

  22. The case of Robbie Keane is an interesting one (amongst many others in the pantheon of Spud transfers).
    Everyone took a sharp intake of breadth when it was announced that Liverpool were ‘paying’ £20m for him and were then surprised that he paid played very little for them. And not very well when he did.
    I assume that a lot of that £20m was made up of contingency payments – i.e. payments related to games played, goals scored etc. When Liverpool realised what everyone else had spotted earlier that he just wasn’t worth the money they stopped playing him and, I assume, told Spuds that there would be no more money forthcoming. He effectively became a ‘toxic asset’ and the only way Spuds could turn the deal into something worthwhile was to ‘buy’ him back (for a sum quoted as being the balance of the unpaid fees) and then, having made a big song and dance about making him captain, lending him out to Celtic, presumabably for a fee, hoping that his reputation would improve and they could sell him again – thus pauing for his replacement.
    It looks like it’s now happened a number of times that Spuds have sold players to the highest bidder omly to find that the ‘buying’ club can’t afford them and they have to be returned – Chimbonda and Defoe are just two.
    And now they’re in for that nice Craig Bellamy. What an investment in the future he is!

  23. Bart, what they are doing is legal, as well as the accepted norm but I believe it to distort the figures. My article is about Spurs finances, not cooking the books. mny experience with accounting is insufficient to even begin to make such a claim, hence why I don’t.

    My point is simple – the rules are flawed. They claim a profit of the sale of intangible assets, which they do make. However such a profit is based off the book value of the intangible asset versus the price paid. I believe the book value vastly undervalues the player, hence the club make a large profit on the sale of intangible assets. That is the crux of my criticism – not what Spurs’ do, but what I believe to be a flaw in the system. Do you disagree with my interpretation that this system is flawed?

    My only criticism with the whole thing regarding Spurs is that by selling a high number of players in a single accounting period, they record a record profit. Most people were bemused by spurs’ recording record profits while spending a fortune on players and this is why, hence why I wrote the article about it. Nothing illegal, just a flawed system in my opinion.

    If you don’t disagree with the fact that the book value undervalues players (and it quite clearly does, as clubs constantly overpay for the players), then I can’t understand where your disagreement comes from. My issue is solely with these constant profits based off a book value that undervalues the player being sold. Every club is in the same boat, but it does partly explain spurs recent record pre-tax profit.

  24. Phil, I’m gobsmacked. You say, the rules are flawed… are you taking on the Generally Accepted Accounting Standards, or what ever they’re called nowadays? I’m bailing out of this discussion now, this is all getting a bit to weird.

  25. More SSAP25 (concerning segmental reporting in the accounts) but I don’t believe current standards and systems are adequate given the difficulties trhanks to “interpretability” in the financials.

    I had an interesting email discussion to that regard with Andy Green (of the anti-Glazer movement “Andersred” fame) and it was he who first pointed me in the direction of accounting legislation and its failures due to the specific nature of football clubs. I daresay he has the credibility to criticise legislation?

    Anyway, I can appreciate raising concerns about such a widely-accepted set of regulations isn’t the easiest subject to raise and will attract cynics, but can you not see my point regarding the profits off intangible assets? The values of them are simply too low when compared to a market valuation (ie the price paid) hence these ridiculous profits.

  26. The simple The simple question to ask has always been< " Does any declared profit show up on the bank balance". Put another way, can Tinyham FC or Tinyham PLC write out a cheque for the full amount of their declared profit and hand it over to the chap who owns them.

    I suspect that the answer is no.

