West London is known to be the more flashy, extravagant, and luxurious part of the capital. So, the Chelsea owners decided to make it their identity by fanatically spending an excess of £530 million across their first summer and winter transfer windows in charge.
Fans, and possibly other football clubs, have been unnerved by Chelsea's aggressive transfer policy and have since raised concerns regarding the fairness of the west Londoner's dealings.
This article will seek to explain the accounting reasons behind Chelsea's willingness to pay exorbitant transfer fees, provide unusually long-term contracts, and how they have still abided by UEFA's Financial Fair Play (FFP) regulations.
Before explaining the Chelsea owners' possible justification for their costly purchases, let us explore the latest changes to the FFP rule.
The latest regulations by UEFA have outlined three measures: solvency, stability, and cost control.
The solvency rule stipulates that any club with outstanding liabilities to their players, other clubs, leagues, or tax authorities will not be able to compete in any competitions conducted by UEFA.
A club adheres to 'stability' if their earnings (relevant income less relevant expenses) for three consecutive reporting periods have not exceeded a deficit of 60 million euros. However, clubs with "good financial health" may be allowed concession for up to 90 million euros.
But the regulation that Chelsea would be most worried about is the "squad cost control" rule. It prescribes that clubs can only spend up to 70 percent of their gross revenue (including profits from player sales) on the wages of players, coaches (excluding the non-playing staff), transfers (refers to the player amortization expense - which will be clarified later), and agent fees.
(UEFA's latest FFP regulations intend to promote better financial health and sustainability among football clubs)
The plan Chelsea's new American owners have formulated is the use of unusual long-term contracts to reduce the amortization expense by spreading them across a prolonged period. Let us explain.
Investopedia defines amortization as "an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time". Put simply - accounting principles do not allow a single lump sum purchase expense for an intangible asset (football players). Instead, that payment is spread across the length of the contract period. Therefore, lengthier contracts will have lower amortization costs for the same transfer fees.
To provide more clarity, let us take the example of Wesley Fofana's transfer from Leicester City last summer. According to Sky Sports, Chelsea purchased the French center-back for £70 million (excluding add-ons) for a seven-year contract.
According to principles of amortization - Fofana's value will depreciate at a rate of £10 million per annum. But if he had been subject to a five-year contract, that value would have been £14 million per annum. Therefore, by spreading the payments over a lengthier period - Chelsea's amortization expenses per year are lower than they would be otherwise.
Going back to Chelsea's position on the new "squad cost control" regulation - the club will have to ensure that players' and coaches' salaries, transfer costs, and agents' fees do not exceed the 70% threshold of the club's revenues.
But the clubs are not expected to reach that level immediately as they have a three-year buffer period where the spending cap will gradually diminish from 100% to 90%, 80%, and finally 70% starting next year.
So, the owners do not have a sudden problem, but they have to prepare themselves for a not-so-distant financial hurdle.
Todd Boehly, Behdad Eghbali, and co. have astutely maneuvered in the industry to thoroughly exploit a loophole that many clubs have experimented with but not committed to. Those who missed out on that boat have been left irritated and are reportedly requesting UEFA to put a stop to Chelsea's clever tactic.
But by the time UEFA get around to introducing a new regulation regarding a limit to the length of a contract - Chelsea would have already completed a large portion of the business they intended to accomplish.
And with the colossal amount of financial capital and resources at the disposal of these wealthy owners - do not be surprised if they open a new loophole as the previous one closes.
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