Why football accounting is so crazy, and why it is hard to believe the Tottenham figures « Untold Arsenal: Arsenal News. Supporting the Lord Wenger; coach of the decade
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.
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False Profits: How Tottenham cooked the books – part one
False Profits at Tottenham: part two
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