Financial reporting for the contractual rights of football players by football clubs

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Name: Casper Metselaar Student number: 11864214

Date: 29-06-2021 Version: Final

Study: Bachelor Accountancy and Control School: University of Amsterdam

Supervisor: Drs. R.W.J. van Loon RA Word count: 7413

Financial reporting for the contractual rights of football

players by football clubs

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Statement of originality

This document is written by Student Casper Metselaar, who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

Nowadays, the contractual rights of football players account for up to forty percent of the total assets of football clubs. With transfer fees paid for players that have only been increasing over the years, they are the most important assets of a football club. Therefore, making their valuation essential for reliable financial reporting of the football club. This thesis looked deeply into how these players are valued and amortized and how this could be improved. This is done by establishing a theoretical framework that shows that players are classified as intangible assets. Existing research made clear that there are three different types of players: homegrown, free agents, and players bought for a transfer fee. There was also done a comparison between the financial statements of four different clubs.

Based on research into the current valuation and amortization methods of the types of players. It is concluded that there are improvements required. On the one hand, improvements for the valuation of players as homegrown players and free agents are currently not on the balance sheet. A model of wage capitalization could partly solve these valuation problems. On the other hand, there are improvements required for the way football clubs disclose amortization. Because right now, clubs report amortization as one number for all their players instead of per contract. This makes it hard to compare the financial statements of football clubs.

The comparability could therefore be improved by new requirements for financial statements from the UEFA.

Samenvatting

Vandaag de dag bestaat tot veertig procent van de activa van voetbalclubs uit spelersrechten.

De transfersommen die voor voetbalspelers betaald wordt is de laatste jaren alleen maar toegenomen. Dit zorgt ervoor dat de manier waarop deze spelers gewaardeerd worden, essentieel is voor betrouwbare financiële verslaggeving. Voor deze scriptie is daarom onderzoek gedaan hoe spelers gewaard en geamortiseerd worden en of er verbeteringen mogelijk zijn. Dit is gedaan door een theoretisch kader op te stellen wat aantoonde dat voetbalspelers als immateriële activa geclassificeerd kunnen worden. Uit literatuuronderzoek bleek dat er momenteel drie soorten spelers zijn: zelf-opgeleide spelers, ‘free agents’ en spelers gekocht voor een transfersom. Daarnaast zijn er jaarverslagen van vier verschillende clubs met elkaar vergeleken.

Op basis van onderzoek naar de manier waarop deze spelers gewaardeerd en geamortiseerd worden, is gebleken dat er verbeteringen nodig zijn. Aan de ene kant zijn er verbeteringen nodig voor de waardering van zelf-opgeleide spelers en ‘free agents’, deze spelers staan momenteel namelijk niet op de balans. Loonkapitalisatie zou hier een gedeeltelijke oplossing voor kunnen bieden. Aan de andere kant zijn er ook verbeteringen nodig voor de manier waarop voetbalclubs hun amortisering rapporteren. Momenteel rapporteren de meeste clubs één getal voor alle spelers in plaats van per contract. Dit maakt het lastig om de jaarverslagen goed te kunnen vergelijken. Het zou daarom beter zijn voor de vergelijkbaarheid