  27. i still don’t understand properly (doubt i ever will)

    if someone is signed for 10 mil and sold for 6 mil, rather than a profit of 1 mil because he went for more than was expected it’s surely a loss of 4 mil?????

    is it not a bit abritrary to assume the value of a player will be depreciated throughout their contract? until you enter the final year or two there’s just no way of knowing whatsoever whether the value of the player will be up or down, so it seems pointless assuming one way or another. if a player has a good season it can go up, if not a good season it can go down, but why assume it will go down and claim it’s a profit when he goes for more than expected. surely you can’t claim it really as profit since nobody is in a position to assume the value of the player a year or two down the line in the first place.

    what is the reasoning for doing this though? is it so that when they ask the bank for money the banks see a prettier picture than is accurate and will be more likely to lend?

    this is giving me a headache :'(

  28. to give an example of what i mean in my last post.

    if you sign an amazing young talent like aaron ramsay, surely you expect his value to go up 2 years into his contract rather than down because he’s very good and developing and will be playing in the biggest games attracting suitors. so if he is bought for 10 mil say and is sold after for 6 mil, rather than calling it a profit, surely that profit presumes his value would be lower when in reality surely it’s a huge loss, because you’d expect a couple of years into his contract (and development) his value is going to be considerably higher.

    i’m so confused

  29. Phil, sorry, but name dropping doesn’t impress me, don’t care who or what Andy Green is.

    Last try;

    First line, of your article: 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.

    The problem I have with your article is that you’re very eager to put Spurs in a negative daylight by ridiculing their profits when all they have done is exactly the same as other football clubs namely sticking to the accounting rules for transfers.

    Then, in your replies to very valid criticism, you change tack and start to criticise accounting rules. Spurs have no influence on these! What on earth do you want them to do, make up accounts especially for unknown Arsenal?

    In addition to this, if you were to value the players at market price in the accounts, you would have to book a profit (or loss) in the P&L every year because he is worth more (or less). Practically this is impossible, how do you determine the market value of a player? Even if this was possible, the result over the years of profit or loss will the same as when you do it the traditional way. Do the sums or let someone who knows about accounting do it for you. (I’m ignoring tax issues here)

    I’m all for taking the mickey out of spurs, but it has to based on facts not misleading information.

    This was really my last entry on this thread; I feel like banging my head against the wall and I don’t want to spend my whole evening on the blxxdy internet.

  30. Ryan: your first paragraph is pretty much what I was saying. It does make sense to amortise a players value as they can leave on a free at the end of the contract so therefore have no value.

    This leads to a discrepancy – near the end of a contract, a players market value (the fee a buying club will pay) is higher than the players book value (the value after the amortisation process). Now, in the club’s bottom line, amortisation IS taken into consideration, so you could argue that the club has already incurred the cost of a sustained period of amortisation, so any profit on selling the player (by this I mean the money recieved minus the BOOK value of the player) is fair game.

    however my criticism is that the whole process of amortisation is spread out over the length of the contract, whereas when the player is sold, the profit is recorded in a single set of figures.

    Imagine 3 of our 10million players. All are on 4 year contracts, so each one costs the club 2.5mill in amortisation each year, so 7.5million in total each year. After three years, the players have a remaining book value of 2.5million each. If the club sells the players on for 8million each, there is a profit in one set of accounts of 16.5 in a single set of accounts, which makes a record profit on the bottom line.

    Of course, over the preceding period, the club has had a cost of 7.5million each year that dampens their bottom line. The big profit from selling a player comes in one fell swoop in the accounts, and therefore we get our large boost to the bottom line.

  31. bart, I wasn’t trying to impress you. The point I was making was that you were near-enough laughing at me for criticising accounting regs, yet someone who knows enough about sports finance to appear on Panorama. No need to get personal or take offence, this is a discussion not a pointscoring argument.

    That line was the editor’s words, not mine though I accept this isn’t clear. I’m sure throughout the article I highlight that they are making nice operating profits and the like, and I’m sure I made the point that this was the norm (indeed I cited that Arsenal do the same and have benefitted from it in the past). My point was Spurs have benefitted substantially recently, and that it has meant they’ve recorded record profits. people wrote to Tony asking where these record profits were coming from so I gave them my answer.

    I don’t feel I change tack in my argument. I’m explaining Spurs’ record accounting profit, and partly the reason they make this is because of the regulations that in my opinion apply inadequately to football. Ergo, the two are linked.

