Professional sports is all about numbers - who scores more goals then the opponent wins the match. How many percent of all passes were completed, what was the ball possession time of each team? Journalists and fans alike love these statistics. No wonder that the sporting news regularly also comment on the financial results of a soccer club -  most often by using the same method they use when counting goals: It is not important how it happened - in the end all that counts is the number of goals scored. It might be worth a comment that it was a brilliant bicycle kick that led to the goal, but in the end it is much more important that the goal was scored than how it was scored.

However, looking at the financial results of a soccer club, this is a very risky approach, which can lead to fundamentally wrong results. In any case, the "how" counts here clearly more than the "how much". 

In this article series I would like to discuss the pitfalls of accounting for a professional soccer club. A large part of this should also apply to other sports, but in soccer these are common practice in any case. Today's first part deals with the biggest account issue in soccer: Player values.

Player values

An operator of a horse racing stable generally values his most important assets - the horses - at market value. If this has risen because a horse has run very successfully, this value rises. If the horse is performing weaker than expected, however, this value must be corrected.

The difference between a horse racing stable and a football club, however, is that the football club does not own the players who play for it. He only has the contractual right that a player must play with the same club during the term of the contract. A change to another club is only possible if the selling club agrees to this change. As a rule, a transfer fee is due for this.

If a club pays a transfer fee, it may record it as an asset. If a club buys a player for 10 million euros, it  does not immediately make a loss of 10 million euros. However, these 10 million euros will be written off over the contract term of the player. In the case of a 5-year contract, for example, the 10 million euros will result in annual costs of 2 million Euro over this 5-year period. This is due to the fact that different accounting rules apply for the horse (which is considered a biological asset) and a player (who is considered an intangible asset). If slavery would be legal, there would most likely be no difference in accounting - but fortunately this is not the case anymore.

The main problem of this accounting treatment is that it does in many cases not represent a true and fair picture of the economic reality.

If for example a player is bought for 10 million Euro and than develops exceptionally well - this does not show up in the book of the soccer club. Even if there were to be an offer to sell the player for 100 million Euro from Real Madrid - the club would still be charged with 2 million annual costs unless the player is actually sold. 

Another, even more drastic example, is a player from the own youth team. As the international accounting standards (IFRS) do not allow to capitalise intangible assets if they are self-developed, this player will not show up as an asset in the books of a soccer club at all.

If a player however is sold, then the selling price will be compared to the actual value in the books of the club. The true value of a player is only shown in this case. This results in fact that most often soccer clubs will record a profit when they sell a player - even if they sell him for a lower amount than they had originally paid as his value has already been depreciated.

This leaves room for the soccer clubs to massively influence their earnings. Here are some examples:   

  1. Financial years for many soccer clubs often end during a transfer period, either in summer or in December. By selling a player right before or after the end of the fiscal year, profit can be easily shifted from one year to the other.
  2. Clubs that have an undervalued player in their portfolio could sell the player for a profit and immediately spend the money for an equally good player of the same value. This would result in a boost to their profit in the current year and lower earnings in the following years.

In the past, some clubs are said to have manipulated their financial situation massively by exchanging players with another club for an overrated price. This leads to a massive profit in the beginning - at the expense of losses in the future. While this is clearly illegal, it is difficult to proof as no auditor will ever be able to judge what is the true fair value of a soccer player.

I hope this post, which will be the first of a series, has helped to shed some light on one of the most important account problems one should have in mind when analysing the financial result of a soccer club.

So if you would like to know how your favourite club is doing financially - don' t look at the numbers in the sporting news but look at how these numbers are composed.

All the best,

Tim