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Table of contents

INTRODUCTION ... 4

CHAPTER 1. GENERAL CONCEPTS ... 6

1.1 INTRODUCTION ... 6

1.2 TANGIBLE AND INTANGIBLE ASSETS ... 6

1.3THE VALUATION OF TANGIBLES AND INTANGIBLES ... 6

1.4HUMAN RESOURCE ACCOUNTING AND ITS APPLICATION TO FOOTBALL ... 7

CHAPTER 2. THE WORLD OF FOOTBALL AND ITS RULES AND REGULATIONS ... 8

2.1INTRODUCTION ... 8

2.2THE IMPORTANCE OF FOOTBALL PLAYERS ... 8

2.3THE UEFA REGULATIONS ... 8

2.4THE BOSMAN RULING ... 9

2.5THE APPLICABLE ACCOUNTING STANDARDS ... 10

CHAPTER 3. TYPES OF PLAYERS AND HOW THEY ARE (NOT) VALUED ... 12

3.1INTRODUCTION ... 12

3.2DIFFERENT TYPES OF PLAYERS AND THEIR VALUATION ... 12

3.2.1 Homegrown players ... 12

3.2.2 Free agents ... 12

3.2.3 Players registered through transfer ... 13

CHAPTER 4. ACCOUNTING FOR PLAYERS BY FOUR DIFFERENT FOOTBALL CLUBS ... 14

4.1INTRODUCTION ... 14

4.2THE CLUBS AND METHOD OF COMPARING ... 14

4.3THE TRANSFER FEE COSTS TO TOTAL ASSETS RATIO ... 14

4.4WRITE-OFFS TO TOTAL COSTS RATIO ... 15

4.5THE IMPORTANCE OF AMORTIZATION AND IMPAIRMENT TESTING ... 16

4.6AMORTIZATION BY FOUR FOOTBALL CLUBS ... 17

4.7SUB-CONCLUSIONS OF THE FOUR CLUBS ... 18

CHAPTER 5. SHORTCOMINGS IN THE CURRENT (RE-)VALUATION METHOD ... 19

5.1 INTRODUCTION ... 19

5.2SHORTCOMINGS IN THE VALUATION METHODS ... 19

5.3SHORTCOMINGS IN THE AMORTIZATION OF PLAYERS ... 20

5.4SOLUTIONS TO THE SHORTCOMINGS ... 20

CHAPTER 6. CONCLUSION ... 22

REFERENCES ... 24

LITERATURE ... 24

FINANCIAL STATEMENTS ... 25

List of tables and figures TABLE 1: TRANSFER FEE COSTS TO TOTAL ASSETS RATIO ... 15

TABLE 2: WRITE-OFF TO TOTALS COSTS RATIO. ... 15

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Introduction

Football is possibly the largest sport in the world, with millions of fans all over the world. What started as a simple game has now grown to a multibillion-dollar industry. For instance, extravagant amounts of money are paid for players. The best example of this probably is the transfer of Neymar jr. in 2017 from FC Barcelona to PSG for the record amount of 222 million euros, more than twice the previous record of 105 million euros that was paid for Paul Pogba by Manchester United. (Hommes, 2017).

More recently there was the announcement (and failure) of the European Super League (ESL), a new competition that would guarantee the participating teams a much larger sum of money than they would get from their domestic league and the European leagues (Champions League, Europa League and Conference League). These benefits would be independent from their sportive results. The announcement of the European Super League is a perfect example of how the world of football has changed. A couple of decades ago clubs bought players to increase their ticket sales revenue, their primary source of income. In contrast most revenue nowadays comes from sponsorship deals and broadcasting rights. The ESL is an example of the attention economy that is currently unfolding, especially with the younger generations who are intensively using social media. They watch only the bigger matches and no longer the ones between small teams, as the highlights of those can be found on social media. Therefore, by announcing the ESL, the founding teams are targeting these new younger fans. The clubs' focus has shifted from the sporting results to how much money comes in every year (Katwala, 2021).

This is where accounting comes in because with clubs receiving more money from sponsorships and broadcasting deals, they can pay more and more money for new players. This increase in transfer fees that are paid by clubs increases the importance of accurate valuation on the financial statements of football clubs. Because it could have huge effects on the profits of a club when the accounting for football players is done incorrectly. The way the accounting is done depends on whether the player is bought for a transfer fee, a free agent or homegrown.

At the same time, it is not allowed to directly own a human being’s rights, which makes the business of football clubs special. As clubs cannot put players themselves on the financial statement, it is the players' contractual rights that are being put on there. These contractual rights give the club the rights to use a player for a specified period of time. The player's contractual rights are classified as an intangible asset since it is something you cannot touch.

In 2010 the UEFA, the organization where the unions of most of the European national leagues are a member of and that organizes tournaments such as the Champions and Europa

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League, introduced the UEFA Fair Play Regulations. These rules were issued to regain focus on what should be most important: the performance on the field. Instead of the enormous funding some clubs got from people who wanted to gain influence by buying huge names. The regulations imposed many requirements from which the break-even requirement and the rules concerning overdue accounts payable are the most important. The overdue payables rule is an encouragement for clubs to settle their debts in time, while the break-even rule ensures clubs cannot easily fall back on wealthy individuals to cover the losses they have incurred. Aside from the overdue payables and break-even requirement, there are also some other rules clubs must follow in order to be allowed to participate in UEFA competitions (Müller, Lammert &

Hovemann, 2012)

Therefore, in this thesis there will be conducted a literature review to answer the main question:

How are contract rights for football players valued in the financial statement of football clubs?

To answer this main question, the following subquestions will also be answered:

What different methods are used in practice in the reporting method of contract rights between football clubs?

Which methods do football clubs use to amortize the costs of football players?

This thesis has the following structure: first general concepts that are important to answer the research question are explained. Secondly existing regulation and jurisprudence concerning the valuation of football players are mentioned. Thirdly there is explained which different types of players there are and how they are valued and amortized. This will be done based on existing literature and by an own comparison of financial statements of four top-five league clubs. Fourthly, shortcomings of the current valuing and amortization methods and how they could be solved is discussed. Finally, a conclusion will be drawn.

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Chapter 1. General concepts

1.1 Introduction

In this chapter, several general concepts that have to do with how the contractual rights of football players are accounted for are discussed. First, there will be explained what tangible and intangible assets are. Followed by an explanation of what human resource accounting, the way to account for human capital, is.

