The walls of Aston Villa Central are still creaking under the weight of what turned out to be quite a busy day here yesterday. There were no less than three posts, none of them particularly brief and all of them focused on financial matters. So, plenty to make the eyes glaze over of most football fans, myself included.

I need to follow up on the third post (this one effectively replaces it), so here’s a quick recap of the day:-

• Firstly, I was exploring the Deloitte 2010 Football Money League Report which ranks and reports on Europe’s top 20 earning football clubs every year.  I discovered that Aston Villa are apparently catching the big hitters up and this year were in 25th place.
• We’ve been waiting for Aston Villa’s annual report to be submitted for the last few weeks, but with the revenue figure I discovered in the Deloitte report I was able to follow up on a post from last summer disputing the claim that there’s any kind of comparison at all between Doug Ellis and Randy Lerner when it comes to money spent on bringing new players to the club.
• Finally, I stumbled on an article from The Telegraph which discusses the amount of money that Randy has invested in Villa and cites the most recent accounts.  It turns out that they were filed last weekend so I had to put together a quick post on it, but as I was writing there were several things about the The Telegraph’s version of the accounts that didn’t make sense.

A reader contacted me late last night to offer to let me have copies of the accounts for both Reform Acquisitions (Randy’s Parent Group) and Aston Villa FC, which was fantastic as I’ve struggled to get hands on them myself. So, thank you very much for your help!

Credentials

The finance side of football has never been more important than it is right now. Pompey have recently achieved the dubious honour of becoming the first Premiership club to go into administration. I’ve frequently mentioned the unhealthy situations at Liverpool and Man Utd, plus we have the vulgarity of the manner in which Chelsea and, more recently, Man City are going about their business. If we’re talking about the top 4 clubs, only Arsenal deserve credit when it comes to the money side.

It’s absolutely right that fans take an interest lest they share some of the blame if the worst comes to the worst as seems to be happening on the south coast right now. I’m not well informed enough about what’s been going on in Portsmouth so I wouldn’t dream of pointing the finger at anyone, but, seriously, who thought the way they were operating was sustainable? If it’s true that Sol Campbell was being paid £100k a week, what did they think was going to happen?

Everyone has the right to voice an opinion and there will be no shortage on blogs such as this one, forums, newspapers, magazines TV and radio all giving their twopenneth. That means that we either have a country populated with an enormously high percentage of accountants, or there are an awful lot of people running their mouths on something they don’t understand.

So what about me, am I an accountant? Er, nope! I’ll happily put my hands up and tell you that I’ve very little experience or knowledge of corporate level accounts like the Aston Villa annual report I’m looking at right now. But I’m not a complete nub nub either. Without wanting to bore you with my life story or CV; I’ve worked within a corporate environment compiling weekly profit and loss accounts, so I’m not unfamiliar with the meaning and usage of terms such as ‘amortization’ and ‘depreciation’, but when you start talking about ‘loan notes’ and whatnot, you’ve gone over my pay grade.

An uncle of mine told me a long time ago that “bullshit baffles brains” and he wasn’t wrong, but Bruce Lee also said that “there’s always someone better than you”. Someone else, probably that Anonymous guy, also said “don’t bullshit a bullshitter”, but now I’m losing my point. My point? Ah, yes; if you’re a bullshitter, you never know when someone who does know what they’re talking about will come along and make you look stupid.

So I won’t bullshit you, don’t let anyone else bullshit you either.

OK, that’s the preamble over, if you’re sitting comfortably, let us begin…

The Telegraph Article

The Telegraph piece throws around some numbers that are contained within the reports, but sometimes their understanding of them seems questionable to say the least. They also wrap the financial element of the article up in a narrative based on assumptions that are flat out wrong.

On some of the main points, they are correct. The group turned over £84.2m, operating costs were £128m, but by the time you mess around with a little interest here, a bit of tax credit there, you end up with a net operating loss for the year of £46.15m. They actually quote the operating loss of £43.7m and later claim that it was £13m more than the previous year. No, the operating loss that year was £13m, not £13m less than £43.7 which would make it £30.7m. Getting a bit mixed up there Telegraph, ain’t ya!!

