The question of this exchange agreement between Juventus and Barcelona

It was a bad week for FC Barcelona. Talisman, and famous Wrong dresser, Lionel Messi has left the Blaugrana due to “financial and structural obstacles” imposed on the club by La Liga. It is a devastating blow not only for the club, but for the league and its television rights holders. In particular ESPN which has just signed a $ 1.4 billion deal broadcast Spanish football until 2029, presumably assuming Messi would attract punters. Ooops.

Barcelona’s finances have been a sluggish disaster for a few years now, so it was still open to question whether they could afford to renew Messi’s contract, which is said to be in the hundreds of millions of euros.

The story of this financial deterioration was expertly told by Simon Kuper of the FT in a timely long read last week. Yet two paragraphs in particular sparked a debate in the FT Alphaville Slack chat.

Here is the section in question:

In the summer of 2020, Barca’s transfer deficit haunted Bartomeu and his board members. Under the rules governing clubs owned by Spanish members such as Barca, administrators had to reimburse losses out of their own pockets. The board needed to urgently record profits before the end of the fiscal year on July 1. A strange swap transfer has therefore been concocted. The counterpart was Juventus, also eager to improve their books. Juve ‘sold’ Bosnian midfielder Miralem Pjanic to Barca for a base amount of € 60million, while Barca sold Brazilian midfielder Arthur Melo to Juve for a base amount of 72 millions of euros.

These sums would never actually be paid. They were invented for accounting purposes. Under the accounting rules, each club could record its handsome assumed selling price as immediate income. Notional payments would be spread over the years of the players’ contracts. Only 12 million euros in real money would eventually change hands, the difference between the fictitious prices of the two players, paid by Juve to Barca. What mattered was that the exchange helped the two giants clean up their books.

Some Alphavillans have questioned whether the deal is completely flawless, especially if it has the effect of helping Barca administrators avoid getting their own pockets.

Now FT Alphaville has no clear idea of ​​the reason for these transfers. We will leave the machinations to Simon. But it is important to note here that what is described is, according to the accounting rules, legitimate. Although it seems questionable.

Let’s explain ourselves.

Oddly enough, football players – or, to be precise, their registration rights – are intangible assets. Yes, Cristiano Ronaldo is counted as software development costs.

So what does this mean in practice? Well imagine two football clubs: ES Alphaville and Davos FC.

ES Alphaville are buying a Davos FC player for £ 10million who has risen through the ranks of youth team football, just as a young future world football leader should.

At the same time, ES Alphaville are selling a player to Davos FC for £ 20million who has been at the club for 3 years, with 2 years remaining on her contract. It was originally bought for £ 10million.

The net effect is that ES Alphaville receives £ 10million in cash. Pretty easy for now.

Now this is where it gets a little more complicated. For the buying club, the player’s acquisition is not immediately recognized as an expense in the income statement. Like say, the commercial gains (or losses) on oil hedges could relate to an airliner like easyJet.

Instead, because the player is an asset whose economic value (playing football for the club) will be spread over the term of their contract, the buyer capitalizes the cost before amortizing the price over the term of the contract. .

Thus, in this case, for their respective purchases, the two clubs will record a cash outflow through the cash flow from the investment account, and not the income statement.

In our example: £ 10million in cash out for ES Alphaville and £ 20million for Davos FC. To simplify, let’s just say that these are the only transfers made by the respective clubs during the period.

However, both clubs also received transfer fees. This cash inflow will also be recorded on the investment cash flow statement:

Now you might notice that we haven’t discussed the losses or gains so far, just the cash flow. So what do these transfers mean for the income statement?

Well, like any asset with a useful life, more football players have book values. This book value, recorded on the balance sheet, is the player’s original cost less accumulated depreciation. Remember the Davos FC player bought from ES Alphaville for £ 20million was originally bought for £ 10million on a 5-year contract with 2 years remaining?

As a result, its net book value on ES Alphaville’s balance sheet will be no more than £ 4million (the initial cost of £ 10million, less 3 years of depreciation at £ 2million per annum).

The £ 10million player bought by ES Alphaville? Well, she was a young player. There is therefore no initial acquisition cost, and therefore no book value.

This is crucial because the gain recognized through the income statement on a player sale is the difference between the player’s residual book value and the transfer fee.

For a concrete example, take a look at the distribution of Juventus transfers in their annual report 2020.

Moise Kean, a young player, has been sold to Everton for € 27million. Capital gains therefore amount to € 27 million. The marauding full-back João Cancelo, meanwhile, was sold to Manchester City for € 65m but, with his book value being € 32m, the gain made the difference: € 30.4m.

(The smaller payout is due to additional fees that clubs are required to pay to clubs that initially trained the player in their youth. More here. In addition, the net present value of the transfer fee is slightly less than the full 65 million euros.)

Here’s what it looks like in the Juventus books, with the key things underlined:

So in our example, ES Alphaville can only record £ 16million in income (£ 20million in capital gains from transfer fees less the residual book value of £ 4million), while Davos FC can save the entire £ 10million.

In theory, these gains can have a direct impact on the bottom line of each club. But in reality, there are costs associated with transfers that must be deducted from revenue. While agent fees are capitalized and amortized, other costs such as a golden handshake are expensed. However, these costs rarely add up to a figure close to the transfer fee. For our example, let’s say they represent 10% of the total consideration.

Here’s what it would look like in the income statement:

There is one final checkbox here, which happens to the cash flow from operations of each club.

While some clubs apparently specialize in developing young players and then selling them to elite clubs for a hefty fee (Sevilla, Southampton and Boca Juniors come to mind), transfer deals are technically not part of the agenda. daily club operations. Think back to our example of air and oil coverage.

Thus, all capital gains or losses resulting from transfers are removed from the operating cash flow statement so that investors can have a clearer picture of the development of the main activity of television rights, the sale of tickets and overpriced products. Gains or losses are then, as indicated above, re-included in the statement of cash flows from investments.

Here’s what it looks like in reality, with Juventus’ 2020 cash flow statement (with our underlining):

So this is it. Player selling expenses, less book value, are capital gains that flow through the income statement, which helps increase profits. While the purchase of players is treated as an investment, the player is therefore initially capitalized and then amortized over the term of his contract.

From now on, many will quibble with the fees paid in the case of Pjanic / Mélo transfers. Especially since Pjanic barely got a kick for Barcelona last season, and Melo failed to prove success with the old lady.

But, looking back, it’s 8:20 p.m. From € 105m transfer from Ousmane Dembele to Barcelona to Denilson blockbuster transfer at Real Betis in 1998, football history is littered with mega money deals that turned sour. On the same point, proving that a player has been paid for inflated fees to increase his net income is difficult. Some players seem expensive, and turn out to be cheap. Others, like Joelinton, a Brazilian specialist in barn doors from Newcastle, do the opposite.

Even if a player has been sold at an inflated price to generate a profit, how do you prove it? Unlike a company or an acquired brand, an actor is not a cash-generating asset that can be tested each year to see if it is up to the expectations of the acquirer. Even though they play the first few seasons terribly, who can say they won’t end up getting good? Yet the Hourly of the Melo / Pjanic agreements, one day before the end of the financial year of the two clubs on June 30th, also raises questions.

Anyway, we hope this explanation has been helpful. And for those who already knew all of that, let us know your favorite football transfer flop in the comments.