In the bizarre world of football, we often hear about top clubs struggling to meet financial regulations and keeping their books balance, only to see them embark on a spending spree once the transfer market opens its door.
This paradoxical situation leads us to the amortisation concept which is an essential factor in the football business equation.
So what does ‘amortisation’ actually mean? And how is it applied in football?
It’s time to shed some light on this topic which has been gaining increasing significant as of late.
Amortisation is the action of reducing the initial cost of a transaction by spreading the total fee into several installments. Therefore, the buyer immediately assumes ownership over the object of the transaction, but remains indebted to either the seller or a third party.
This process is common in many domains, including real-estate mortgages, car loans and student loans.
What is Amortisation in Football?
In football, amortisation means spreading the transfer fee spent on a player based on the length of his new contract. This allows the club to splash hefty amounts without overburdening their balance sheets.
Thanks to this process, Chelsea spent an astronomic figure of £270 million in the summer of 2022 following the change of ownership, only for the Todd Boehly’s management to shell out an astonishing £323 million in the following January.
What distinguished the Blues’ spending spree – aside from the jaw-dropping figures – is the noticeably lengthy contracts offered to their new signings, with some of them penning deals lasting for eight and a half years, allowing the club to spread the costs until 2031.
On the contrary, when a club sells a player, the transfer fee received is entirely registered as a profit on the books from the first season. Thus, the amortisation notion is only applied on the buyer, whereas the seller secures an immediate windfall on the balance sheet.
How Does Player Amortisation Work?
Player amortisation enables the club from splitting the cost of the operation on several years to come, based on the length of the contract.
So let’s say that ‘Club A’ signed a ‘Player X’ for a total sum of £50m and offered him a five-year contract, the transfer fee will be divided into five installments for accounting purposes. So the balance sheet of the first year will show that ‘Club A’ spent £10m in transfer fees on ‘Player X’, in the particular year.
The following four years would probably offer the same figure, unless the club manages to put the player’s signature on a new contract. In this case, the remaining nominal value would be spread upon the new number of years determined by the new agreement.
In the previous example, let’s suggest that three years following the player’s initial signing, ‘Club A’ extended the contract of ‘Player X’ by two additional years. At this point, the club had already paid £30m from the total fee, with only £20m remaining. So based on the new contract (which would expire in four years), ‘Club A’ will spread the remaining £20m nominal value over the next four years, registering £5m on every yearly balance sheet.