…and tell me more about amortisation…

You may have read this blog recently on Arsenal’s financial position. Lots of people did, but there is no facility on the blog for responses, so what do you do if you disagree with anything? Write your own blog post, I guess.

The Arsenal Vision blog explained in a lot of detail the effect of various accounting items on Arsenal’s figures, notably player trading and wages, and how these things are affecting Arsenal’s ability to compete for players now. Overall the post makes many good points and the conclusions are broadly right – poor spending decisions and poor planning have caused a legacy problem the current coach and executive team have to deal with.

Having said that, I think there are a few issues with some points. And as I can’t comment on the Arsenal Vision site, I’ve had to put it here. Direct quotes from the Arsenal Vision blog are in blue.

“To comply with Financial Fair Play clubs must break even or better on a rolling three-year aggregate.”
Well, yes and no. The rules actually say clubs can include up to five years to balance profits and losses, but in order to avoid sanction they need to be able to satisfy Uefa with their projected budgets that they’ll return to governance. So Arsenal can’t make wild assumptions about doubling ticket revenue or earning £100m from reaching the Champions League final in 2021. Clubs submit their budgets and Uefa decide.

“As of May 2018, Arsenal still had about 195m in “free cash.” We have repeatedly heard from management that money generated by the club is free for investment into the squad.”
“Free cash” is taken to mean cash that is not specifically set aside for debt repayments that are due imminently. But this sum is at a moment in time, specifically the 31^st of May. It’s true that the cash pile was at a record high on 31 May 2018, but:

• Arsenal’s income is not like someone receiving a regular monthly salary, the income varies wildly month by month, and very little comes in during the summer so a large chunk of working capital is needed
• There were players bought in summer 2018, and payments made for them, even if not full price up front, so that needs to be knocked off
• There were still payments to be made on previous purchases, and the total was higher than Arsenal were owed on sales

For lots of reasons “free cash” is not all available to spend on players.

“In 18/19 the club will still be amortizing the deals for Auba, Laca, Ozil, etc. from 17/18, while the revenue from Theo, Giroud, etc, all was booked in 17/18.”
This is true, but when the revenue was booked isn’t relevant to amortisation.

“Further, the club essentially sold no one in 18/19 but bought new players (Leno, Torreira, etc.) spending about 75m.”
I make it about £68m spending and sales income of about £8m, but okay, still bought a lot more than sold. However, other players with some book value and therefore some amortisation disappeared off the payroll and the books at the same time, notably Mertesacker, Cazorla and Perez.

“That expense will also be amortized in 18/19, 19/20 and beyond at about 15-20m/yr. Therefore, the club likely will see a jump in amortization expense that I estimate to be as much as 35m more than in 17/18.”
I’m not sure why the increase in amortisation of £15m-£20m a year stated in the first sentence jumps to £35m in the second sentence.
In 2018-19 the net increase in the value used for amortisation was only about £25m, so in fact amortisation will only go up about £5m from May 2018 to May 2019 (year one of the extra £25m being spread over five years). That’s a significantly different amount.

“I keep staff and other wage costs the same [between 2018 and 2019].”
Several factors push wages up or down, but in 2017-18 £17m was paid to Arsène and his departed staff. There would have to be significant new contracts for the wages not to fall as at May 2019.

“In 18/19 FFP revenues will likely be the similar to 17/18. Therefore, in 18/19, Arsenal will likely see a huge jump in expenses due to the signings of 17-19 along with the stall in revenue due to no Champions League. This will culminate in a huge P&L loss for 18/19 which I estimate could be about 92 million.”
There will be a loss, and most of the figures provided are definitely in the right ballpark, but the amortisation calculation throws the total off, so the loss will more likely be in the region of £55m.

“But what about 2019/20 when the club has additional revenue from Adidas (30m/yr more than Puma) and Emirates (10m/yr more than before)? The club is also trimming its wage bill significantly with the departures at least of Cech, Ramsey, Leichsteiner (sic), Wellbeck (sic), Jenko, etc. so at least 20-30m in reduced annual wages and even further reduction in amortization costs. With these considerations, I project that Arsenal will reduce wage and amortization expenses by about 50M next year not including any signings or contract extensions.”
Again this lumps wages (a cash cost) in with amortisation (an accounting cost). Amortisation is not an expense that affects cash, but wages are. Wages are real money paid (mostly) to players.
It’s true that some wage costs are disappearing off the payroll and the books in 2019-20, as they do every year (Cech, Ramsey, Welbeck, Lichtsteiner all going in this case), but wages will still be in the same ballpark overall. Some replacements will have to be signed and paid similar wages, and others promoted into the first team squad will get rises, leaving the overall position in 2020 likely to be similar to 2019.
As for amortisation, to reduce it by £20m in a year implies losing players who came into the club with a value of £100m (five years amortisation at £20m) and gaining no one to replace them. That seems highly unlikely. But just as amortisation won’t jump by £35m in 2018-19, it won’t fall by £20m in 2019-20 either. In fact it’s likely to be fairly static at about £95m in both 2019 and 2020.

“Since there is no Champions League football for 19/20, even with the new kit deals and trimming the fat a little, I project Arsenal will likely still see a small net loss on the season of 19/20 of around 2m (assuming no player trading).”
This assumes a big drop in wages, but I can’t see that happening, so the loss posted in 2020 is more likely to be around the £25m mark (again without the effect of any player trading).

“The problem with respect to FFP is that the very profitable year of 16/17 (+43m) now drops out of the FFP calculation for the 20/21 season.”
Yes, but the rules allow for ‘year 4’ and ‘year 5’ surpluses to be included to offset any three-year losses from 2018 onwards, so it’s not quite as bad as it appears. Admittedly it’s not a great situation, so Arsenal may decide not to boost salaries as much as they might like to, or potentially they’ll try to take profits on players that can be sold (selling for financial reasons rather than football reasons).

“Without doing “something” positive in 19/20 Arsenal will be about 30m behind the FFP target of break-even over the three-year window from 2017-20 and could face FFP sanctions for the season of 2020/21.”
“Assuming my projections to be somewhat accurate, we know the club needs to offset FFP losses of 30m with player trading in 19/20 to avoid FFP sanctions for 20/21.”
“The profitable years of 16-18 will be dropping out of the three-year FFP window leaving only the losses. These losses will have to compensated by profits in 2019/20.”
Sanctions are a possibility, but Arsenal would seek to demonstrate budgets that would bring them back into governance within the overall five years permitted.

“Maybe they just assumed the “well run” club of Arsenal didn’t need to be too concerned with FFP.”
Arsenal are fully aware of all the FFP rules and implications, 100 per cent guaranteed.

Having said all that, it is true that without CL football for three years in a row, Arsenal have become cash-strapped, have debt obligations to meet and need to be much more concerned about FFP (unless the owner does something like an injection of equity capital, which is allowed and which rival clubs have done). Their rivals mostly have much more free cash flow to invest in transfers and salaries and arguably have stronger squads now, making it a struggle to narrow the gap. Much as we deride the ‘fourth place trophy’, thanks to Uefa’s pandering to the ‘elite’ clubs with an ever-bigger share of the pot, Champions League qualification is more important than ever. When you think that one different result at the end of 2018-19 could have swung it – say scoring a penalty in the 91st minute against Spurs – you can only rue what might have been.

Twitter: @P_h_i_1