Accountancy is like the 3 shells and the pea game, now you see it, now you don’t, round and round it goes, where it stops nobody knows.

Rule 1, Rob Peter to pay Paul.

Rule 2, If you can do it, rob Paul to pay Peter.

Rule 3, Claim for everything, avoidance is legal, evasion is not.

Rule 4, Don’t just push the envelope, put a stamp on it and send it round the world.

Lescott money will be shown straight away — expect for that almost certainly some of it will be an obligation to pay Everton over a period of time, in which case that will come into the accounts when the cash is recieved.

It is relevant in that the players are one of Everton's most valueable assets as a business; therefore, not to show them in he accounts would under-value the club's assets, it would also mean that clubs who spent lots would never have to pay tax as they would also always make a loss.

When a contract gets extended, this gets capitalised over the contract — ie a £5 million-a-year contract for 5 years is a £25 million asset for the club! This is the same as when players are brought, the transfer fee I don't think is considered (nor agent's fees etc). Obviously, however, in accounting you can't generate your own assets therefore Hibbo, Ossie etc will have no asset value.

Matt, let’s assume that Lescott was bought for £5m on a 5 year contract, and had 2 years left to run on it.

Therefore, as you say, Everton will have recognised his contract as an asset of £5m when he was bought, then amortised £1m a year until the contract expired, it was renewed, or he was sold.

Therefore, when he was sold, his value on Everton’s balance sheet would have been £2m.

When he was sold, the first thing that would have happened is that the final £2m would be journalled to a "disposal account".

Double entry book-keeping dictates that this would be:

• a credit to the balance sheet (removal of the £2m asset from the balance sheet) and
• a debit to the profit and loss account (an expense of £2m which reduces the profit Everton report in the year it happens)

At the same time, as Man City have paid, let’s say, £22m for him, Everton will also do another journal which is

• a debit to the balance sheet for a £22m debtor (or cash, or a mix of both, depending on the terms of payment) and
• a credit to the profit and loss account for the £22m, against which the £2m write off is deducted, so showing a £20m profit

As this went through in August, it won’t show until the accounts ending June 2010.

However, as has been well documented, this was spent on Distin, Bily and Heitinga, so the £20m profit will be reduced by the first year amortisation of each of their contracts (I don’t know the figures off the top of my head, but lets say 3 years on £5m for Distin, 5 years on £10m for Bily and 5 years on £5m for Heitina - so £1.67m + £2m + £1m = £4.67m).

So, in next year’s accounts, for the players mentioned above, we should be showing a profit on trading of around £15m.

So, to answer your first question, Everton will indeed show this as a one time profit, whereas Man City will spread the £22m over the life of his contract.

Of course, if I remember correctly, Lescott in fact extended his contract last year, so this will affect the figures above slightly, but hopefully you get the principles involved.

When Lescott renewed his contract, the remaining value of his initial fee at that time will then be written off over the new contract length. So, say it was £3m, and his new contract was for 4 years, then £750k would then be written off every year, not the original £1m.

I’m not an expert on tax, so someone else can discuss capital allowances and how it affects taxation, but there is certainly an impact on the company accounts.

We sold 1 player and bought 3 players for roughly the same amount, but will show a £15m profit this year, but will show increased expenses in the following years compared to what would have been charged if Lescott had stayed.

None of the above affects cash, which these days (Portsmouth will agree, I’m sure) is just as important as profitability, if not more so, certainly in the short term.

Where we will have gained (hopefully!) is that we would have got Man City to pay the full £22m up front, whereas we be paying for the other 3 over a period of time. Makes no difference in the accounts (other than reducing interest charges) but certainly helps to pay our wages and other obligations as and when they fall due.

Interestingly, and I know you didn’t ask the question, but we cannot recognise any value for home grown players until they are sold, when we take the profit of the fee.

The like of Hibbert and Osman will have no value in the accounts (and that’s not meant to be a prompt for some wag to say "on the pitch, too" - incidentally, all those who slag these 2 off are in effect saying that we have qualified for Europe consistently over the previous 5 years despite them - so in the toughest league in the world, we’ve done this with only 9 men - how good are we!!! But I digress..)

The reason I mention this is that a certain Jack Rodwell (as with Rooney) will only ever be recognised in the accounts when he is sold. A bit of a nonsense if you ask me, but accountancy is governed, inter alia, by prudence, which limits the company’s ability to recognise profit until it is realised.

Companies can revalue propery upwards to reflect the fact that land generally increases in value, but I can’t see accountancy rules ever allowing player contracts to be revalued upwards, as their values are fleeting and by no means certain (who would have valued Lescott at £22m a year ago??)

