Can Liverpool Afford A World Class Forward?

This Summer Liverpool has been spending money like it’s going out of fashion. With the unfortunate sale of Luis Suarez to Barcelona, increased TV broadcasting revenue, new commercial deals and champion’s league money the club seems to have more purchasing power than ever before. As we stand, a week before the Premier League kicks off, Liverpool has added 6 players to their ranks and by all accounts are soon to add their seventh with the signing of Moreno. Despite all of this Liverpool are yet to sign the exciting forward player we so desperately need. In this article I will look at Liverpool’s finances and attempt to answer the question “how much more can the club spend?”

Accounting for Players

The aim of Financial Fair Play (FFP) is that all clubs participating in UEFA competitions do not routinely operate on a loss. Article 61 of FFP sets out the acceptable deviation which starts at €5million over the current year and the previous two but goes as high as €45million where the owners cover the loss by injecting equity into the club. The figure which FFP is concerned with can be found in the clubs Profit and Loss account so when attempting to ascertain whether a club complies with FFP it is the figures entered into this financial statement which we must focus on.

Transfer fees paid for footballers are capitalised i.e. entered in the balance sheet[1] as assets rather than the profit and loss account[2] as expenses.  A club’s players are treated as intangible assets in accordance with IAS 38. This is due to the fact that the benefits they provide aren’t tangible in an economic sense (although there are fantastic websites that track a player’s statistical contribution to a team such as the one you are currently on!)

The capitalised transfer fee paid by the club is then amortised[3] over the life of the player’s contract. Take the transfer of Adam Lallana to Liverpool, who by all accounts signed a 5 year deal which cost in the region of £22million.

How would Liverpool’s accounts reflect such a deal?

His wages would be posted to the Profit and loss account as an expense but the transfer fee would be capitalised (treated as an asset.)

1. The £22 million would be entered as an intangible asset in the balance sheet[4]
2. Each year of his contract a constant amount (£4.4million) is then amortised to the P+L account. This means the initial £22 million is reduced by £4.4million and then an expense of £4.4million is posted to the P&L account.
3. Liverpool’s Net Profit is then worse by £4.4 million + the wages paid to Lallana for that accounting period.

On somewhat of a tangent you may have realised that offering players longer contracts has short term benefits in that the club can spread the transfer fees over a larger number of years thereby allowing them to spend more on players now and still comply with FFP. However this will limit the amount a club can spend on players in the future.

Club Finances:

Players Sold by the Club:

Now that we know how to account for players let’s look at the ones Liverpool have sold this season or are rumoured to be close to selling.

Luis Suarez:

Luis Suarez cost Liverpool £23million pounds on a 5 year deal in 2011. This means every year the club would reduce the value of the intangible asset (the value of which was initially his transfer fee) by £4.6 million[5] and enter the same figure as an expense in the Profit and Loss account.

However things get more complicated when a player signs a new deal. We have to look at the Net Present Value[6] of the intangible asset (value of the player). Suarez signed a new four year deal in August 2012. At this time the Net Present Value of the transfer fee was around £15.7 million[7]. The amortisation fee has to be recalculated as that £15.7milkion will now be spread over an even longer period. The yearly amortisation fee will now be around £3.9million.

Suarez signed his final contract with Liverpool in December 2013 rumoured to be a four and a half year deal. His Net present value at this point was £10.2million[8] which had to be amortised at a rate of £2.3million[9] a year.

As Suarez was sold to Barcelona in July a further 6 months of amortisation must be accounted for which amounts to £1.15million leaving a net present value of £9.05million.

This means Liverpool have made a profit on sale of around £62.95million (£72million – £9.05million)  and not the reported £49million (£72million – £23million.)

We now have to factor in the rumoured £200,0000 a week which Liverpool no longer have to pay Suarez and the remaining 6 months of the year on which no amortisation fee has to be paid to find that Liverpool have improved their Net Profit by £74.5million![10]

For the remaining players I will just state the profit made from each deal but I will include the calculations in appendix 1 below for those interested.

Pepe Reina: £7.2 million

Players rumoured to be leaving the club

Fabio Borini £11.94 million
Daniel Agger £15.2million
Assaidi  £6.65million

The aggregate improvement in net profit on the previous year from outgoing players could be a whopping £115.49million!

Other forms of Revenue

Liverpool has boosted revenue massively this season on three fronts. The Champion’s League money could potentially boost the clubs revenue by a further £30million. Liverpool also earned a staggering £42.5million more from TV revenue then they did the year before. The club has also been busy securing commercial deals to allow us compete with the financial goliaths of the premier league. It is estimated that the club could rake in an extra £20million from these deals alone.

This gives us an increase in revenue of £92.5million which must then be added to the £115.49million above giving us an aggregate improvement in net profit of approximately £208million! This massive increase combined with the club’s average net spend of £32.5million over the past three seasons means Liverpool have a lot of money to play with.

