You may have heard the term "player trading." You sign a player for a million, he does well, appreciates in value, and you let him sign with another club for 10 million. You've made money and, for many clubs, this is an increasingly important revenue stream alongside gate receipts, media rights, sponsorship and commercial income.
In fact, as the financial blogger @SwissRamble writes, in the past decade (pre-COVID), the top two tiers of English football have lost a whopping £3.1 billion ($4.1 billion), pre-tax, which would have become a massive £8.2 billion ($10.85 billion) pre-tax if not for the massive (£5.1 billion) profit on player trading in that period. And bear in mind, that's in England -- the wealthiest, most commercially successful of Europe's big footballing landscapes. Elsewhere, the reliance on this practice to square the books is far greater, and because it's a practice filled with grey areas, it is coming under more scrutiny because transfer values can be inflated to make the books look better.
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In Italy, football's financial regulator reported 62 suspicious transactions since 2019, 42 of them involving Juventus. And last month, financial police raided the club's offices. UEFA have also been looking at this practice as they try to wrap their heads around a fundamental, and almost philosophical, question: how should the game deal with something that generates huge profits, but isn't always related to events on the pitch?
Q: OK, explain this "player trading" thing. Isn't it just clubs being rewarded for being smart, buying low and selling high?
A: In some cases, sure. But there's a wrinkle and it has to do with accounting. Accounting practices in football mean that when you move a player to another club for, say, 10m, you get to book 10m revenue straight away. But if you acquire a player for 10m, that 10m is spread over the life of the player's contract. So, for example, a 10m player who gets a five-year deal will cost you 2m a season for the next five years. The "asset value" of the player on your books declines by 2m each year.
Want a practical example?
Chelsea signed Romelu Lukaku from Inter for €115m last summer. (There may have been additional bonuses and whatever, but let's leave them aside for simplicity's sake). That €115m is spread over the five year contract they gave him, so on the books, it's costing them €23m a season (what you call amortization) and his asset value declines by that amount each year. Two summers from now, he'll have an asset value of €69m (€115m minus €23m x 2). In terms of accounting, if he leaves in 2023 for more than €69m, they'll make a profit off him, at least on paper and at least for that season.
Q: What if he extends his contract?
A: Then the residual asset value is spread out over his new deal. Taking the Lukaku example: after two years, he has three years left, meaning his value would be €69m. If he extends the contract by another two seasons, he'd have five years left, so the annual amortization would go down to €13.8m (€69m divided by the five years remaining). All of this, of course, is on paper.
Q: Why do they do it that way?
A: It's based on something called International Financial Reporting Standards (IFRS). Without boring you excessively, players aren't treated solely as employees; they're also treated as means of production. Think of a bakery buying an oven to make cookies. They might spend $10,000 on the oven and they figure it will last them five years, after which they'll need to replace it. So on their books, they'll take a $2000 hit each year for the next five years.
Q: That seems to make sense in some ways...
A: In some ways it does, but there are differences. You don't have to pay the oven to work for you, but you do have to pay Lukaku a salary, as well as accounting for the cost to acquire his services (his transfer fee), and you can sell the oven on the second-hand market to whoever you like.
Lukaku, of course, has to agree to the sale. And if his contract expires, he becomes a free agent and walks away for free, something the oven, presumably, won't do. (Unless it becomes self-aware, like in Terminator and the machines all rise up against us, and then we're screwed either way and it won't matter.)
Q: So what's the problem?
A: There's no problem with Lukaku -- other than the fact that it's a bit dubious to think of human beings as assets -- but more broadly, there are two potential issues here. I'll take the obvious one first, and it's the one for which Juventus and other clubs are being investigated: player trading swaps.
I'll give you the most obvious example. In the summer of 2020, Juventus sent midfielder Miralem Pjanic to Barcelona for €60m (plus up to €5m in bonuses) and, at the same time, acquired another midfielder, Arthur, for €72m (plus up to €10m in bonuses). Leave the bonuses to one side for the sake of simplicity and this was basically a case of acquiring Artur for Pjanic plus €12m. They could have valued Arthur at €12m and Pjanic at €0, or Arthur at €212m and Pjanic at €200m -- on a cash basis, it would have made no difference, but it was in both club's interests to get the numbers right, accounting-wise.
Arthur had been acquired for €31m in 2018 on a four-year deal and thus had a residual value of €15.5m on Barca's books. He signed a five-year deal with Juventus, meaning the amortized annual cost for Juve would be €14.4m. Pjanic had cost Juventus €32m in 2016 and signed a five-year contract, which he extended for another three years in 2018, leaving him with a residual asset value of €9.6m. And he signed a four-year contract with Barcelona, so his amortized annual cost was €15m.
