With the AGM fast approaching, now seemed to be a good time to post this.
Explanation of some of the key features in the 2018 accounts and also look ahead at the impact of loss of parachute payments.
Impairment and Onerous Contracts
The two key features in the year ending 30th June 2018 were player cost write-offs and player trading. There are two aspects to the write-offs, ‘impairment’ and ‘onerous contracts’.
Both impairment and onerous contract write-offs relate to players that will not feature for the club in future for various reasons such as career ending injury or falling out of favour with management. I would hazard a guess that the players concerned are Steven Naismith, Russell Martin, Nelson Oliveira and Matt Jarvis. Another candidate could be Yanic Wildschut.
Impairment means writing off the remaining book value of the player’s original transfer fee. For example if we sign a player for £3m on a 3 year contract an ‘intangible asset’ of £3m is created in the balance sheet and ‘amortised’ over the length of the contract, so amortisation would be £1m per year and the player’s book value would be £2m after 1 year and so on. If the player’s career with the club ends after the second year for example, an impairment entry of the £1m remaining on his book value would be appropriate.
The 2018 accounts include an impairment entry of £9,373,000 which represents the remaining book value of the players concerned.
Onerous contract write-offs relate to the remaining financial liabilities contained within the contracts of those players deemed to have no future with the club. In simple terms this is the wages remaining on the player’s contract.
The 2018 accounts include a £11,228,000 provision for onerous contracts.
The combined effect of impairment and onerous contracts on the 2018 profit and loss account is £20,601,000. This is a one-off ‘hit’ and it makes sense to get rid of this bad news in a year in which there are sufficient profits to do so. Getting this out of the way now will help wages to appear more manageable in future as there will be no more costs relating to those players.
The player trading figure in the accounts is often misunderstood to be the cost of buying players less the income from selling players. This is not the case. The figure reported in the accounts represents book ‘profit’ on player sales less amortisation. The up-front cost of buying players is not included in the accounts ‘player trading’ figure.
The 2018 accounts tell us that player trading added £24,027,000 to profit. If we strip out impairment and amortisation (as described above) it leaves us with the book ‘profit’ on player sales of £48,023,000. By ‘book profit’ I mean proceeds from player sales less the residual book value of those players at the time of sale. The accounts tell us that the residual value of players sold was £6,746,000, so we therefore know that the proceeds from player sales in the year was £54,769,000.
It is not possible to assign sale proceeds to individual players from the information available but we can break it down a bit more. The post balance sheet events section of the 2017 accounts tells us that the club had sold Andreu, Dorrans, Howson and Jacob Murphy for a combined £16,900,000.
That leaves £37,869,000 for the other player sales, which I reckon is Pritchard, Jerome, Watkins, Josh Murphy and Maddison.
Further breakdown of these figures is pure speculation but we can compare to sales figures reported in the press.
Players sold during year ending 30th June 2018
Estimated sale value £K
Proceeds per accounts
Agreed to terminate contract upon agreeing a deal with Coventry
Reported in EDP 4/7/17 as less than £1.5m
Reported in EDP 4/7/17 as “£5m chase for the player”
Reported in EDP 19/7/17 as £10m plus £2.5m contingent add-ons
Sub-total of players sold per 2017 post balance sheet events
Reported in EDP 12/1/18 as in the region of £11m. Spurs have a sell-on clause.
Reported in EDP 16/1/18 as around £2m.
Reported in EDP 15/2/18 as around £1m.
Reported in EDP 12/6/18 as worth in excess of £10m.
Reported in EDP 20/6/18 as worth up to £24m. Coventry have £2.2m+ sell-on clause.
Sub-total of all other players sold in 2017-18
Player purchases in 2017-18
The cost of players signed for a fee is reported in the accounts as player registration additions in the intangible assets section of the balance sheet. This cost does not affect the club’s profit and loss other than amortisation as previously described.
The 2018 accounts tell us that the cost of player registration additions was £15,450,000.
From the post balance sheet note in the 2017 accounts we know that the club had agreed to purchase the registrations of Franke, Hanley, Husband, Raggett, Stiepermann, Trybull, Watkins and Zimmerman for a combined total of £8,800,000.
That leaves a balance of £6,650,000 for McLean, Hernandez, Srbeny and Marshall.
In summary I would say that the transfer fees received seem to be generally lower than reported and transfer fees paid are higher than reported. There may be reasons for these discrepancies (player signing-on fees, agent fees, etc.) but the oft-quoted payments by instalments is not one of those reasons.
Profit & Loss summary 2018 and forecast 2019, 2020
Championship TV revenue
Premier league solidarity payments
Premier league TV revenue
UEFA solidarity & prizes
Total operating turnover
Other operating income
Player wages % of t/o
Onerous contracts (wages w/off)
Impairment (player cost w/off)
Net player trading
JV profit and asset disposals
Profit before interest and tax
Net Interest (payable)/receivable
The 2018 results make good reading. The club’s finances have been well managed in a climate of drastically reducing revenues.
The sale of James Maddison in particular transformed the results for the year but if we exclude the ‘exceptional’ items of player-related write-offs and player trading the underlying financial performance is still good. Underlying profit before interest and tax was £6,154,000 without these items.
Football staff wages (excluding cost of onerous contracts) reduced from £37.6m to £30.8m and were maintained at 50% of turnover.
Non-football wages reduced from £13.1m to £12.2m and operating expenses fell from £18.8m to £14.5m.
2018/19 season and beyond
The forecasts for 2019 and 2020 in the above table make the assumption that we will be playing in the Championship (obviously promotion would be a game-changer) and that player wages are maintained at 55% of turnover.
The table illustrates just how difficult it will be to balance the books in 2019 and beyond against a background of a further £31m+ reduction in turnover (from £61m to £30m). The player wage budget would need to fall from £31m to less than £17m.
Non-player wages and operating expenses would also need to be cut and perhaps £5m of savings could be found as a result. Even with these dramatic cost reductions a loss of £6m would result based on the assumptions made. In other words £6m would need to be generated from player sales in order to be self-funding.
The club has done well to manage the first phase of downsizing, which was clearly facilitated by the sale of Maddison, but there is an equally big challenge in the current year and ahead.
The player wage budget must have already been reduced to something like £17m for the current season which makes the team’s achievements even more remarkable.
Long may the on-field success continue. OTBC