“Do not talk about spend, talk about net spend.” The reality is, in football, net spend is actually irrelevant. It means nothing.

The over simplistic stats and infographics are spouted by fans unable to comprehend the more complex methods of accounting in football, and media outlets whose target audience is those fans. The concepts of transfer fee amortisation and player book value are the real factors that make a difference.

Amortisation

By now we should all know what amortisation is.

It came into the public domain when the media delved deeper to explain how Chelsea were spending so much. But amortisation is not a loophole they discovered or invented. It is something that has existed. It is something that I began blogging about way back in 2018.

For those still not up to speed, amortisation is the common accounting practice of spreading the cost of a players transfer fee over the length of their contract.

A common mistake is people that then mix this up with paying the selling club in instalments. One is how you pay for the player (often used to help cash flow), the other is how to account for their outlay.

The easiest way to give this as an example is a £50m player on a 5-year deal has their transfer fee amortised at £10m a year. If that player then leaves for nothing at the end of their contract, a club has not actually made a book loss on them as their fee has been fully amortised – and the net spend junkies will have it down as a £50m loss.

If a player signs a new contract during their existing contract, the value of the transfer still yet to be amortised is then spread out over the length of the new contract.

So after 2 years, our £50m player has had £20m of value amortised. 2 years at £10m a year. He then signs another 5-year deal. The £30m outstanding is then split over the new 5 years – so £6m a year. With the new deal, the club are saving themselves £4m a year in amortised transfer fees.

Book value

At any point during their time at the club, a player has a book value. And it is based on this book value that you can establish whether a club has made an actual profit or loss on the player.

The book value is very simple. It is the difference between the transfer fee spent on the player, minus what has so far been amortised.

If after 2 years we sell our £50m player, he will have a book value of £30m. That means that any sale over £30m is considered, within the accounts, profit. Anything under £30m is a loss. And this is where we need to be aware of how it works.

When you sell a player, the remaining amortised transfer value must be accounted for in that financial year. So if you sell your £50m player for £20m after 2 years, what you actually show is a £10m loss. And even though you might have bought £20m into the clubs coffers, what has actually happened is the deal has cost you £10m

The £20m that has come in is wiped up by the £30m in remaining amortised transfer fee, and you have a further expenditure of £10m to balance the books.

This is why Arsenal were so reluctant to sell Nicolas Pepe.

At £72m, Pepe was costing us £14.4m a year. After 2 years, we still had £43.2m outstanding for him. That means had we cut our losses and sold him for £20m, we would have had to have submitted a total loss of £23.2m.

Whilst some might think “better to get £20m for him not than lose him for £0m in 3 years”, with PSR / FFP it is actually better to retain the player and not have that additional cost hit your accounts.

Pepe’s existing amortisation and wage costs would have been budgeted for. An additional one off loss would not have been and could have led us to losing more that calendar year than PSR allowed.

The final part on book value is with regards to players who have come through your academy. They have a book value of ZERO.

Their zero book value is not because they are worthless, but because they cost the club nothing in amortised transfer fees. Therefore when you sell them, there is not a fee you need to write off. They will be 100% profit.

And this is why you may see clubs like Chelsea sell the likes of Reece James and Conor Gallagher. The pair are captain and vice-captain, but if Chelsea are struggling to balance the books due to the high amortisation costs, the easiest way they can balance the books is selling someone with a zero book value.

Selling players

Book value is perhaps the most important factor for clubs when they are deciding whether to accept a bid for a player that they no longer require.

As we saw with the Pepe example, there is very little worth in selling a player for less than his book value. It does not provide you with any additional income and actually increases your losses for that year.

And due to book value, it is not as simple as “selling £100m worth of players gives us £100m more to spend”.

Selling someone for £40m might generate you a larger profit than selling someone for £60m. Especially if the first player being sold is an academy graduate and the second player was recruited for a huge fee.

Selling Gallagher for £40m will represent £40m profit in Chelsea’s accounts. Meanwhile, selling Mykhaylo Mudryk for £60m would show a £10m loss (based on what would have been amortised on his £88.5m transfer fee spread over his 8.5 year contract).

So whilst selling Mudryk may see a bigger incoming transfer fee, his sale for £60m would see the club increase the losses in their accounts, whilst selling Gallagher for a lower fee would be 100% profit.

Finally, a look at a real example with Arsenal.

In 2021, Aaron Ramsdale joined Arsenal on a 4-year contract for £24m (rising to £30m with add-ons). That is £6m amortised a year. In 2023, he signed a new deal taking him through to 2026.

At that point, the club would have accounted for 2-years worth of amortised transfer fee. At £6m a year that makes £12m. The remaining £12m would have then been re-spread out over his new 3-year deal at £4m a year.

Now fast forward to present day. We are looking to sell Ramsdale this summer. We would have accounted for £16m of his transfer fee, and have £8m remaining. That means any profit is based on his £8m book value, and not the £24m initial fee.

If we sell Ramsdale for £40m, that will represent a £32m profit in our accounts, even though it would only be a £16m “net profit” based on his initial transfer fee.

Final thoughts

If you have made it this fair, thank you. I know these sort of blogs are a little marmite and do not get the hits that “Arsenal look to sign 6′ 2″ 22 goal striker” headlines do. But I enjoy researching and writing this sort of blog, and will never go down the clickbait route.

Knowledge is power at the end of the day, and if you can have even a small amount of awareness of amortisation and book value, it will allow you to better understand how the club operates, and move you beyond the simplistic view of net spend.

I have a small series of these blogs planned, with the next one being to explore the book value of a dozen players that we might look to move on this summer. Understanding their book value will be key to then work out the impact of selling them will have on our transfer budget.

Thanks again for reading, and as always feedback (positive and negative) will be much appreciated.

Keenos

Arsenal fans – time to upgrade that work mug!

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