1.2 Tangible and intangible assets

Assets are all belongings a company has that have value right now or can create value in the future. Assets are commonly tangible, meaning they have a physical substance, like a machine, factory, or finished product. Another type of assets are intangible assets; these can be transferred contractually or do not have a physical substance. Examples of intangible assets are trademarks, goodwill or patents. Unlike tangible assets that mostly have a finite lifespan, intangible assets can have an indefinite lifetime (Schuetze, 2001). The definition of an intangible asset according to IAS 38 is something that generates revenue in the future and which costs can be measured reliably. An example of a reliable measuring method is, for example, on the market by supply and demand (Oprean & Oprisor, 2014)

1.3 The valuation of tangibles and intangibles

For both tangible and intangible assets, it is required that their value is reduced to zero over its useful life. The assets are firstly put on the balance sheet for the costs they are acquired for. For tangible assets, this reduction in value is done by yearly write-offs dividing the value of the assets evenly over its useful life. For intangible assets the method is quite similar, only it is called amortization. However, this is only the case when the intangibles have a useful life that is not indefinite and that the intangible is not goodwill. As for goodwill and other intangibles with an indefinite life, an impairment test must be performed annually. When the real value of the assets is lower than the book value, there must be made an adjustment in the form of a booking to impairment loss for the difference between the book and the real value of the assets (Powell, 2003)

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1.4 Human resource accounting and its application to football

Human resource accounting is accounting for employees and management of a company as human capital that can provide future benefits to the company. This means that expenditures related to these employees are not reported as expenses on the income statement, but are reported as assets on the balance sheet. Human resource accounting is also seen as a tool that can help make managerial decisions to increase profitability and other company goals (Bullen

& Eyler, 2010).

Human resource accounting can be measured as either human resource costs or human resource value. Where costs can consist of acquisition costs and learning costs. With acquisition costs being things such as costs of direct recruitment and indirect costs of promotion within the firm. Learning costs include for example, the direct costs of formal training. Human resource accounting does not report these costs to an expense account but to an asset account as these costs have future economic benefits (Bullen & Eyler, 2010).

However, it can be argued that an employer does not have the exclusive right for the services of an employee as the employee is free to leave. The benefits such as training are therefore also not guaranteed to be retained within the firm. Nevertheless, the contract that an employee signs gives the employer some control over the services of an employee. As it guarantees for the employer that the employee will provide services for him for the specified period of time agreed upon in the contract (Rowbottom, 1999).

Then there is the question of whether a ‘human resource’ can be seen as an intangible asset. This will be the case if there is a future cash inflow as a result of the services of the human resource. This would result in a positive change to the company assets. However, there is debate about whether it is possible to accurately measure the value of a human resource since their services are also connected to other factors of production. This is different though in the world of sports where players are bought by their clubs. In this case, there is evidence of a change in the assets of an organization (Rowbottom, 1999).

Summarizing, football players can classify as an intangible asset as they are likely to create value for their club, while also having the rights to their services from the signed player contract. This makes that Human resource accounting can be used for the valuation of football players (Rowbottom, 1999).

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Chapter 2. The world of football and its rules and regulations

2.1 Introduction

In this chapter, there will be first given information about the value of football players to a club.

Secondly, UEFA regulations will be discussed that set requirements that football clubs need to adhere to, to play in European competitions. Thirdly, the Bosman Ruling will be discussed.

This ruling had a major impact on the situation for players who run out of their contract. Finally, the applicable accounting standards will be discussed.

2.2 The importance of football players

Football clubs have many assets, with tangibles such as their training ground and stadium.

However, the most valuable asset of football clubs is an intangible one: the contractual rights of their football players. These contracts give football clubs the rights of the player for a specified amount of time. During this time, the services of the player may be used to achieve sporting results. As the players’ rights are transferred by contract and the players generate money for their club, they fulfil the definition of an intangible asset (Rowbottom, 2002).

So, football players are the core assets of their club. Their value represents the value of the services they provide. The football players have influence over the sporting success of their football club and thereby also have an impact on the fans and the commercial activities for the club. The influence of the players on the success and commercial activities of a club inspires them to acquire high performing and/or famous players. Not only for their sporting success but also for the marketing side of the club. This could quickly increase the reputation of a club, improving the club’s brand (recognition). This in turn can give a club more power when negotiating with mass media and sponsors, resulting in higher incomes. This is one of the reasons the amounts paid for football players have increased over time (Lozano & Gallego, 2011).

2.3 The UEFA regulations

In 2010 the UEFA issued the Financial Fair Play Regulations (referred to as FFP from here on) in response to a growing number of football clubs that were unable to pay off their debts and kept making losses. This was despite the football clubs yielding more and more revenue every year. The situation was at a point where the long-term viability of clubs was in jeopardy. The

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FFP were introduced to improve clubs’ financial performance and protect their long-term viability (Müller et al., 2012).