By the way, by the time you mess around with interest and whatnot with the previous year’s accounts, the net loss was £7.28m which is a figure that might ring a few bells and should be compared with the £46.15 from these most recent accounts. Don’t panic about that though, we’re not on some terrible downward slide.

I’m differentiating between the operating loss and net loss, despite the bottom line looking a few million worse than The Telegraph claims because one of the line items taken into account between the operating and net bottom line is what The Telegraph refers to later as “a profit on transfer dealings”, but that’s not a very good description and gives the wrong impression. I’ll come back to that though.

Wages

The Telegraph claims that “the loss is explained by a rise in player wages to £70.6 million, up from £50.4 million.” Well, there’s £20.2m so it doesn’t explain it fully, but they’re also not being entirely accurate here. Surprised?

The numbers are correct, but we’re not just talking about player wages here. Actually, we’re not just talking wages either, this is the total cost of enumeration to the club. When I used to pull the P&Ls together, I’d account for employee cost to the business at 110% of salaries and wages; the additional 10% being a decent estimate of employers’ national insurance and pension contributions etc.

In this case we’re not exclusively talking about players, we’re talking employees. We’re talking about everyone at the club: The players, the coaches, football management, commercial, marketing, operations, maintenance, administration, projects, even the match day stewards. Everyone. Well, the directors are the exception I believe.

It’s true, the staff costs have risen from £50.4m in 2007/08 to £70.6m in 2008/09 which is a 40% increase, but the full-time employee headcount has increased by 109 people which is 32% increase, so the increase in money isn’t totally out of line. Quite why we have so many new employees isn’t clear though and perhaps an explanation would be useful. The biggest increase comes under the heading of “Players, football management and coaches” where the number of employees has swelled from 86 to 134.

I wouldn’t jump to conclusions about the apparent increase in staff directly related to football matters. At first I assumed that we must have brought in an army of extra coaches, fitness experts, scouts, etc. However, for all I know, the Academy may have been accounted for separately prior to these accounts and this just reflects the absorption of an existing, but separate part of the business. I stress though, that’s me just throwing ideas around, I’ve no idea if that’s the case. If it were, I’d probably expect it have been specifically mentioned in the report.

Profit On Transfer Dealings

I’ll quote this paragraph from The Telegraph as it’s probably the most egregious:-

The purchase of Richard Dunne, James Collins, Stewart Downing, Stephen Warnock and Fabian Delph contributed to the rise in wages. The club still made a profit on transfer dealings however, thanks largely to the £12.5 million sale of Gareth Barry to Manchester City.

It was when I was writing about this article last night and I got to thinking about this section that the penny dropped that The Telegraph might be full of crap. If you’ve already seen that post you know what I’m about to say and if you didn’t, you still might have a good idea.

*knock* *knock* *knock* Hello?? McFly?!?! None of those “transfer dealings” took place during the financial year of 2008/09!! Basically, you’re just making this up, aren’t you??

They are just making it up, the accounts don’t delve into such level of detail I’m afraid. While it’s true that new players will “contribute” to any increase in wage costs, because of the massive salaries players earn it’s natural to jump to the conclusion that the players have caused the the bulk of the increase. If that were the case, let’s see how the wage bill jumps when those players are accounted for in the 2009/10 accounts!!

The “profit on transfer dealings” irks me the most. Like the other players, the Gareth Barry transfer to City isn’t included in these accounts, but it’s more the impression the article creates that we made more from transfer fees coming in from selling players than we paid out buying new players. Perhaps that’s just me, but that isn’t what it means.

If you’re interested, and I alluded to this at the top, the figure that The Telegraph are referring to is called “Profit on disposal of players’ registrations” and appears in the top most summary between operating profit/loss and net profit/loss. This is why i specifically mentioned it above; The Telegraph are in error by quoting a loss for the season, but also then quoting a detail within their article which isn’t included in the loss figure.