Of course, we never get to see the finer details of all of this, especially the effects of the player contract amortisation and payment terms thereon as there are always several other players bought/sold to muddy the waters. It sure would make interesting reading to see their management accounts!

Bob, you took the words right out of my mouth mate.

Obviously, however, in accounting you can’t generate your own assets therefore Hibbo, Ossie etc will have no asset value.
----------------------------------------------------
Just like on the pitch then!

"... (and that’s not meant to be a prompt for some wag to say "on the pitch, too" - incidentally, all those who slag these 2 off are in effect saying that we have qualified for Europe consistently over the previous 5 years despite them - so in the toughest league in the world, we’ve done this with only 9 men - how good are we!!! But I digress..)"

PAY ATTENTION AT THE BACK, MR MCLAUGHLIN!!

There’s a Board Rubber heading towards your head!

FFS :)

I’m not an accountant but I work with them and their overcomplication of simple maths drives me nuts.
But say for instance Everton FC was a factory, and someone gave that factory a couple of machines for free, lets call them a Hibbert Machine and an Osman Machine.
Then surely those machines would at least have a residual value in the company accounts as an asset? Even if they were purchased and the value fully amortised they still would have a scrap value as an asset but not as a cost?
And then there’s the ’goodwill’ value of a company. Say The Club were up for sale the day after Rooney played against Arsenal, would he be valued as 0 Quids in a company sale? Or would there be a ’goodwiil’ or ’potential’ value attributed to him in the sales price?

Eric,

In answer to your question, the reason why the likes of Hibbert,Osman Rodwell etc are not given a value is because they have been developed by the club and not bought in.

Using your analogy, Hibbert and Osman are machines who the Everton factory have designed and built themselves and not as you say been given to us for free. Because they have been built inhouse it ’s harder to put a number on their value to the club, whereas in the case of the likes of Heitinga, Cahill etc., because we paid money for them it’s easy to put a value on them.

I agree with you that it’s one of the quirks of accounting rules that you are not allowed to place a value on an asset which you develop instead of one you buy. For example Cadbury’s having built up a successful confectionary business would not be allowed to place a value on any of the brand names that they have developed, but could a value on any that they had bought.

Going on to your other point about goodwill, you are right when you say that any buyer of the club would have included a value for Rooney in the price they would be prepared to pay for the club. Put simply, say EFC were bought for £100m but it’s balance sheet only had a net asset value of £75m, the difference between the two figures of £25m would be regarded as the premium or "goodwill" that the buyer had to pay to buy the business from the curent owner.

The key principle of accounting for profit is the prohibition on taking account of what are known as ’unrealised profits’ .

For example: If you run a shop and buy stock to sell next year none of the profit that you know will accrue when the item is sold can be included until next year’s accounts. This expected profit is ’unrealised’ in this year’s accounts. The stock is shown in this year’s balance sheet at cost. In the Profit and Loss account this cost is deducted from total purchases of stock so you deduct from sales only the cost of the items actually sold.

This is straight forward because the asset (stock for resale) is bought specifically to sell on as part of the business of making profits.

In the case of players it is recognized that their primary function (in business terms) is to earn the club income by playing in front of paying customers rather than simply when they are sold in the transfer market. Income accrues over the whole time they are under contract so it is regarded as appropriate that any cost incurred in buying them is spread over all the accounting periods in which that income is expected to accrue. Part of the cost is charged against income in the period up to which accounts are prepared and the balance carried forward as an asset in the Balance Sheet. This is the process of amortisation.

Football clubs use the total length of the players’ contracts as a means of calculating the period over which the cost is amortised. When this is extended the balance of cost in any future set of accounts is recalculated accordingly.

The bar on ’unrealised profit’ still applies so it is not permitted to take account of any extra profit which might accrue if they are sold. This can only be included in the year when the sale takes place. In the case of home grown players the cost of developing them is written off to the accounts as it is incurred.

As mentioned above it is quite normal for the value of a business to far exceed its Balance Sheet Net Assets. The difference is a whole raft of items collectively termed Intangible Assets, including the value attributed to reputation, customer satisfaction, brand loyalty, trade marks, and the collective skills of the workforce.

The fact that the club can expect to receive a fee for the player’s registration if it is transfered to another club similarly gives rise to a potential Intangible Asset. Any potential buyer of the club would be fully aware of the extra value any intangible assets might have.

FFS Karl Masters.
I was responding to Ian Barkers post before Bob made the same point & riposte. Read the full fucking thread before making a judgement.