The FFP regulations were an addition to the Club Licensing System (CLS) that the UEFA had introduced in 2005. The CLS contained a set of requirements a club needed to fulfill to be eligible to play in UEFA’s club competitions. The requirements were divided into five categories. Firstly, sportive; which mainly focuses on plans for the development of homegrown players. The second one is personnel; clubs need to follow the rules concerning personnel and other personnel-related issues. Thirdly, infrastructure; which is about requirements for the stadium and the training facilities. The fourth one is legal, which states that clubs need to be legally well organized. Finally, the last one is financial, which states that clubs need to fulfil their financial obligations (Franck, 2014).

The FFP rules that were issued, came into force at the end of the 2013/2014 season and mainly were an addition to the financial requirement of the CLS. Clubs who want to play in the European leagues of the UEFA had to get a license from their national association stating that they met the criteria of the FFP. The two key criteria of the FFP are: no overdue payables, clubs must be up to date with their payments. The second one is ‘Breakeven’, which means the relevant income must match the relevant outcome. For the Breakeven, a balance is calculated over the last three years of the income and outflow. In this calculation, a maximum deviation of five million euros is allowed. This rule is especially important because it makes it much harder for outside investors to ‘fix’ the financial losses of a club with a large donation. (Peeters

& Szymanski, 2014)

The success of a football club is often seen as national prestige. This increases the likelihood of collusion between the national association and the football club, as the national association desires for its members to obtain sporting success. To minimize this risk of collusion the UEFA established the Club Financial Control Panel (CFCP), which monitors the process and audits the decisions of the national associations. Clubs that do not meet the criteria of the FFP could be excluded from the competition.

2.4 The Bosman Ruling

Up until 1990 if players ran out of their contract, their club had to offer them a new contract for the duration of 1 season. This contract could be rejected by the player, after which the player

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However, there was no free choice for the player what club he could go to as his current club had the right to decline the transfer (Antonioni & Cubbin, 2000).

This situation changed in 1990, with the Bosman ruling. Bosman was a player under contract to R.C. Liegois, a Belgian football club. When his contract expired, Liegois offered Bosman a new contract for only a quarter of the value of his original contract. Bosman rejected this offer, leading to Liegois putting him up for transfer for twelve million Belgian Francs. As no clubs were willing to pay this amount, Bosman negotiated a transfer to U.S. Dunkerque. The transfer would take place for a reduced amount of the twelve million. However, Liegois did not trust Dunkerque to fulfil the financial obligations, so they cancelled the transfer. Leading to Liegois suspending Bosman, who was now unable to play for a whole season (Binder &

Findlay, 2012).

While suspended Bosman took his case to court, claiming that the club's action infringed on Article 48 of the Treaty of Rome. Article 48 of the Treaty of Rome guarantees freedom of movement for workers within the European community. It was eventually the European Justice Court (EJC) which ruled that the transfer was an infringement of Article 48 of the Treaty of Rome. The court ruled that players who ran out of their contract should be able to decide for themselves what club they want to play for next. This ultimately led to players who ran out of their contract being 'free agents'. Another effect of the Bosman ruling is that the amortization amounts of player contracts increased, as the residual value had to be zero at the end of the contract. (Binder & Findlay, 2012)

2.5 The applicable accounting standards

In the second paragraph of this chapter, it is explained why football players are accounted for as an intangible asset. The definition of intangible assets is written down in the International Accounting Standards (IAS) 38, which is a part of the International Financial Reporting Standard (IFRS). IAS 38 states that something can be considered an intangible asset when it is likely to generate revenue in the future, and its costs can be measured reliably (Oprean &

Oprisor, 2014).

In the previous chapter, it has already been proven that football players can generate revenue for their club. On the other hand, whether the value of the players can be estimated in a reasonable manner still has to be proven. The value of players is partly based on the transfer market, the place where all players are offered and bought. The transfer market is a place that is considered to offer realistic values for players. The price that a club here pays for a player

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can be seen as the player's value. This, because it is the amount the buying club pays for the player and the selling club receives for the player. Therefore, the value of players can be estimated realistically and thus, do football players fulfill the IAS 38 requirements for intangible assets.

However, since players are considered an intangible asset, their value must be written off according to the IAS rules. This write-off needs to happen during the economic life of the asset. In the case of football players, the value is their contract. This economic lifespan cannot be longer than five years, as this is the maximum time for a contract. The write-off needs to happen when the player's real value is lower than its book value on the closing day of the book year. This write-off can also be reversed later, this is the impairment test that was discussed in the second chapter (Jönnson, Johansson & Aronsson, 2004).

However, there is a discrepancy in the valuation of football players. Where their book value can become lower because of the write-offs, it cannot increase above the initial book value. Meaning that the value of a player who achieves good sporting results cannot become higher than his initial book value. This is because of the prudence principle; this concept will be explained in a later chapter.