If you’re interested further; that same line item from the 2007/08 accounts was £11.8m and in these accounts for 2008/09 it was £2.9m. I think we all know that we didn’t make a combined profit of £14.7m in transfer dealings during the course of those two seasons.

Clearly what’s going on here is a little bit of accounting jiggerypokery. Yes, that’s a technical term.

***Warning – Overtly Technical Content Now Follows***

At the level we fans discuss transfer fees, we couldn’t possibly account for the complexity that’s really going on. We tend to stick to £X spent buying players, £Y gained through selling players so the net spend is £Z. I do the very same thing here all the time and try to keep tabs on the transfers page.

The reality is very different. We’re rarely talking about lump sum payments being made into and out of clubs, it’s more like frequent regular payments, possibly with some kind of balloon payment at the end. Off the top of my head, I believe there’s regulations about the time limit for paying for a player in full which makes sense. You can’t have clubs continually moving players around with nothing more than IOUs to back them up. There’s also things like sell-on clauses to murky the waters further.

Of course, the accountants are not satisfied with that, it’s way too simple. They get their hands on these transactions and then it gets really complicated!

Basically, buying players is referred to as “the acquisition of the registrations of new players” and the money spent an investment. The costs, which include not only the transfer fee payable, but also the associated costs of acquiring the registration (read: agents!), are capitalised and amortized over the term of the respective player’s contract.

Therefore, the profit on the disposal of the players’ registration is calculated by deducting the carrying value of the player and any sale costs from the sales proceeds.

So, that’s cleared that up then, yes?

Simple version – we can make a “profit” because we sell a player at more than his depreciated value on the balance sheet. It’s got nothing to do with the cost of buying new players during the same transfer window and may have little baring on what we paid for that player in the first place, depending how long he’s been an “intangible asset” on the books when he’s sold.

*** Technical Content Ends ***

I was very pleased to see that the actual amount specified in the Aston Villa FC accounts as invested on player acquisitions was £42,726,761 which is close enough to the ~£46m I generally throw around when talking about the net transfer spend in 2008/09. So, you know, basically; nur nur nur nur!!

Loan Notes and Whatnot

I’m going to avoid getting into this area too much before I understand the heady world of corporate finance at this level a bit better. Hopefully, if there are any real, bonafide accountants that have read this far, I haven’t butchered their trade too much and what I’ve written is close enough to reality. If I’ve made you cringe with my ignorance at any point, please let me know so that I can correct the record.

Randy Lerner has put a bunch of cash into Villa through Reform Acquisitions, that much I know. As far as I can see, the loan notes flow into Villa in sums of £10m here, £15m there and are on a 10 year term before they are to be repaid in full.

Now, I remember reading fairly recently that those loan notes charged a very acceptable rate of interest which gets paid to Reform Acquisitions. I haven’t looked deeply enough yet, but I don’t see those payments. The Telegraph claims that they are interest free, but since I’ve spent this time taking them to pieces, it would be intellectually dishonest to now make an appeal to their authority. I don’t know is the short answer.

There is mention of a management fee payable to Reform of £7,652,748, but to date it has not been paid. There was no such fee in 2008.

Debt

Last year, the level of debt was revealed and that became a major issue for certain people. People who I suspect understand these things even less than I do to be honest. Well, if the last reported net debt of £72m caused such fury, I can’t wait to find out what amazing insight we get when the new debt figure of £85m hits the streets.

Wait… what’s that? A debt is a debt you say? ZOMG, that’s amazing!!  You work on Wall Street, right?? 😉

*deep breath* OK, I’m glad there’s some football tomorrow, I’m pretty much done with all this financial mumbo jumbo for a bit!! Next week’s theme will be: “Sub-Prime mortgages and the global economic meltdown”* – don’t miss it!!

* 0% serious!!