    I’d appreciate your continued input to this, as I’m keen to learn if I have made a mistake, but I feel there’s a middle ground between us where the truth lies. I appreciate the difficulties in valuing players at market prices in the accounts and I don’t propose any improved system as my background in accounting is too limited to do so.

    As I said in response to Ryan, the way the cost of amortisation is charged over time, whereas the benefit of this undervaluing of players (the profit made on the sale of intangible assets) is realised in a single set of accounts, hence the record profits. My original article didn’t make this clear, so to be questioning it is a fair point.

    I’ll keep an eye on this discussion and would be interested to see your responses, but I appreciate there’s more to life than discussing this article!

  32. My bottom line is: We are a club that even keeps the books in the right and clear way.
    We are a shining example to the world in all and every way. Okay, I admit I am biased. 😉

  33. It seems quite simple to me – Spurs are taking advantage of asset depreciation to make it seem like they are in fact making huge profits on player sales, which is very misleading.

    Instead of listing amortisation and player trading separately they have bunged them together. If you buy a player for £10m and sell him for £6m, you quite obviously have not made a profit! Depreciation allows them to pretend the player’s value has plummeted down to £5m, and therefore report a ‘profit’. When in fact they have lost £4m on that player.

  34. Leo S: that would be it in a nutshell. They’ve “paid” the cost of that asset depreciation in a few previous sets of accounts, and now benefit in one fell swoop.

  35. OK, my take.

    Phil’s central point that Spurs recent results are misleading, because they have significantly benefited from the profit on player sales, is undoubtedly correct.

    However, I think that some of the phrases used in the article (“cooked the books”, “conned us all”, “bent and disreputable”) are equally misleading, though perhaps they are a little tongue in cheek. The reality is that Spurs follow exactly the same accounting conventions as all other football clubs or at least the 100 or so that I have reviewed in my time. Even Arsenal account for player trading and amortisation in the same way.

    The discussion on whether current accounting rules are appropriate is an interesting one. I can see where Phil is coming from, but revaluing to market value would also be a nest of vipers. Who would decide on what the correct market value of a player is? If it’s the club, this could also lead to unscrupulous behaviour, as they might over-estimate a player’s value and artificially inflate their profits. It’s also not a given that a player’s value increases over time. At Arsenal, we are used to buying and developing young players, so this is probably valid most of the time. However, for a club like Chelsea, which buys older players at inflated fees, the market value is almost certainly decreasing (Shevchenko, Ballack, etc).

    There really is no right answer on this one. I should know, as I spent three years at university debating this in the most tedious detail (when I wasn’t playing football and drinking beer).

    As Bart implied, one of the basic accounting concepts is prudence, i.e. the books should reflect the most conservative valuation. This can lead to excess profits when a sale of an asset is made, but accountants consider this to be the lesser of two evils. That is why whenever reviewing a company (in this case a football club), you should never look at just the bottom line, nor should you look at one year in isolation. In the same way as if you were considering buying a house, you would not make your decision based on just one photo, no matter how glossy.

  36. Guys

    Fascinating discussion. It’s all getting a bit heated here – we’re all Gooners together (I’m a season ticket holder = block 30 and have been following the club for 45 years so I’m nearly as old as Tony) so let’s calm down. Phil thanks for bringing some light to the Spuds finances – I’ve been wanting to see this for a long time. I can’t wait to see the Harry effect over the next accounting period as the wages and transfers kick in..

    I run a large (£100M) business. In broad term,s I agree with Bart and the Swiss Rambler here (I’m not an accountant but am responsible for both a large P&L and a large capital budget). The important thing here is to differentiate between cash, capital and operating profit.

    You buy a player for £10M.If you pay upfront that’s £10M of cash out of the door.