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Chapter 3. Types of Players and how they are (not) valued

3.1 Introduction

This chapter will discuss the characteristics of three types of players and how they can be accounted for. These three types of players are homegrown players, free agents and players registered through transfer. For each type of player, what defines them and how football clubs can (not) account for them will be discussed.

3.2 Different types of players and their valuation

3.2.1 Homegrown players

The first type of player that will be discussed is the homegrown player. Homegrown players are ‘players who, regardless of their nationality, have been trained by their club or by another club in the same national association for at least three years between the age of 15 and 21’

(UEFA, 2019). Because IAS 38 does not allow costs to be capitalized, homegrown players carry zero book value. For example, Lionel Messi, who won the golden ball for best player in the world multiple times, has a book value of zero because he is homegrown. Another example is the spending of the Bundesliga clubs on their youth academies for the 2012-2013 season, this was for a total of eighty million euros. An amount that has only increased further over the past years (Kulikova & Goshunova, 2014).

According to Kulikova & Goshunova (2014), not capitalizing the costs of youth players is wrong as the players have high-quality training that guarantees the football club’s future success. The players form the foundation of the squad and can generate future revenues for the club. In addition to this, one of the five requirements set by UEFA, as discussed in chapter 3, is that clubs must have a youth academy with a plan for homegrown players. Therefore Kulikova & Goshunova (2014) suggest it would be good to capitalize these costs.

3.2.2 Free agents

Free agents come in two forms. The first one is the free agent whose contract ended at club A and who joins club B. He can freely choose what club he wants to join because of the Bosman Ruling discussed in chapter 2. When joining his new club, the player has bargaining power for a higher salary or signing fee, because his new club does not need to pay a transfer fee (Oprean

& Oprisor, 2014).

Free agents are like homegrown players not included on the balance sheet because they

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usual way through the transfer market. Comparing their value with players on the transfer market would also be wrong because the free agents are not sold or bought here, because clubs do not have to pay a transfer fee for them.

3.2.3 Players registered through transfer

The third type of player is the most common one, namely players who are registered through transfers. These are players whose rights are bought by another club. When this happens, the control of the rights of the player switches from club A to club B. Club B here pays a so-called transfer fee. This transfer fee is based on the valuation according to the transfer market. Making that the player's rights can be classified as an intangible asset according to AIS 38. Therefore, a club can capitalize players for their transfer fee and additional signing costs. These costs can then be written off over the economic lifespan of the contract, as discussed in the previous chapter (Oprean & Oprisor, 2014)

Another option for clubs is to account for the transfer fee as an expense. By doing this, the transfer would be classified as an operational or exceptional expense. However, this option has a big influence on the profit a club makes. Therefore, most clubs capitalize the costs of the transfer.

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Chapter 4. Accounting for players by four different football clubs

4.1 Introduction

This chapter makes a comparison between the financial statements of four football clubs.

Firstly, there will be explained why these four clubs have been chosen. Secondly, a comparison is made between the transfer fee costs to total assets ratio of the four clubs.

Thirdly there is a comparison made between the four clubs concerning the total write-offs to total costs ratio. Finally, the applied amortization method of the four clubs will be compared to each other.

4.2 The clubs and method of comparing

In this part of the chapter, the valuation of players in four football clubs’ annual reports will be evaluated. The selected clubs are FC Barcelona, Manchester City, AFC Ajax and Borussia Dortmund. The reason for this selection is the variety of players (as described in chapter 3.2), so it is possible to compare the valuation differences for these types of players.

FC Barcelona and Borussia Dortmund are clubs that buy players but also have several homegrown players. Manchester City is known as a club that mainly buys players. AFC Ajax is known for its youth academy and is thus a club with many homegrown players.

The financial statements of these clubs will be compared in three ways. Firstly, by calculating and comparing the transfer fee costs to total assets ratio. This comparison is made to assess the size of the transfer fee costs compared to the total assets of the clubs. Secondly, the write-off to total costs ratio is calculated and compared among the four clubs. This is done to contrast the size of the yearly write-off compared to the total costs. Finally, the way the four clubs report their amortization will be compared based on what information they disclose in their financial statement.

4.3 The transfer fee costs to total assets ratio

Looking at the different financial statements, the difference between the clubs and leagues is sometimes quite large. With Ajax (2020) having 161.29 million Euros in transfer fee costs, an amount that is just over a quarter of the 578.082 million euros FC Barcelona (2020) has in transfer fee costs. In between FC Barcelona and AFC Ajax are Manchester City (2020) with 448.632 million euros and Borussia Dortmund (2020) with 248.948 million euros in transfer

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Table 1 below shows how the transfer fee costs of every club compares to the total assets of the club. The column labelled average is there to indicate how the clubs relate to each other.

All the numbers used in the table are from the clubs’ financial statement for the 2019-2020 season. Finally, the amortization reporting in the four clubs’ financial statements is compared to see possible differences.