Do the math and both clubs come out well ahead, at least in the short-term. Barcelona get €72m for Arthur: take away the €15.5m residual asset value and the €15m annual cost of Pjanic and they're up €41.5m. Juventus sell Pjanic for €60m: take away the €6.4m residual value and the €14.4m in amortisation for Arthur and they're up €39m.
In Juve's case, investigators suggest those valuations are inflated just so they could show more revenue in player trading to make their books look better.
Q: Do the authorities have a case?
A: That's the thing -- it's a judgement call, as there is no objective cast-iron method for calculating a player's transfer value. But history will record Pjanic as one of the 50 most expensive players in history. Among players at his position in central midfielders, only Paul Pogba (€105m) Frankie De Jong (€86m), Arthur (€72m) and Rodri (€62m) cost more than he did. And the difference is that the four guys ahead of him on the list were all 23 or younger when they moved, while Pjanic was 30. Transfer valuations are supposed to decline once a player hit his late 20s and early 30s.
So, of course, based on historical benchmarks -- let alone how good you or I might think Pjanic actually is -- that deal was always going to raise eyebrows.
That's just one example. Prosecutors suggest Juventus made as much as €300m in paper capital gains with an array of similarly dubious deals, many involving lesser-known younger players. (For example, striker Elia Petrelli, who is 20 and whose entire resume consists of 16 appearances in the Italian third division and 13 minutes of Serie B football, was sent to Genoa for €8m as part of the deal that made Nicolo Rovella a Juve player in January 2021.)
Of course, they're not the only club that's being investigated, but the problem is who's to say Pjanic wasn't worth €60m, or that Petrelli wasn't worth €8m? Clubs overpay for players all the time.
Q: It seems like a violation of the spirit, if not the letter, of the law (or at least, accounting principles)...
A: Maybe it is. Whether or not it's illegal and you can prove it's illegal, part of some wilful deception, is another matter. (And in Juve's case, the investigation is broader, using wiretaps to look for other forms of malfeasance.).
More broadly, there's a case to be made -- and Juve may wish to make it -- that all of this is far from a deception. The club is listed on the stock exchange, so their reporting standards are more transparent than most. Any investor could have seen the Pjanic-Arthur swap and drawn his own conclusions, for example. Beyond that, 64 percent of the club's shares are owned by Exor, the Agnelli family's holding company and Andrea Agnelli is the club president, so it's not as if he's being deceived.
The problem as I see it is that while a number of clubs have engaged in these sort of shenanigans -- mainly to gain fiscal advantages or show paper profits to meet league guidelines or even just avoid equity injections in the short-term -- many have not. And the rules should be the same for everyone; they should not depend on how clever or brazen your accountants are.
Q: You said there was a broader problem earlier...
A: Yes. I'll give you three reasons. First off, the practice of player trading depends on agent intermediaries to make deals happen, and that's a largely unregulated, murky business. This has been especially true recently, as a flurry of mergers have given out-sized power to half a dozen agencies -- whose main business isn't representing players as much as it is representing clubs to move said players around -- often at the expense of clubs.
Second, relying on player trading to balance the books can work exceptionally well for some clubs -- Swiss Ramble estimates that, over the past decade, in the Premier League alone, Chelsea have made $800m, Liverpool $475m and Arsenal $470m -- but it's nowhere near as stable as, say, filling your stadium or media income. And when you can't (or don't want to) sell, things can get hairy very well. Especially if you engage in the sort of transactions -- like dubious swaps -- mentioned above: the risk is that you simply postpone costs down the road and they get bigger and bigger.
Finally, there's something slightly distasteful about the commodification of athletes. These are people who play sports and entertain us for a living. They're not simply numbers on a screen that you move around to balance books.
Q: So how do we fix this? And does it need fixing at all?
A: I think it does need fixing. More transparency would help: it always does. I'm not sure you need to go as far as FIFPro did a few years ago, when they proposed abolishing transfer fees altogether, but at some point we need some guidance on what the purpose of a team actually is.
Yes, they play a sport and that's also entertainment, and they fund themselves in different ways. But should this part of the business -- especially when finalised to generate revenue, rather than improve results -- be a part of that? And should it be included in considerations when we licence clubs and assess their financial health? Are there better accounting practices we can use to determine the financial health of a club?
I'm not an accountant, but I imagine there must be ways that are a better fit for something that is part-sports, part-entertainment and part-business. As for the rest, there's definitely a conversation to be had.