    You amortise (or depreciate – probably a better word as it’s a tangible not an intangible asset) or to put it in non accountant speak, write down the cost of that player over the time of the contract. That cost goes against the P&L and so counts against the operating profit each year. THIS IS WHAT I AM NOT SURE SPURS ARE DOING – PHIL CAN YOU CLARIFY? So each year, in exactly the same way as wages the cost of the player is set against revenues and so reduces operating profit.

    If, after 3 years, with the value of the player down to £2.5M, because you have already taken a £7.5M hit against profits over three years, you sell the player for £5M, in that years accounting period, you take a profit of £2.5M, the last year of depreciation at £2.5M set against the income (revenue) of £5M. It’s not a fiddle and over the four year period you have made a loss of £5M but in that years accounts you make a profit of £2.5M. Completely normal, completely by ther book, just how Arsenal do it. At the same time, where your free cash flow suffered by £10M in year 1, it benefits by £5M in year 4.

    So – my conclusion – it all depends whether Spurs are repporting the depreciation in the normal P&L or whether it’s a separate set of books.

    I love this stuff. It’s a great read for a football mad businessman. Keep it coming. Tony, Walter, Phil and Swiss Rambler – you are all legends.

    PS – not long until Blackpool …..

  37. I am embarrassed by the typos – must proof read next time – several large glasses of red haven’t helped ….

  38. Agree with Rambler there, pretty much sums up the ‘middle ground’ that Phil mentioned. And yeah, I don’t care if the Spurs accounts for the recent years are misleading,can’t take it when it’s an awesome Arsenal site that’s doing the misleading. The heading for this article and the various pointers to it are just bad/wrong. A much more appropriate introduction would be to just say something meaning : to explain how the Spuds accounts show profits even though the club is not in that good shape. Not ‘cooking the books’ and all the rest of it

  39. This is a very interesting discussion. Here are my 2 cents.

    Firstly, I think everyone agrees that what Spurs have done is not illegal but a common practice within the laws.

    The issue here is whether it is or isn’t misleading and if it is misleading what can be done about it.

    The way I see it, when players are bought the books don’t take all the hit in the same year. So if someone signs a player for 15 Mil on 5 yr contract, another for 12 mil on 4 yrs and another for 8 mil on 4 yrs – we get an outlay of 35 mil in one year but the books would have 3+3+2=8 mil as the amortization for that year.

    Interestingly, none of these numbers will be part of the “player trading” segment.

    Now if in the same year the clubs sells three players who have let’s say book values of 2 mil (signed for 10 mil, in last year of 5 yr contract) 5 mil (signed for 7.5, 2 yrs left out of 3) and 9 mil ( signed for 15, 3 yrs out of 5 left) for 4 mil, 8 mil and 30 mil respectively. The profit on player trading will be 26 (2+3+21) mil.

    So the books will have an 8 mil cost for that year and a 26 mil profit. In reality there is a cash outlay of 35 mil and an inflow of 42 mil. I’m sure the cash flows will capture this in some way but it will not be captured in the profit and loss.

    Over one or two years the profit from player trading can give the impression of a profit that does not exist. But over the years the cash flow will ensure that the club has to find the money from somewhere regardless of whether they declare a profit or a loss. So if the business isn’t doing too well (increase in income can’t balance the cash outflow) they will need to find extra debt or fresh equity.

    Considering all these things it would not be fair to say that the financial systems are not good. Is there a room for improvement? certainly. Is there a need for better and detailed coverage/reporting of financial issues? Most definitely.

    I can see why Bart has a problem with this article and I can also see what Phil is trying to say. In the recent years spuds have probably been able to show better profits when they don’t really exist but it is not the same as “cooking the books” or “bent accouting”.

    I think we can get much more clarity if we can look at their cash flows and how their debt/equity has changed over the last couple of years.

  40. Really interesting subject…..from an Accountants perspective!!!

    Found a good article – quite old but covers this in quite a lot of detail…

    Google “revaluation reserve football players”

    4th Article down “12 Accouning for footballers doc”

  41. Good posts. I’d imagine market valuations would be done independently (a professor at my university was involved in valuing Leeds’ squad when their creditors came knocking, so the people are out there).