Table 1: transfer fee costs to total assets ratio numbers in ‘000 EUR

When comparing the ratio for all the clubs, it becomes clear that the overall ratio is above thirty percent. With an average ratio of 39,9 percent, both Manchester City and FC Barcelona are right about this average. However, AFC Ajax is over eight percent below it and Borussia Dortmund is over eight percent above it. Thus, the table shows that the ratios for some teams are about the same. The table also shows that the transfer fee costs play a significant role in the finances of these football clubs. Therefore, it is important that they are valued in a proper way.

4.4 Write-offs to total costs ratio

In this part of the chapter, the amounts the four different clubs write off every year and how it relates to their total costs are discussed. Because the latest statements were from the 2019-2020 season, which was affected by Covid-19, the 2018-2019 season write-offs will also be part of the comparison. There will again be a column labelled average to indicate how the ratios of the clubs relate to each other.

Looking at the financial statements, it becomes clear there are some large differences in the number of yearly write-offs the four clubs report. With Barcelona having the highest with 171,645 million euros (FC Barcelona, 2020) and AFC Ajax the lowest with 52,533 million euros. In between are Borussia Dortmund with 95,023 million euros (Borussia Dortmund, 2020) and Manchester City with 145,82 million euros (Manchester City, 2020). The results of the comparison and write-off to total costs ratio are in table 2 below.

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consistent ratio of around 18.5 percent. In contrast, the ratios of FC Barcelona and AFC Ajax differ a couple of percent over the two seasons. However, this could have to do with extra costs because of Covid-19. Nonetheless, it can be concluded that the write-offs with an average of nineteen percent are a substantial part of the costs of football clubs.

4.5 The importance of amortization and impairment testing

As discussed earlier in this chapter, the costs of players who are bought for a transfer fee need to be written-off during the economic life span of the contract. This to make sure the residual value of the capitalized amount is zero at the end of the contract. The ratio from the write-offs compared to the total costs of a club shows that the write-offs are quite a large part of the costs.

This result was also found in a case study by Gazzola & Amelio (2016), who looked at the impairment of football players by clubs in the Italian League. The study found that the average value of amortization of players to profit/loss ratio was around thirty percent from the clubs they looked at. This means that the amortization of players is quite a large part of the clubs’ ‘costs’.

According to research from Bengtsson & Wallström (2014), who looked at the financial statements of football clubs in the top five leagues, the disclosure of impairment differs a lot per club. They had some clubs who disclosed the amortization per contract in the financial statement, these were Juventus and Porto. For Juventus, it was also visible that players from their youth and free agents were indeed on the balance sheet for an amount of zero. The other clubs in their study however only disclosed the amortization as a whole for all players.

Therefore, they conclude in their research that the big difference between the disclosure of the clubs is not in accordance with the objective of a financial statement, to help make economic decisions and be comparable.

Many clubs do not report the way they determine their way of amortization and impairment.

However, one club in the study of Maglio & Rey (2017) does disclose this. They found that although many clubs do not disclose their impairment testing procedures and their

assumptions for this, Rangers FC does. Rangers FC (2020) state in their financial report that for their impairment test, the net present value of future cash flows is compared to the carrying amount of the cash-generating unit (all players in the first squad). This estimate is based on many assumptions, forecasts results, and margins, which are explained in much detail in the financial report. Examples of assumptions are that the club will finish in the top-2

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of the Scottish Premiership and use a discount rate of thirteen per cent. There is also another mentioned critical value for impairment. This is when the club does not manage to reach the group stage of the Europa League twice in the next five seasons.

4.6 Amortization by four football clubs

To have a better look at the application of amortization, the disclosure of amortization of the aforementioned clubs, AFC Ajax, FC Barcelona, Manchester City and Borussia Dortmund, will be compared.

Firstly, the financial statement of FC Barcelona is reviewed. FC Barcelona (2020) discloses only the amortization as a whole for all their soccer players. So, it is not possible to see individual contracts. They do however note in their financial statement that they consider the squad as one cash-generating unit. Because individual players do not generate their own cash flows, apart from when they are sold.

Secondly, the financial statement of AFC Ajax is reviewed. AFC Ajax (2020) has about the same explanation as FC Barcelona. They also see the football squad as one cash-generating unit and do not disclose the amortization per contract. They do however note that they write off the amounts linear to the economic lifespan of the contract.

Thirdly, the financial statement of Manchester City is reviewed. Manchester City (2020) states that the transfer fee costs of a player are written off linearly over the economic life span of the contract. They do not impair a player's value unless there is an insurance claim or the player suffers a career-threatening injury. Like the other two clubs, Manchester City does disclose the amortization as a whole and not per contract. However, they do note that when a player renews his contract, the renewal costs are added to the current book value of the player.

