The Mail Bag
Amortisation
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I wonder if one of our more learned members could help me out with something that has bugged me for a while.
Amortisation is the figure removed from our income every year to compensate for the reduction in the value of every player (at least those we paid a fee for) as they progress through their contracts ? you can see it quoted every financial year in the accounts (e.g. 2009 figures http://www.evertonfc.com/assets/_files/documents/feb_10/efc__1265113120_Everton_Annual_Report_and_Acco.pdf). It is usually around £10-12 million.
This money is deducted from the bottom line (not just assets) but isn't actually spent ? it is an accounting 'artefact' in a way which I presume is there because it is an allowed deduction before tax is payable? There then follows a statement every year that we made a loss on the bottom line even though this money is sitting there unspent and would comfortably push us into 'profit' every year.
To my mind, this money is available to be spent every year ? perhaps on renewing contracts or possibly 'concealed' capital we can make use of any way we like? Or am I completely wrong? Have we in fact been in profit for many years giving lie to the often quoted 'loss making' label?
Graham Atherton, Posted 09/08/2010 at 12:43:21
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I think what you are talking about is "Amortisation of players contracts".
This has become standard accounting for Football league clubs to write off the cost of aquiring players over the life of their contract.
For example lets say the YAK cost 12 milion in in 2006 and got a 4 year contract then we would have to charge 3 million a year to the accounts for every year of that contract over the 4 years.
I am not exactly sure what happens when the contract is extended but assume it only applies to the initial contract period.
There are probably more expert views among our TW posters who can give a more elaborate view but in a nutshell that is what it's about.
Buy something like a car which is going to last 5 years. Pay the shark £10 grand for it. Now if you were running a business, you would say that it really reduces my profit by £2 grand each year for the next 5 years. Otherwise if I put all £10k into the first year it means the business makes a very small profit in the first year and bigger ones in the other 4.
So the second year means you charge £2k to the accounts even though no money has left the bank. It makes the profit more even. And that is all Everton are doing, but the assets in this case are not cars but footballers.
And if you want the techy bit, you have taken cash out of the bank and as accounts ALWAYS balance then as you have only put £2k into costs, then you have to put £8k somewhere else and that is assets. Next year, you take 2k out of assets and put it in costs and so on until there is nothing left.
Phil Roberts ACMA!!
The Balance Sheet doesn?t show the VALUE of the players contracts. It shows the balance of the COST of those contracts, viz. the original transfer fee and costs of acquisition. Generally, the value of players under contract that are home grown is not shown in the accounts.
Again Profit/Loss is not the same as cash flow. When a club buys a player (say for £9m) it acquires an obligation to expend that amount. Even if payment is spread over a number of years or is partly satisfied by a player exchange it will eventually be spent. It could be treated in the accounts in different ways:
1) Deduct the whole amount in the year the player is bought. Profit is reduced in year 1 by £9m. (The old way)
2) Deduct it when the actual cash is spent. Over one or more years profit is reduced by £9m (Too arbitrary)
3) Deduct it over a number of years according to a formula. Again profit is reduced by £9m. (What happens now)
So however it?s done, this 'cost' will eventually result in a reduction in profit of £9m.
In fact, accounting 'rules' require the club to estimate the expected 'lifetime' of the asset (i.e. how long it will go on being utilised to earn income) and to amortise the cost over that time. A proportion of the cost is set against profit over this period of years as 'amortisation'. The balance of amounts not yet written off is carried forward in the Balance Sheet as an asset, just as would apply with a piece of machinery or a motor vehicle.
Profit or loss is equal to the rise or fall in the net assets over the course of an accounting period (year).
Hope this helps. It?s not just another example of BK bullshitting the auditors to pretend the club doesn't have any money.
I am delighted that Arteta has signed, his value has appreciated on the old b sheet; but our hearts have warmed should be the most important consequence.
But for the excellent way Moyes has wheeled and dealed under our constrained business plan, I sincerely hope he does not allow Pienaar to lose us money. We need him, yes. But we need the money even more.
Sign him up or sell him on! And I do feel far more confident after Saturday, despite the defeat. not a complete misery guts...
A better way to judge how the club is doing would be to look at the cash flows, this will show what money was spent on players, any loans etc...
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1 Posted 09/08/2010 at 15:15:03
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Depreciation is a 'non-cash item' as it doesn't reflect cash coming in or leaving the Company, merely a movement between the P&L and the Balance Sheet.
Oh sod it, I'm bored already and I do this crap for a living...............