Why football accounting is so crazy, and why it is hard to believe the Tottenham figures

Our review of the finances of Tottenham Hotspur was read by more people than any other articles we have published.  With such interest Phil Gregory has taken a further look at Tottenham, the finances of football and the conclusions we can draw.

A big issue for fans and clubs is one of knowledge. Anyone needs at least a rudimentary financial knowledge to make heads or tails of a club’s financial reports. Naturally only a very small portion of the fan base has this and so they take what the club says at face value. This leads to issues where the club can shift the goalposts (such as Spurs quoting a record pre-tax profit, which had more to do with player sales than anything else, rather than pointing out that the operating profit is down) and this gets regurgitated in the media by journalists who have no more of a clue than the average fan.

For me, this is partly an issue of regulation. If I had my way, clubs would have set performance indicators that they must quote every year, which would eliminate the whole nonsense of shifting the goalposts. A fan-friendly initiative such as this is important: football is not like any other business, where the only stakeholders in a firm hold a financial stake and so apprise themselves of the situation.  Every football fan has an emotional stake in their club, and so I believe the club has a responsibility to go the extra mile to make sure fans know what is going on. If clubs aren’t doing well, they can’t be expected to publish bad news off their own back, so such regulation would have to be implemented by the higher powers in the game.

Anyone who has followed my financial review articles will be familiar with the issues I’ve had in terms of clubs not breaking down their turnover. How can a fan know what is going on inside their club if they only have a general figure for turnover, with no breakdown into constituent parts? And yet the regulation that concerns the reporting of various segments of a business contains a clause which states:

when, in the opinion of the directors, the disclosure of any information required by this accounting standard would be seriously prejudicial to the interests of the reporting entity, the information need not be disclosed; but the fact that such information has not been disclosed must be stated

What does that mean? Well, it means that at the discretion of the club directors, they can decide not to break down their figures. Of course, they can only do it when it would be “seriously prejudicial”, but how deems that? Why do some club routinely not offer a breakdown of the figures? When the clubs who decide to exercise this right include Hull and Chelsea, we start to see what type of management would deem it necessary to not disclose all the relevant information. More transparency is needed.

Anyway, back to Spurs. My other issue, one which in hindsight I didn’t explain at all clearly was that of “player trading”. In the interest of clarity, I’ll briefly restate my position:

When a club sells a player, any profit made is not calculated as a difference between the transfer fee paid or received, but as the difference between the value of the asset at the time of selling and the fee received.

The value of the asset is affected by amortisation (transfer fee received divided by number of years on the contract) and amortisation is charged as a cost each year. Hence, as the player’s value falls, the club incur a cost over a period of time.

After a few years however, the players value is diminished in the accounts and is often well out of kilter with the market value, hence when a player is sold, a large profit is realised in the accounts. Bear in mind that part of the reason for this undervaluing of the player is the process of amortisation that occurs over a number of years.

My issue with this system is that once a player is sold, the profit is recorded in a single set of accounts, hence it has a distorting effect on the bottom line. Naturally, such a distortion can be avoided if you look at operating profit figures as I mentioned earlier in the article as being a better judge of a club’s core financial sustainability.

Such issues are tough to resolve, and many commenters pointed out the difficulties of valuing players at market prices as opposed to using the current system of amortisation. I’m inclined to agree with them now, and think it’s best to maintain the status quo for lack of a better alternative. With the proposed introduction of specific compulsory performance indicators, such issues would be diminished with the end of cherry-picking the number that shows the business in the best light.

My other issue with this links back to my concern at fan understanding of the club’s workings. Quoting “player trading” profits when a side has spent £120million on buying players makes no sense to a fan, as to you or I a player trading profit cannot be made if you sell a player for less than you bought him for. Ultimately this is an issue of definitions, but Tottenham’s accounts cite the £56.5million figure as both a profit on intangible assets and a profit on player trading. It is the former, but it isn’t really the latter if we go by the popular definition of a player trading profit being when the fee received is greater than the fee paid. They are well within their rights to do this but does it help the fans understand the workings of the club?