    Fair point on the accounts taking a conservative value, I can see the logic in that certainly.

    My issue with amortisation as a way of valuing the asset is that it is so linear. Sure, a player may be worth relatively little near the end of his contract, but is his value really reduced by a quarter after one year of a four year contract? This, to me, is where the issues start to emerge: the system is too rigid. Thanks for your insight TSR.

    Countryman: You are correct, the amortisation cost is considered as part of “football trading”. Naturally money in is considered positive, and money spent and amortisation is considered negative. A weak point of my article is that I forgot to mention that amortisation is counted against the profit and loss account, which to the average Joe implies that the asset depreciates without any cost being incurred by the party which owns it. Poor writing on my part!

    The thrust of my concern was basically how amortisation is done over a number of years, yet the boost from selling a player benefits a single set of figures, giving a nice bump to the profit figures. This means a club can claim a profit on player trading even if they sold the player for less than they bought him for, which is what baffles the majority of fans.

    And Countryman, I think you’re forgetting about the game at Anfield!

  42. Saketh: get an angry email to Tony ;). Though I do take your point. I think he’s been reading too many tabloids recently, though my ambiguous writing causing this confusion won’t have helped matters!

    Desigunner: amortisation is included under Spurs’ “football trading” figures (cos they like to make things difficult) but yes,amortisation would normally be categorised separately. In your example, the 35million expenditure would be under the player trading figure, no?

  43. I’ll be surprised if 35 comes in the P&L in any form at all. It will be hidden, bundled up in the cash flows somewhere, that’s my guess. The 8 mil will come into the P&L in some form either independently or bundled up with something else. Is “player trading” part of the P&L in Spurs’ accounts or do they just add it later?

    I don’t think any club includes the net outflow figure while calculating player trading. Otherwise very few would make profits on that. Since they amortize the costs they can add the number in the balance sheet and take a proportional hit in the P&L without worrying about the player trading segment.

    I also feel it would be very tough to get a consensus on market value numbers. If we really want to consider accurate market value then the amount a player is sold for is his market value! If a player is sold for 15 mil how can his present market value be any different from that number? In that case player trading will always be zero!!

    The best way to sort these issues is to force clubs to publish their cash flows and balance sheet details along with any profits they announce. That way it will be tougher for people to claim big profits when the reality is quite different.

  44. one of the blogs I enjoy reading greatly, and I suspect if there is another one that rather than re-printing transfer gossips or talk about some silly news fed to us through the ever controlling and influencing media tries to educate us on how football works etc. I rarely comment on hear as I find that at times it simply needs non and as clear as it can be but thought since some one has gone to the trouble of calling the author closet spud thought I will say what I think too, some times the intelligence of some of us football fans shocks me…keep up the great work and looking forward to more interesting and intelligent articles

  45. Phil,
    Though I am not an accountant or anything , i would like to align myself with Swissrambler and Bart in this article. The article looks biased and some what desperate to prove tottenham are corrupt.
    I understand the point that football trading profit could be misleading when taken in isolation. May be different of putting would have been better.

  46. So, what’s up with Jan Vertonghen? Is he coming to Arsenal ? Who is the other mystery defensive signing Wenger is after?

  47. Isn’t the simple answer to this is to ask “How much did each club pay in tax?”
    Accountants have been playing fast and loose with the numbers since the days of Nero and have been getting more creative in recent years. But the tax man likes his “fair” share and is reasonably efficient at getting it…albeit sometimes being handicapped by League rules.

  48. I think GF60 puts a real interesting point forward. How much tax does a club pays.
    But then again, do the spuds pay taxes as they are living on an island?

  49. 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.

  50. 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.

  51. 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.

  52. What’s the cash flow look like?

    P+L’s a dodgy guide to health when there’s lots of depreciation, capex etc.

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