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Team payers: football is a multi-billion-dollar global industry, but, explains Paul Thompson, the way in which the English Premiership is accounted for is influencing teams' choice of, and spending on, players. (Business Football).

The funny old game of football has become the largest spectator sport on the planet. Millions of people tuned in to see the world's top teams do battle in the World Cup last year. Although an Italian club will take top honours in Europe this season, the English Premiership is, according to an influential report on football finances by Deloitte & Touche, "undoubtedly the financial champion of Europe, generating the highest income and highest operating profits". Last year the Premiership's total revenue reached 937 million [pounds sterling]--almost a quarter of all the revenue generated by football in Europe.

Not surprisingly, many top English clubs--notably Manchester United--have listed on the London Stock Exchange. Loyal fans can now buy a financial stake in the clubs they support. But listings are a mixed blessing. On the one hand, they enable dubs to raise finance for new players and facilities by selling shares to the public. On the other, they can result in the promotion of shareholders' interests above those of fans.

Whereas many unlisted clubs are run as a hobby by multi-millionaires--Fulham, for example, is owned by Mohammed Al Fayed--listed clubs must be run to deliver profits and dividends to their shareholders. This aim of making a profit, rather than simply pleasing fans, has prompted two significant changes in the way that listed Premiership clubs operate.

First, they have intensified their search for other sources of revenue. Not long ago, gate receipts were the main source of Manchester United's annual revenues, but the bulk of last year's 146 million [pounds sterling] revenue came from merchandise sales, sponsorship and TV rights (its key financial data for the year ended 3I July 2002 is available at manutd/findata/kfd/). Last season its players sported new kit after the club linked up with Nike as its official supplier. The 300 million [pounds sterling] contract is reputedly the largest sponsorship deal in sporting history.

Second, the pursuit of profit has had an effect on transfer dealings. Listed clubs have to justify big investments in new players (in the form of transfer fees) to their shareholders in terms of return on investment. To complicate matters, the way that they account for these transfer fees has a direct impact on their financial results.

Deloitte & Touche argues that new rules relating to the accounting treatment of transfer fees may have encouraged Premiership clubs to go on a transfer binge. This in turn may have dramatically altered the squads of many clubs. The new rules require them to show transfer fees on their balance sheets as intangible assets. Since the new rules kicked off in 2000, transfer activity and fees have soared. Last year, transfer spending in the English football league increased 80 million [pounds sterling] to a record 423 million [pounds sterling], 364 million [pounds sterling] of which was spent by Premiership clubs.

While the new rules mean that purchased players get a place on the balance sheet, as well as on the team sheet, homegrown stars won't show up on the balance sheet. Take David Beckham, for example. He was not acquired by Manchester United from another club. He was recruited for peanuts as a novice and was developed by the club into a world-class player. He is therefore an internally generated intangible asset. Clubs are banned from placing a value on such players and popping this amount on to the balance sheet.

Deloitte & Touche believes that the new regulations have prompted many clubs to manipulate circumstances in order to bring players on to the balance sheet. Accumulatively, the new rules have added more than 1 billion [pounds sterling] to Premiership balance sheets. United's August 2002 signing of Rio Ferdinand alone brought 30 million [pounds sterling] on to its balance sheet. (His transfer is not reflected in the balance sheet for the year ended 31 July 2002, because he was not signed until after the end of the financial year.)

Under the old rules this expenditure would have been expensed immediately in the club's profit statement, duly wiping out most of its profits (in the last financial year United reported operating profits, before player amortisation and trading, of 33 million [pounds sterling]). No amounts for Ferdinand would have appeared as an intangible asset in United's balance sheet. In this way, the former treatment tended to penalise the clubs that spent big money on new players.

By contrast, the new rules allow this amount to be amortised over the period of the players' contracts. This makes big splurges to sign new stars more acceptable. In Ferdinand's case, the amortisation expense for the coming financial year (to 31 July 2003), based on his five-year contract, will top 6 million [pounds sterling]. While that's a big hit to profit, it's far less than conceding a one-off penalty of 30 million [pounds sterling], as would have happened under the old rules.

So what's the final score? If new, kinder accounting rules are encouraging a transfer bonanza in the Premiership and, in turn, are affecting team selection, accountants really are having a direct effect on performance.

Paul Thompson is assistant professor of accounting and finance at the Malaysia campus of Nottingham University Business School
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Author:Thompson, Paul
Publication:Financial Management (UK)
Geographic Code:4EUUK
Date:Jun 1, 2003
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