These are just a few of the issues that I’ve come across in the course of looking into the Premier League’s finances.  My own view is that greater transparency in the game would go a long way in aiding both the authorities and fans in spotting another Portsmouth before it comes to a head.  But I don’t think it is about to happen.

You might also enjoy reading

False Profits: How Tottenham cooked the books – part one

False Profits at Tottenham: part two

Barca on the edge of defaulting over their debts

Untold Index – where old indexers give up in despair

Woolwich Arsenal

24 Replies to “Why football accounting is so crazy, and why it is hard to believe the Tottenham figures”

  1. Could you do a in-depth, impartial (a non-football fan)finacial analysis of Arsenal please. I would like to see what they came up with.

  2. a thought provoking article as always, very rare in the bloggosphere.

    Phil everyone is trumpeting our speedy progress towards being debt free, I wonder bearing in mind our Directors take no dividend, are they just waiting to sell at the best price. Does this expose us to the same fate as ManIOU and Liverpool?

  3. It’s not only a major job, but a great job done, Phil!!
    Thanks for this attempt to bring light in the darkness of the financial world in football.

  4. Thanks Walter.

    Kiwigooner – I don’t want to take the comments off topic already so I’ll keep this brief. They’ve done nothing to suggest they are only interested in the money. Why take no dividends if their only interest was their wallets? Why do lockdown agreements, when wealthy people are willing to overpay for the shares if they wanted to cash in? Even Lady Nina, who is now not on the board hasn’t tried to cash in! It doesn’t add up to them serving themselves. They are custodians of the club, and are doing a great job through the lean years.

  5. Didnt mean to divert Phil. Just the consensus seems to be that our biggest protection from a leveraged buy out ironically is our debt.
    Hope and pray you’re right though,

    Keep up the good work

  6. your explanation of player amortization is correct, but you should point out that player amortization reduces profit during any given year. therefore, as i believe you explained earlier, if a player is purchased for 25M with a 5 year contract, his value is reduced, or amortizes by 5M per year. in this example if the player is sold at the end of 3 years for 25M there will be a profit of 15M (25M less the unamortized value of 10M). howver, operating profits for the 3 prior years have been reduced by 15M so the “profit” and amortization offset each other….just in diffwerent periods. a much simpler and understandable approacch would be to compare the business’ cash flow on a year to year basis and forget about amortization.

  7. You can never be certain, but I can’t see the board selling up, let alone to someone less than reputable. From conversations with Andersred, who keeps an eye on things LBO related from his work against the Glazers at United, he thinks that nobody would attempt an LBO at the moment, what with credit markets as they are, general concern at the global economic situation and the politics of it (United and Liverpool’s troubles are all too apparent). I wouldn’t worry too much (though rules are needed in this regard, a future article!)

  8. Why cant the whole system of amortisation be abolished? this concept really distorts the actual figures. And will really make the idea of football as a business to be like a joke. Also it does not account for fair value of the players. Does anyone know why this concept was used in the first place?

  9. I was just re-reading the analysis of Arsenal’s finances – what can I say, reading about how uniquely positioned we are as a club and knowing that we are on the cusp of an incredible era for The Arsenal gives me a warm fuzzy glow.

    People who say they are only interested in the football side of things really miss the point – there is so much to celebrate as an Arsenal fan because the future is so bright you have to avert your eyes for fear of permanent retinal damage.

    Phil, based on your research would you be prepared to guesstimate how far away the club are from eradicating debt entirely? I’d be intrigued to hear your thoughts.

    It’s going to be a day worth celebrating – showing to the world just how well a football can be run – if you have a wizard at the helm.

    One note of caution though, when this day arrives the pressure on Wenger and the club to deliver will be greater than ever and maybe that is how it should be but it would take an especially churlish idiot to not appreciate what should be marked as one of the most extraordinary achievements in the history of football.

    For those dumb enough not to notice – it’s a privilege to support the only club in the world which is swimming upstream against the flow and through torrents of shit. This will have been achieved with almost every element loaded against us, from financial doping to biased media to plagues of onfield injuries and off field boardroom issues and even savage negativity from a significant proportion of the clubs own fans. And all this whilst a global economic disaster of unheralded proportions has unfolded in the background.

