Amortisation Policy

[DCFC1388]

Thought I would give it its own thread. 

I was pleased to see a breakdown of examples within the report and to me it makes much more sense than the usual 'straight line' policy used at other clubs.

My only concern is that we wont make as much profit on sales as others would using the 'straight line' policy.

 

[RamNut]

Given the unusual nature of football clubs - having  a lot of depreciating intangible assets - amortisation is a significant element of the accounts. I’m surprised that all clubs have not been required to submit a full schedule of those assets, showing how the amortisation value was calculated. 
in our case that led to a lack of clarity and ultimately a breakdown of trust.

when eventually scrutinised by the IDC panel, the panel were persuaded that we used a valid systematic process which was appropriately signed off by accountants and auditors. From the outside it all seems a bit weird.

I read somewhere a proposal that ffp should exclude amortisation which seems to have some merit to me.
Base ffp on real world revenue trading, excluding depreciation of intangible assets.

our crime was not our level of spending, but our level of spending badly (by signing players that we couldn’t sell), so that we could not recover the ’subjective’ residual Values, and therefore ended up in a spot of bother. 
Any financial governance system that effectively forces clubs to sell players in order to stay compliant - even if they don’t need to otherwise - seems like a ? system to me. 
but what do I know, I’m just a fan supporting  a club that was effectively forced to sell its best player every season in order to comply with ffp, whilst the real problem  - player wages - was not addressed across the whole of the EFL.

ultimately ffp is producing is producing some bizarre outcomes.  

Edited August 27, 2020 by RamNut

[LeedsCityRam]

2 hours ago, RamNut said:

Given the unusual nature of football clubs - having  a lot of depreciating intangible assets - amortisation is a significant element of the accounts. I’m surprised that all clubs have not been required to submit a full schedule of those assets, showing how the amortisation value was calculated. 
in our case that led to a lack of clarity and ultimately a breakdown of trust.

when eventually scrutinised by the IDC panel, the panel were persuaded that we used a valid systematic process which was appropriately signed off by accountants and auditors. From the outside it all seems a bit weird.

I read somewhere a proposal that ffp should exclude amortisation which seems to have some merit to me.
Base ffp on real world revenue trading, excluding depreciation of intangible assets.

our crime was not our level of spending, but our level of spending badly (by signing players that we couldn’t sell), so that we could not recover the ’subjective’ residual Values, and therefore ended up in a spot of bother. 
Any financial governance system that effectively forces clubs to sell players in order to stay compliant - even if they don’t need to otherwise - seems like a ? system to me. 
but what do I know, I’m just a fan supporting  a club that was effectively forced to sell its best player every season in order to comply with ffp, whilst the real problem  - player wages - was not addressed across the whole of the EFL.

ultimately ffp is producing is producing some bizarre outcomes.  

I would entirely agree. The main premise behind FFP is to force clubs to be sustainable & that is more relevant to cash accounting not accounting measures as such. I would think a measure based on EBITDA (or just removing depreciation & amortisation) would be more appropriate rather than relying on highly subjective interpretations of player value. Could maybe bolt on an element of future player contractual obligations to that also to prevent issues piling up in future financial years.

Taking my unbiased hat off, our policy does seem questionable. I dont understand how any certainty can be applied to the timing of a future sale & value of a sale. Quite apart from a long term injury, there's also form (Jozefzoon and Malone both signed for circa 3m but would have struggled to have got even half that after Year 1 of their contracts) & how settled a player is at the club (Rob Hulse's collapsed transfer to Middlesbrough for example). I wonder what the full criteria is for writing down a residual value of a player.

That all said, if it was signed off by auditors & applied consistently, its very difficult for an external agency ro argue with.

Edited August 27, 2020 by LeedsCityRam

[angieram]

I think we might have adopted the current amortisation policy as a response to the overspending.

However, providing it is shared with and understood by those responsible for recruitment within the club, it allows us to reset our recruitment goals to focus on players we can either develop to keep that residual value or not pay too much for in the first place. Recent signings do seem to be starting to use these principles.

Of course, the Academy is the ultimate example of this policy in action - growing your own is the most cost effective way to run a club when you take into account the value the player produces in terms of product for the club as well as any transfer fee.