Finally, the financial statement of Borussia Dortmund is reviewed. Borussia Dortmund (2020) only mentions the total amount of amortization, but not the amortization per contract.

However, they do state that they also amortize a contract when the fair value of the player is lower than the book value. This happens aside from the amortization based on the straight-line method.

So, the disclosure of the amortization by the four different clubs is quite similar. The results that Bengtsson & Wallström (2014) found for Juventus and Porto was an exception.

However, it would improve the comparability of financial statements if more clubs would

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4.7 Sub-conclusions of the four clubs

Based on the comparison that was made between the financial statements of the four clubs.

There can be concluded that the ratio of transfer fee costs to total assets differs per club. AFC Ajax, a club known for having many homegrown players in their squad, has the lowest ratio.

This is in accordance with the many homegrown players in their squad, as they are not included in the financial statement. Next, there are the ratios of FC Barcelona and Manchester City.

These ratios only lie 0.08 percent apart, which is not entirely in accordance with the descriptions of the clubs. As FC Barcelona is known as a club with also some homegrown players in their squad. Where Manchester City mainly buys their players. Therefore, it would have been more in accordance with the description of the clubs if the ratio of FC Barcelona was below that of Manchester City. Finally, there is Borussia Dortmund with the highest ratio, which is not in accordance with the description of the club. Because Borussia Dortmund is known as a club with many homegrown players in their squad.

The comparison of the write-off to total costs ratio gave some differing results. It became clear that Manchester City and Borussia Dortmund both have a steady ratio over the two seasons that were looked at. At the same time, the ratio of FC Barcelona and AFC Ajax differed a few percentages over the two seasons. Nevertheless, the average ratio of 19.4 percent showed that the write-offs are quite a large expense for football clubs.

Finally, a comparison of the ways the four clubs report their amortization was made.

The clubs did not have many differences in the reporting method of amortization. They all report the amortization as one number for all contracts. The only two differences worth mentioning is that Manchester City states that when a player renews his contract the costs for the renewal are added to his current book value. The second difference is that Borussia Dortmund also amortizes a player's value when its fair value is below its book value.

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Chapter 5. Shortcomings in the current (re-)valuation method

5.1 introduction

This chapter will firstly discuss several shortcomings of the current valuation method.

Secondly, the shortcomings of the current amortization, impairment and disclosure of the value of football players are overviewed. Finally, some thoughts will be given on solutions for these shortcomings.

5.2 Shortcomings in the valuation methods

The current valuation, where the transfer fee costs of players are capitalized, is a method that football clubs mostly use. However, this method does not take into account the value of homegrown players and free agents. This is odd because, for example, for homegrown players, football clubs make costs in educating the players. Moreover, these costs can be significant, as became clear from the research of Kulikova & Goshunova (2014). They concluded that spending on youth academies by clubs will only increase.

Another problem that arises by not having homegrown players on the balance sheet is that they come with hidden values. Because when clubs now sell a homegrown player, the profit they make on this transfer is the same as the transfer fee. This while they did make costs for educating the player (Bengtsson & Wallström, 2014).

Then there are also the free agents, players who join a new club after their contract has ended at their old club. These players have a bargaining advantage compared to players who are bought for a transfer fee. This advantage can result in a higher wage and a higher signing bonus. This means that their value cannot be compared to that of players who are bought for a transfer fee (Oprean & Oprisor, 2014).

Another shortcoming in the current valuation method is the prudence principle. This principle makes that football clubs are not allowed to increase the book value of their players above the initial value, which makes it sometimes hard to value players at their fair value. This is especially the case when a player has a good season and thus increases his potential value on the transfer market. Because of the prudence principle, his club cannot value him at his fair value (Jöhnsson et al., 2004).

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5.3 Shortcomings in the amortization of players

The previous chapter discussed that the way football clubs disclose their amortization differs per club. On the one hand, clubs like Juventus disclose the amortization per contract. However, on the other hand, clubs like FC Barcelona only disclose the total amortization for the year.

There are no clear requirements for how football clubs should disclose the amortization, which causes the current difference in reporting (Gazzola & Amelio, 2016). Therefore, it can be beneficials for the comparability and decision-making of investors if the UEFA or IFRS would introduce requirements for this.

5.4 Solutions to the shortcomings

The previous part of this chapter discussed several shortcomings of the current valuation and amortization method used by football clubs. The first problem that will be offered a solution to are the homegrown players and free agents. They are currently not on the balance sheet, while clubs did make costs in educating them or paid signing fees.

One possible solution for this is offered in the paper of Oprean & Oprisor (2014). They suggest wage capitalization. This entails that the total wage the player will be receiving during his contract is capitalized and written-off linearly. This method is particularly useful for free agents, as the wage could serve as a valuation ground. However, for homegrown players, wage capitalization would only partly offer a solution. This is the case as you only capitalize the wage and not the costs the club made in educating the player. Another critical note to the wage capitalization, it could make the value of free agents artificially higher than that of players bought for a transfer fee. Because the higher bargaining power from the free agents often leads to them having higher salaries than players who are bought for a transfer fee. Furthermore, clubs must offer the players a higher (lower) wage every time the player's value increases (decreases) so that the method reflects his fair value.