    Did anyone notice we played excellent football all the while, in spite of this? People choose to ignore that luck plays a vital part in sport – I don’t think many would argue we have had much during the oft quoted 5 trophyless seasons.

    AKB? You’d better believe it. If you ask me it’s not really an insult, apart from to the intelligence of those who choose to wield it as such.

  10. Well put Jonny. I can’t wait to reap the rewards of our prudence. Put the finances alongside our brilliant new Academy, I simply cannot see how we won’t become the powerhouse of English and quite probably European football.

  11. I must say that it doesn’t require you to be Einstein to come up with some segmental figures for EPL clubs if you just do a bit of research.

    There are three basic segments:

    1. Matchday income – tickets, hospitality, programmes etc.
    2. Media income – mostly Sky but increasingly the global EPL deal. And Champions League for top 4 clubs.
    3. Commercial – including shirts and apparel, but also major sponsorship deals.

    The first one is pretty easy to work out – you find out the median price of a ticket and assume that 85 – 90% of fans pay that. It’ll be lower at clubs like Wigan than at Arsenal, say £20-25 per head. Multiply that by the number of home games and the gate*0.85/0.9 and you get the matchday income base figure. Then you work out how many corporates pay, how much they pay and you can add on a little bit for programmes which is usually around 40-60% of the gate * £2 – 5. At Arsenal the latter is 37000*£3 = £100k a game, so call it £2.5 – 3.0m a year, which is only about 3% of matchday income.

    The EPL media income is pretty public stuff, so you can work that out if you want. Ditto champions League.

    The rest of it is commercial and you can assume that the biggest amounts there are for shirt/stadium sponsors, merchandising and other sponsorships.

    I must say that I drew up a spreadsheet for Arsenal without looking at the accounts and it wasn’t a million miles away from the actual figures. Of course, Arsenal are a plc so their reporting is fairly transparent.

    The biggest issues for clubs are usually not balancing the basic salaries of players against guaranteed income streams, whilst limiting bonuses to incremental income earned through good performance (e.g. getting out of the Group stage of the ECL, finishing higher than 4th in the EPL).

    From an accounting position, actually the figure called ‘shareholders funds at year end’ is rather important. The thing is, though: in football quite a bit of the assets are players whose accounting figure can depend on how you ‘depreciate the asset’.

    I am strongly of the opinion that the best way to analyse football clubs is by analysing cash flow, since this is an industry where high costs of fixed assets (i.e. stadia) mean that operating profits will need to be high to offset the depreciation of the stadium (Arsenal will depreciate Emirates at around £9m a year based on a £450m new stadium lasting for 50 years) and interest/capex repayments for building it.

    Thus Arsenal’s operating profits clearly rose significantly after building Emirates Stadium but it wouldn’t be any good if those increased profits didn’t comfortably more than offset the new interest and capital repayment charges (luckily for Arsenal that is indeed the case so long as the stadium stays full).

    I think for those of you who think Spurs are going bust, you should consider that they are in their cycle where Arsenal were around 2002ish. A 36,000 stadium being packed out, performance gettting better, building a new training facility in Enfield and planning a new 56,000 stadium. It’s exactly the same programme as Arsenal, the question is whether the performance on the pitch will make the figures stack up. The big difference as I see it is that didn’t sell an Anelka for £25m more than they paid for him, which is pretty much what paid for the training ground for Arsenal. I guess Arsenal also got a lot of extra money playing Champions league games at Wembley for a couple of years……

    There are quite a few at this site who don’t think Spurs should build a new ground, which is rather hypocritical as that’s precisely what Arsenal did. What it comes down to is this: does the EPL want to be the best league in the world, with crowds to match Germany, in which case Spurs, West Ham, the clubs on Merseyside, Leeds in time and others need larger stadia, or do people think that Arsenal and Man Utd should cecede from the EPL to join some European Super League?