This policy also means we have unfortunately got to be prepared to let some of these players go whilst performing well and still in contract so we can take financial advantage of their value. I don't think we are seeing this consistently enough yet.

But learning from previous mistakes is the sign of a maturing business model.

[Mckram]

I’m not too concerned with the method used as long as our transfers reflect that.

There’s no way that signing someone like Johnson for £6m at age 28 is an option under this policy.

We have to rely heavily now on signing players with huge potential (Bielik - although probably looking risky now and had his value written down), Holmes for a low fee or youth players.

I’m happy with that, no time for ridiculous fees on players in their prime. 

[Tamworthram]

6 hours ago, DCFC1388 said:

Thought I would give it its own thread. 

I was pleased to see a breakdown of examples within the report and to me it makes much more sense than the usual 'straight line' policy used at other clubs.

My only concern is that we wont make as much profit on sales as others would using the 'straight line' policy.

 

I think your final paragraph pretty much sums up what I’ve read elsewhere in that the policy adopted by Derby may be beneficial for a certain, short period, over time it all evens itself out and there is no gain in the medium to long term.

[duncanjwitham]

18 minutes ago, Tamworthram said:

I think your final paragraph pretty much sums up what I’ve read elsewhere in that the policy adopted by Derby may be beneficial for a certain, short period, over time it all evens itself out and there is no gain in the medium to long term.

You're technically correct, in that there's no net change in the long term. Ultimately the players value will be amortised away if he leaves for free.  What it does (from my limited understanding) is smooth out the financial implications of signing a player, assuming that we can sell them on for something reasonable towards the end of their contract.  Obviously that's a big assumption.  If you buy a player for £5m on a 5 year deal, then sell them for £5m after 4 years, under the old system you'd lose £1m a year, then gain £4m in year 4.  That's biggish losses and an even bigger gain.  Under our system, you'd lose maybe £100k a year, then gain £400k in year 4, which is much more manageable.  Our system makes it much easier to fit in with the idea of the FFP rolling 3-year allowable-loss windows.  The only problem is the big bear-trap that's waiting at the end of year 5, where you suddenly lose almost £5m in one go, if you're not careful.

[RoyMac5]

25 minutes ago, Mckram said:

There’s no way that signing someone like Johnson for £6m at age 28 is an option under this policy.

That surely depends on how much the players value changes? You are supposing that we haven't bought Messi on the cheap to sell after a couple of seasons at a similar value.

The point about any of this is 'buy players that fit what the club needs'. Preferably buy players at 'good value' rather than over paying and paying too high wages. And do it within the Clubs budget.

Edited August 27, 2020 by RoyMac5

[duncanjwitham]

25 minutes ago, Mckram said:

There’s no way that signing someone like Johnson for £6m at age 28 is an option under this policy.

But this policy won't really come into play for older players. If we think the player is likely to leave for a free, then they straight-line amortise down to 0 over their contract, like players at other clubs do.  Nothing has changed here with our new policy.  Admittedly, Johnson is probably borderline at age 28 (compared to say Davies or Huddlestone at ~32), but we're supposedly setting different ERVs for different players, so we could have easily used something like £1-2m for Johnson.

Obviously there are other concerns at paying £6m for a 28 year old outside of amortisation.

[DCFC1388]

19 minutes ago, duncanjwitham said:

You're technically correct, in that there's no net change in the long term. Ultimately the players value will be amortised away if he leaves for free.  What it does (from my limited understanding) is smooth out the financial implications of signing a player, assuming that we can sell them on for something reasonable towards the end of their contract.  Obviously that's a big assumption.  If you buy a player for £5m on a 5 year deal, then sell them for £5m after 4 years, under the old system you'd lose £1m a year, then gain £4m in year 4.  That's biggish losses and an even bigger gain.  Under our system, you'd lose maybe £100k a year, then gain £400k in year 4, which is much more manageable.  Our system makes it much easier to fit in with the idea of the FFP rolling 3-year allowable-loss windows.  The only problem is the big bear-trap that's waiting at the end of year 5, where you suddenly lose almost £5m in one go, if you're not careful.

