Don’t Fall For The Story That Value Of Liverpool Players Has Plummeted By £200M

The planned opening date of the summer transfer window is only a couple of months away, but confusion reigns. With seasons being extended because of the COVID-19 crisis, the mechanics are far from clear.

The status of free agents come June 30, the length of window, and whether teams will be able to sign and play new players during any extension to the 2019/20 season are just some of the issues to be sorted out.

The one thing saner voices seem to agree on its that spending in this transfer window is going to be down substantially from the €7.7 billion spent worldwide in the summer of 2019.

At the end of March, the CIES Football Observatory predicted that if the big-5 league seasons were cancelled the transfer values of their players would drop by 28%.

The biggest losers in percentage terms would be Marseille (-38%), and Inter (-36%). When it came to measuring by money Manchester City stood to “lose” €412 million; Liverpool €353 million; Barcelona €366 million; Manchester United €293 million; Inter €276 million; Real Madrid €350 million; PSG €302 million; Bayern €267 million; Spurs €227 million; Chelsea €251 million. That’s just 10 teams and supposedly, in combination, they will experience an astronomical drop of €3 billion in players value if they are unable to complete their seasons.

Last week TransferMarkt.com got into the action when it announced that it was cutting €9.22 billion from its global player valuation model. The reduction came from cutting 20% across the board with the exception of players born in 1998 who were only reduced by 10%. 

According to Transfer Markt the value of Premier League players is down €1.8 billion with Manchester City down by €250 million and Liverpool by €227 million.

Not surprisingly the numbers offered up by CIES and Transfer Markt differ, but both agree that clubs have shed, or are about to shed, a massive amount of value.

Incurring these sort of write-offs is surely going to hammer the clubs’ finances.

Except it isn’t.

When it comes to valuing individual players there is some sense to the exercise; when the players are grouped into a squad value and that’s used as a measuring stick, it is a nonsense.

Squad value assumes that a team would generate X money if its players were all sold at the point in time. But that isn’t how it works – it a false premise.

Teams simply don’t liquidate their squads at the drop of a hat and so squad valuation numbers have no connection to real life.

When it comes to valuing the squad all that matters is what’s recorded in each club’s financial statements. A look at a selection of balance sheets shows that the transfer market would have to drop by the same again and more before teams would have to take an impairment charge against their intangible assets i.e. their players.

So why the big difference between the balance sheet values and the valuation sites?

Only when a player is sold or released can a club properly and accurately record the transaction and any resulting profit or loss.

Accounting rules only permit teams to book the transfer fee and other related costs, e.g. agency fees, paid to acquire players and to then deduct amortization costs based on the length of contracts. The net amount is recorded as an asset on the balance sheet.

This also means is that players brought through the academy system have zero value on a team’s balance sheet. Rather than teams suffering the vagaries of market swings and having to post large impairment charges or gains, balance sheets are based on a very conservative approach and it’s just as well.

A plunging transfer market will impact profit and loss statements in 2020/21, but the financial hit will be due to individual transfer deals rather than a dip in the value of squads.

More on how a deflationary transfer market will hit some teams more than others in the next post.