Player purchases and new contracts:

We must now take into account the players which the club have purchased to date. Liverpool has spent £89million thus far this summer and, if reports are to be believed, Moreno will be signing for a further £16million. This will bring the clubs total expenditure on players to £105million. As explained above, these transfer fees are amortised over the life of the players’ contracts. We must also factor in the yearly wages paid to these players and the rumoured new contracts for existing players.

Unfortunately we don’t yet have concrete wage figures for LFC’s new signings nor do we have information regarding contract length. We therefore have to estimate the yearly amortisation costs and the increase in wage expenditure.

If we assume the average deal is for 4.5 years and each player will be paid on average £80,000,000[11] then we can calculate that the clubs expenditure will increase by £23.3million (amortisation fee) + £29million (wages) which is £52.3million each year for 4.5years.

How much more can we spend?

Liverpool could potentially post an incredible £155.7million profit in the P&L account for the upcoming year. However FFP looks at the net profit/loss posted for the previous two years as well as the current one. Last year Liverpool made a loss of £50million, and whilst a lot of this is down to spending on infrastructure[12] which is excluded from FFP calculations, not all of it is. We also have to look to the future. The estimated increase in expenditure of £52.2million will be in the club accounts for the next 4.5 years. Assuming Liverpool continue to qualify for the Champions League they will have to be careful how much they spend after the current three year period as the massive profit posted this year will no longer be taken in account but the increased expenditure will be. The way Liverpool can avoid coming under fire by UEFA this is by selling players or offering the players purchased this year new contracts after the three year period is up to further spread out the transfer fees.

Now we must ask ourselves the question can Liverpool afford to buy more players?

In short yes they can. However the question every Liverpool fan wants answered is how viable is it for the club to purchase a world class striker.

Option 1: Long-term

Liverpool could afford to pay a significant transfer fee for a young star especially if they offer them a medium or long-term contract which will spread the transfer fee over a longer period and then offer that player a contract extension two or three years later. To see the effect such a transaction would have see the Agger and Reina deals in the appendix below.

Option 2: Medium-Term

Let’s assume Liverpool were to purchase a top class forward like Cavani for £40million and offer him a four year deal with wages of £130,000 per week[13]. Each year £6.76million (wages) and £10milliom (amortisation fee) will be entered as expenses in the Profit and Loss account. This would clearly have little effect on the massive profits Liverpool could potentially have at the end of the transfer window but could have implications for the final year of his contract in three years’ time.

If Liverpool were to extend Cavani’s contract after three years by a further two years this means they would reduce the yearly amortisation fee from £10million to around £3.3million thus significantly reducing the impact such a deal would have after the current three year period in which the Suarez transfer will no longer effect FFP compliance. Alternatively Liverpool could attempt to sell Cavani after the three year period. Any offers they receive over £10million would be reflected as a profit on sale in the profit and loss account.

Option 3: Short-term

Another option would be a stop-gap striker who would stay with the club for two to three years after which the club would let them go or sell for whatever fee they could get. Given the club’s current financial situation signing someone like Falcao or even Carlos Tevez is not as ludicrous as it might seem at first glance. While the deal wouldn’t represent value for money it would allow the club benefit from a brilliant player and not have any effect on the club complying with FFP in three years’ time.

Conclusion

Liverpool is financially in a great position at the moment. As explained above the club can afford to buy at very least one top class player and maybe another squad player as well especially if they chose options one or three above. They are only limited by their bank balance and the availability of credit. The problem will be identifying the right targets which will suit the way the club plays and also ensuring that the club remains compliant with FFP for future Champion’s League competitons.

If you enjoyed the article and have any questions follow me @henrylaw11.

*Figures are based on reported values and estimates.

Appendix 1: Changes in Net Profit as a result of player sales

Pepe Reina:

Pepe has been at the club almost nine years now so his net present value and yearly amortisation cost are almost negligible.
However his wages and the transfer fee received are significant-
Wages of £100,000 p/w = 5.2 million + 2 million transfer fee = £7.2 million improvement in net profit.

Fabio Borini:

Bought for 11 million on a 5 year deal reportedly earning 45,000 p/w.
The yearly amortisation fee is £2.2million annually which must be multiplied by his 2 years at the club giving us £4.4 accumulated amortisation.

The profit on sale from Fabio would be= £7.4million which must be added to + £2.34million (wages) + £2.2milliom (amortisation we no longer have to pay) = £11.94million

Daniel Agger:

Like Pepe, Agger’s Net Present value  is negligible due to the length he has been at the club and due to the fact that his first contract had only months to rum before he signed a new deal.

Wages: £5.2mill + negligible amortisation fee + transfer fee (£10million) = £15.2million 

Oussama Assaidi

Cost LFC £3 million in 2012, with wages rumoured to be £25,000 p/w on a 4 year deal.
2 years accumulated amortisation: £1.5milliom

£1.3 million(wages) + £750,000 (less amor) + £4.5 million (transfer fee – net present value) =

£6,550,000.