Explains why we offered the likes of Johnson & Butterfield new deals so that we could spread the final years costs across an extra year

[The Scarlet Pimpernel]

I think I read that we re-evaluate our players worth every 6 months. This seems entirely sensible to me and actually reflects the reality of club assets.

[DCFC1388]

I wonder now that this is approved and out in the open if any other club will adopt this policy. I reckon Middlesbrough n Gibson will be one of the first to look to do it!

[The Scarlet Pimpernel]

8 minutes ago, DCFC1388 said:

I wonder now that this is approved and out in the open if any other club will adopt this policy. I reckon Middlesbrough n Gibson will be one of the first to look to do it!

I also assume other clubs are now free to sell their assets (stadiums etc) in a similar manner to ourselves if they so desire?

[RadioactiveWaste]

6 minutes ago, DCFC1388 said:

I wonder now that this is approved and out in the open if any other club will adopt this policy. I reckon Middlesbrough n Gibson will be one of the first to look to do it!

I certainly think other clubs are going to move to this method and point to the tribunal ruling as precedence its accepted. To be honest, it is probably concerns about efl compliance that kept any other clubs from doing it. 

And you just know some club will adopt it, not be very clever about how they do it, try to fiddle something and end up being charged. 

 

[RadioactiveWaste]

1 minute ago, The Scarlet Pimpernel said:

I also assume other clubs are now free to sell their assets (stadiums etc) in a similar manner to ourselves if they so desire?

I think there was talk of it not being allowed in future for P&S but I don't know where we stand. 

And provided valuation is proper, and accounted for in right year (ahem, Wednesday) then yes. 

[duncanjwitham]

4 minutes ago, The Scarlet Pimpernel said:

I also assume other clubs are now free to sell their assets (stadiums etc) in a similar manner to ourselves if they so desire?

That was never in doubt, the rules (post 2017-ish) explicitly allow it.  We weren't charged for the actual stadium sale at all, and neither were Sheffield Wednesday. The only issues were the valuation (us) and the timing of the sale (Sheff Wed).

[The Scarlet Pimpernel]

1 minute ago, duncanjwitham said:

That was never in doubt, the rules (post 2017-ish) explicitly allow it.  We weren't charged for the actual stadium sale at all, and neither were Sheffield Wednesday. The only issues were the valuation (us) and the timing of the sale (Sheff Wed).

Thank you.

[Ghost of Clough]

1 hour ago, angieram said:

I think we might have adopted the current amortisation policy as a response to the overspending.

However, providing it is shared with and understood by those responsible for recruitment within the club, it allows us to reset our recruitment goals to focus on players we can either develop to keep that residual value or not pay too much for in the first place. Recent signings do seem to be starting to use these principles.

Of course, the Academy is the ultimate example of this policy in action - growing your own is the most cost effective way to run a club when you take into account the value the player produces in terms of product for the club as well as any transfer fee.

This policy also means we have unfortunately got to be prepared to let some of these players go whilst performing well and still in contract so we can take financial advantage of their value. I don't think we are seeing this consistently enough yet.

But learning from previous mistakes is the sign of a maturing business model.

Close, but I think we adopted this policy to enable us to spend as much as we did. We started using this policy the same year we splashed the cash

12 minutes ago, RadioactiveWaste said:

I think there was talk of it not being allowed in future for P&S but I don't know where we stand. 

And provided valuation is proper, and accounted for in right year (ahem, Wednesday) then yes. 

A proper method of valuing stadium has now been set, which will be difficult to argue out of. A value per seat is set based on standard of stadium is used to attain new build cost. £2500 being basic, £3500 being state of the art, with PPS being above average. This is then revised down based on depreciation.
Of course, this doesn't apply to Mr Messenger or Gibson's crew.

[Ellafella]

8 hours ago, DCFC1388 said:

Thought I would give it its own thread. 

I was pleased to see a breakdown of examples within the report and to me it makes much more sense than the usual 'straight line' policy used at other clubs.

My only concern is that we wont make as much profit on sales as others would using the 'straight line' policy.

 

What are your thoughts on the pedestrianisation of Norwich City Centre? ?

[DCFC1388]

1 minute ago, Ellafella said:

What are your thoughts on the pedestrianisation of Norwich City Centre? ?

Couldnt care less ?