  12. dark Prince: it follows the usual idea of depreciation, ie an asset is worth less over time for obvious reasons. There has to be a system like this, that much is clear. It is particularly important for a football club as a player has zero valu at the end of a contract, and the accounts need some way of writing off this value. The current system isn’t ideal, but is better than any alternatives I’ve heard of. My advice is just to consider operating profit figures, as these aren’t affected.

    Jonny: Without having dug too deep into it, it looks like we’re shot of the expensive property debt, and just have a bond of around £180m at 5.2(ish)%. I don’t know whether we can pay that down, but it’s pretty cheap so the inconvenience of doing so means it’s probably not a problem. We’re fine as our operating profit is greater than the debt interest, so we have it under control. It’s not much of a burden, and I will be interested to see the set of accounts for the current financial year with an eye on the finance charges we are still paying with respect to the bond debt (it should be low!) .

    As you say, very interesting times lie ahead. I can genuinely see us ending up a bit like Barca – homegrown and dominant on the field, but with class and without the debts!

    Rhys: You are right, TV figures can be calculated fairly easily. Matchday less so, as you need to know how many tickets of which price are sold, plus food and drinks. The fact remains however that a fan shouldn’t have to – in my opinion a club has a duty to put that information on a plate for the fans. There’s also the issue of what goes under “matchday” “commercial” and “broadcasting”.

    I don’t know if I mentioned, but one club actually included a compensation fee when their manager got poached under “commercial”. I mean, really? Who do they pay to come to that conclusion? It’s only minor, but it highlights the case of clubs having the ability to put numbers where they like.

    You make a good point about Spurs, and yes their accounts bear many parallels with Arsenal’s with the only exceptions being their wages as a % of turnover is a bit higher (but still within safe limits) and they spend a bloody fortune on players whereas we consistently sell on at a profit.

  13. One big problem I have with financial transparency is,
    Will it not weaken Arsenals bargaining position when the whole world knows how much money they have.
    I.E. selling clubs will up their prices because they know Arsenal have the cash.

  14. Adam: it wouldn’t make a significant difference, as we are already very open. The concern in regards to segmental reporting is more the obvious financial basketcases or lower table sides.

  15. Rhys – there are a few questions about Tottenham and their stadium which have not been answered – but they are mostly matters of opinion.

    1. Because they are building on the same ground as they have now, they won’t have property to sell as Arsenal did. Which won’t matter if their construction costs are less, but will if the construction costs are high because of the difficulty of the construction.

    2. As we showed here over a year ago, tottenham does not have season ticket waiting lists like Arsenal. They put their equivalent of silver members automatically onto the season ticket waiting list and this inflates the numbers. Likewise they have never done an experiment of playing in a big ground – such as we did at Wembley. So we don’t know that their ground will always be full.

    3. We don’t know anything about the basic level of income that they are budgeting for, for the mortgage to be paid. Arsenal’s has been clearly stated – in the group stages of the Champs League every four years, and an average league attendance of 50,000. With a season ticket waiting list of 10 years this continues to look viable.

    4. Because the ownership is primarily in the Bahamas with some in the Virgin Islands their accounts are subject to top up by the owners which Arsenal do not rely on.

    5. There are thoughts that as soon as Tottenham have the ground and seem to be regularly in Europe they will then be sold – and that introduces a certain instability.

  16. What fans do or do not understand is obviously a matter of debate. What matters is the understanding gained by someone who is proposing to buy a club (i.e due diligence) and by UEFA when they are deciding whether or not debt is manageable and, therefore, whether or not a club will be licensed to play in European competition. In Spurs case it could be via someone being asked to loan them a lot of money for a new stadium.
    Those nice people who bought West Ham made a big song and dance about finding all sorts of skeletons in cupboards after moving in – implying that things had been successfully hidden from them or that their own due diligence was at fault. Their excuse was that they were blinded by the emotion of being West Ham fans (who used to own Birmingham!)
    Spurs do not have a tax haven based ownership model in order to make life easier for any authority (or potential buyer) to get a full understanding of their business. But we won’t get to know anything like the truth until someone else has to make a major decision with regard to Spurs – and, even then, it will remain convenient to sufficient people to keep some things under wraps.
    Arsenal are past masters of financial obfuscation but remain more open than most and, certainly, more finacially stable than just about anyone – making them a very attractive target for take over in the future by someone wishing to pay themselves dividends.
    What we appear to know more so now than ever before is that the effects of what we might loosely call the Bosman ruling are beginning to bite very hard and very frequently. Major names are walking away from major clubs (including Arsenal) and ‘free’ transfers are almost becoming the norm. Clubs’ ability to attract players to them is more and more under the spotlight and that’s where investment in marketing comes to the fore. Such investment is what Arsenal, paticularly under Wenger, have undertaken very efficiently and what Spurs are only just about to start.