Secondly, the problem with the prudence principle, which states that players should not be overvalued on the balance sheet. This means that a club cannot value a player for more than his initial signing costs. Meaning that the market value of players can become significantly higher than their current book value and will carry a sizeable undisclosed value. An excellent example is Paul Pogba. A player who was capitalized by Juventus for €1.635.000 and eventually sold for over 100 million euros (Bengtsson & Wallström, 2014). This problem can only be solved by introducing new accounting standards that make it possible to revalue players for more than their initial transfer value. In that situation clubs have the fair value of players on

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their balance sheet. Nevertheless, more research is needed to specify a set of rules that would be best.

Thirdly there is the problem with the disclosure of the amortization of players by football clubs. As became clear in the research by Gazzola & Amelio (2016). Clubs approach amortization disclosure very differently, even within the same league. Thus, making it harder to compare the financial statements from different clubs. Therefore, it could be beneficial if the UEFA specified requirements in addition to the current FFP rules for the disclosure of player amortization. A preferable option for this would be to amortize per contract as this would increase the transparency of the financial statement.

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Chapter 6. Conclusion

This thesis examined the impact football players have on the financials of a football club. It has become clear that players can generate money not only with sporting results but also by improving the football club’s brand. Which in turn leads to higher sponsorship and viewing rights revenues (Lozano & Galego, 2011). Together with research done in this thesis, looking at the ratio of the transfer fee rights on the total assets showing that player rights make up thirty to forty percent of a club’s assets. It can be concluded that players are essential assets to a football club.

This importance constitutes why there was a deeper look into the current valuation method of football players by football clubs. The research showed there are roughly three types of players: homegrown, free agents and players bought for a fee. The valuation method used differs per player.

The homegrown player is a player who is educated by his current club and played there for at least three years from age 15-21. This type of player is currently not on the balance sheet as there is no good way to compare their value and they are acquired for free. In this thesis, a solution was offered by suggesting capitalizing the wages of these players based on the work of Oprean & Oprisor (2014). However, this may not be the best solution as this would not take into account the costs of educating a player. In addition, clubs would have to give a higher salary every time a player’s value increases. To make sure his book value is close to his real value.

Next, there are the free agents. These are players who ran out of their contract at their old club and can now join a new club for free. As with homegrown players, clubs do not pay any costs to acquire a free agent. Therefore, the players are not on the balance sheet. So, the value of the free agents is not in the financial statement. The wage capitalization method of Oprean & Oprisor (2014) offers a solution to the problem, as the wage of the free agent is also his costs. However, this method gives an artificially higher value as free agents have higher bargaining power than other players because their new club does not need to pay a transfer fee to acquire them. Thus, leading to free agents often getting a higher wage compared to other players. Therefore, using the wage capitalization method could result in overvaluation.

The third and most common type of player is the player acquired for a transfer fee.

During the transfer of a player, club A pays a transfer fee to club B to obtain the player’s rights.

The transfer fee here is a player’s value as determined based on the supply and demand on the transfer market. Clubs commonly use two methods to account for this type of player. The first

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one is to incur the full transfer fee as costs, and the second and most commonly used method is to capitalize the costs of the player. When doing this, the club writes off the player’s value linearly over the player’s contract period. Research from Bengtsson & Wallström (2014) showed that this could lead to players having hidden value. Especially in the case of players bought at a young age who increase in value. For clubs, it is not allowed to increase the book value of their players above their initial book value because of the prudence principle. To solve this problem, new regulations from either UEFA or IFRS are required.

Aside from the valuation methods, how clubs amortize the costs they make for players was also researched. Because homegrown and free agents are not on the financial statement, this only applies to players bought for a transfer fee. For this thesis, the financial statements of AFC Ajax, Borussia Dortmund, FC Barcelona and Manchester City were reviewed. All four of these clubs disclosed the amortization as one number for all their players. Thus, making it hard to compare the financial statements. Research from Bengtsson & Wallström (2014), found that Juventus discloses the amortization per contract, making it much easier to understand the reported amortization. Therefore, it would be recommendable for the UEFA to impose new requirements to include a more detailed view of the amortization.

In this thesis, a variety of papers were used, from which some were not written by established journals. This has been the case because sports are not a topic most of the established journals oftenly accept papers on. Therefore, some of the literature used is not recent.

Based on the findings in this thesis, for further research, I would recommend looking more into what new regulations would be required to improve the financial reporting of amortization by football clubs. I would also recommend doing more research on a method that would allow clubs to capitalize the costs they make for the homegrown players and allow revaluation to take away the hidden values of players.

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