The Business of Soccer: How do transfers impact Financial Fair Play?
and what Derby County did to break the rules
This season Derby County lost out on safety by 7 points. If it hadn’t been for a pesky 21 point deduction due to financial issues they would have comfortably been back in the championship this season. They had 12 points deducted for entering administration, and a further 9 points for something not many people know about which ultimately lead to their demise their sin? Amortisation. So let’s learn more about what dropped Derby into league 1 and debunk one of the biggest myths of how transfers impact financial fair play.
Derby County’s wacky accounting got them fined, and the fateful point deduction that lead to their relegation this season. Amortisation seems like a big and complicated concept but I promise you it’s not and I’ll guide you through it today.
To understand how Derby County broke the rules let us first talk about what amortisation is, why it matters in financial fair play, and how it lead to Derby’s demise this season.
What is amortisation?
Let’s use a real life example that’s fresh on everyone’s mind. Manchester city buys Erling Haaland for £50m and puts him on a 5 year contract. Most fans would say Manchester city needs to show a £50m loss for the fee paid, but that’s actually not the case. Amortisation allows you to show the loss of a players contract value over the lifetime of his or her contract. Erling Haaland purchased for £50 over 5 years will mean Manchester city has to show a loss of £10m each year. NOT a £50m loss at the time of purchase. And this is why clubs can buy many expensive players in the same transfer window.
What did Derby do that was so bad to get a 9 point deduction for incorrect amortisation practices?
Tom Lawrence was signed to Derby for £5m and a 5 year contract. Using the straight line amortisation rule they would have to show a £1m loss each season. What Derby County did however was made up their own value of the player and their contract. If they stated Tom Lawrence’s contract to be worth 4.5m in year 1 then they would only need to show a £500,000 loss instead of 1m.
Profit and sustainability rules within financial fair play allows for at most a £13m loss each season for teams in the English Championship. If Derby continued this practice with 10 players or the whole squad they could conceivably save millions in their balance sheet each year while every other team was playing by the rules. This unfair advantage is the exact reason for the 9 point deduction. And this is just skimming the surface of wacky accounting practices at Derby. Their owner created a shell company, sold the grounds at a ridiculous profit but we can cover that another day.
There is a great book called The Numbers Game by Chris Anderson and David Sally that looks to demystify big questions in football using statistics. One chapter specifically is on the top factors of team performance, the first is the team on the field, the second factor is the coach, and the third is the team’s accountant…It looks like this season Wayne Rooney and the Derby County squad just weren’t able to outplay their accountant.