  17. What’s confusing about Spurs from a fan’s perspective is that they seem to have been spending heavily on players for years, while Arsene Wenger has been virtually covering his modest expenditure with player sales. For at least the last ten years I remember looking at their transfer dealings and wondering just where the money is coming from (a few months ago somebody posted a comparison of the net transfer spend of both clubs which confirmed this. Anyone know where that is?) and yet they still manage to turn a small profit most years it seems. All this without the vast resources of a Man Utd or a Chelsea.

    Can anyone shed any light on this anomaly? I’ve heard it suggested that Joe Lewis could have been topping up their balance, Abramovich style but is it really feasible that he could have been doing this without people’s knowledge?

  18. Joe M

    According to most Sp*ds I have tried to speak to on this subject, the answer they give, is ‘that Joe Lewis is a really good businessman’.

    Which is very funny. And helps explain (to me) why this series of articles by Phil does have a relevance, many thanks!

    Drifting off on a slight tangent here, but a recent quote from Slur Fergus IntheRedNose & Sons Inc:

    “I can’t speak for other clubs to be honest with you but we are comfortable with the squad we’ve got…”

    Que an article in the Observer about ManIOU’s amazing new Youth Acadamy Graduates.

    Like the £30M Nani and Anderson?

  19. Jon, I am not an accountant, but I think the fact is that if you keep on buying players year after year after year, and adopting this form of accounting then as long as some of the players don’t lose half their value in half the length of the contract (which most don’t) you keep making money – on paper.

    You buy Bob for £20m, write him down to £10 after 2 years, sell him for £15m at that point and you have made £5 profit on paper, although of course as we all know you have made a loss.

    As long as the machine keeps buying players using the money of the owner then the club keeps showing this profit – but if you take out the endless supply of cash from the benefactor the whole thing falls apart.

    Likewise if you stop buying, you have to stop selling (since you need players) and suddenly your figures are terrible.

    This I believe is part of the problem for clubs trying to get inside the UEFA financial rules. If your benefactor stops putting money in, you stop buying, so you also slow down the selling, so you make a loss, so you can’t play in Europe.

    If you start buying again you need benefactor money to pay for it, and that is not allowed so you can’t play in Europe.

  20. Tony, my only ccrrection there would be that in Tottenham’s accounts, there is no evidence the owner puts money in, all turnover is accounted under the various segments. Now, there’s no statement explaining what qualifies to go into each segmentso you have a right to be suspicious but if they were bunging £20million extra in under matchday and commercial, I think it’d get found out my someone.

    The issue that confuses me is their system of parent companies, and one in particular, Tottenham hotspur athletic ltd. This company has turnover figures broadly similar to the club itself, has TV revenue that is EXACTLY the same, but also has a “management fee” in it’s turnover breakdown too.

    I make no allegation, as I don’t understand their system of parent companies (I emailed Spurs but got nothing back, what a surprise!) but it is certainly strange.

  21. This is standard accounting practice and Arsenal amortise players as well. saying that buying a player for 20 million, and writing off 5 million a year, then selling him after 2 years for 15 million will show a false profit of 5 million is just totally incorrect, because the amortised amounts of 5 million are an expense in each of those years.

    So the true picture is, buy player for 20m, expense 10m(reducing profit), then sell for 15m, equals 5m expense first year, then expense of 5m plus profit on sale of 5m in second year. total loss thus being, 5 million. And all shown in the accounts in the mandatory way according to accounting standards that all companies must follow, as indeed do Arsenal.

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