2014/15 accounts released - £10.7m profit

[Prestwich_Blue]

Awesome mate, thanks. Technically then, the more we structure contracts and purchases to include bonus payments to either player or club the easier it is for us in accounting towards FFP breakeven? Or does the total contingency liability still fall under our accounting process for FFP? Ie, using your Sterling example, if we put him in the books as £44m and a increase our liability by £5m does that mean for accounting purposes we've actually spent less this year on transfers than we have in reality (should of course we have to pay the bonus in future years)?

That's right. The structuring of contracts to include more conditional bonus related elements helps us with accounting for FFP as it keeps our expenses closely related to our success.

As an example, let's say we have a guaranteed element of £70k a week and a bonus related element equivalent to £50k a week, instead of a guaranteed element of £100k a week and £20k which is bonus related. If we win everything then there's no difference but if we win nothing we save £30k a week, as we're only paying out £70k instead of £100k. If you multiply that by 20 players over a full year, that's over £30m difference to the bottom line.

That also applies to transfers as well so the more we defer, the less that goes through our books (although we write the transfer off over the term of that contract). That's why I'd assumed that, for reasons of prudence, we'd book the Sterling contract at £49m and amortise it at £10m a year, then adjust when we sell or renogotiate his contract. But it seems we put it through at £44m, amortising at £9m a year, and if we pay the extra £5m (or part of it), I think that goes though as one single payment.

 

[Prestwich_Blue]

Forgive me if this point has already been made but I don't remember reading anywhere in the press that the Rags had made a loss of £4 mill last FY and that their gross debt had climbed from £342 to £411 million.

It was about a month ago & well covered to be fair.

 

[Paul_Powers_Tash]

It was about a month ago & well covered to be fair.

It must have been when i was away. Damn it, I was looking for even more Media Bias against us to get worked up about.

 

[Gareth Barry Conlon]

In reality there will be a corresponding 'contingent asset' which may cover the bonuses, but potential prize money doesn't meet requirements for disclosure so won't be included in the accounts.

Don’t want to pick holes but for the sake of clarity there is no such thing as a contingent asset. Assets have to be represented in the books at fair value. Sterling will go in the books as a £49m asset, on the liabilities side of the balance sheet cash is reduced by £44m and the contingent liability forms the balancing figure of £5m. Net movement on the bottom line is Nil.

If we have to pay out the extra £5m, cash would go down by £5m and the removal of the £5m contingent liability would be the balancing figure, it would mean there is no change to the bottom line if we pay out in future. The effect is that the full cost of the acquisition is factored into the accounts on day 1. There is nothing unusual about this, its standard stuff.

 

[Prestwich_Blue]

Don’t want to pick holes but for the sake of clarity there is no such thing as a contingent asset. Assets have to be represented in the books at fair value. Sterling will go in the books as a £49m asset, on the liabilities side of the balance sheet cash is reduced by £44m and the contingent liability forms the balancing figure of £5m. Net movement on the bottom line is Nil.

If we have to pay out the extra £5m, cash would go down by £5m and the removal of the £5m contingent liability would be the balancing figure, it would mean there is no change to the bottom line if we pay out in future. The effect is that the full cost of the acquisition is factored into the accounts on day 1. There is nothing unusual about this, its standard stuff.

I don't want to pick holes either but I don't agree with you about Sterling. If we've paid £44m then that's what he goes on the books as. Otherwise we would have recorded a contingent asset and would be over-amortising his contract.

The note about contingent liabilities clearly says "Additional transfer fees, signing on fees and loyalty bonuses of £112,918,000 (2014: £100,563,000) that will become payable upon the achievement of certain conditions contained within player and transfer contracts if they are still in the service of the Club on specific future dates are accounted for in the year in which they fall due for payment.

As I said earlier, originally I thought the same as you but was told that was incorrect and that we'd only capitalise the amount we paid (or were contracted to pay if we were paying in instalments). There is no actual figure in the accounts themsleves for contingent liabilities (apart from in the notes) and I don't believe there's anything in creditors, apart from any payments that had fallen due during the financial year but hadn't actually been paid.

 

[Gareth Barry Conlon]

We will have to agree to differ. If you include the add-ons as contingent liabilities then you have to have a balancing figure on the asset side i.e. reflect the full value. It’s basic double entry, assets and liabilities have to balance on day 1. You would amortise the full amount over the contract but you would also adjust the contingent figure as well so the additional cost of amortisation is off set by reducing the contingent liability as and when the various elements fall away (if they fall away).

 

[Prestwich_Blue]

We will have to agree to differ. If you include the add-ons as contingent liabilities then you have to have a balancing figure on the asset side i.e. reflect the full value. It’s basic double entry, assets and liabilities have to balance on day 1. You would amortise the full amount over the contract but you would also adjust the contingent figure as well so the additional cost of amortisation is off set by reducing the contingent liability as and when the various elements fall away (if they fall away).

It entirely depends on the context of the contingency and this would be classed by GAAP as a "medium possibility" or "reasonably possible", where either there's a possibility but not a high-probability that it will be paid in full.

So if part of the additional fee is based him making 30 appearances this season, you'd probably record that part of the fee in the accounts as there's a high likelihood (i.e. >50%) he'll meet that condition and you would also declare it in the notes.

But if one condition is winning the CL (which it is in his case) then there is no requirement to put that part in the books but just to disclose it in a separate note (along with other contingent liabilities).

 

[Chris in London]

On the bright side, if you go on any Arsenal forum, every thread looks a bit like this one.

 

[goalmole]

Forgive me if this point has already been made but I don't remember reading anywhere in the press that the Rags had made a loss of £4 mill last FY and that their gross debt had climbed from £342 to £411 million.

It was about a month ago & well covered to be fair.

I'd missed it too. But it's great news. Cheered me up as much as our £11mill profit.

 

[Gareth Barry Conlon]

Fascinating read. All very positive except one thing stood out for me. £113m for contingent liabilities... @Prestwich_Blue can you shine a light on these? The article suggests they are bonus payments and the likes to, I'm presuming, other clubs should our players hit certain achievements.

By the way isn't this article a prime example of when it should have its own thread? It really does get lost in these collated ones.

It entirely depends on the context of the contingency and this would be classed by GAAP as a "medium possibility" or "reasonably possible", where either there's a possibility but not a high-probability that it will be paid in full.

So if part of the additional fee is based him making 30 appearances this season, you'd probably record that part of the fee in the accounts as there's a high likelihood (i.e. >50%) he'll meet that condition and you would also declare it in the notes.

But if one condition is winning the CL (which it is in his case) then there is no requirement to put that part in the books but just to disclose it in a separate note (along with other contingent liabilities).

Soz if I have got the wrong end of the stick but I was assuming the £113m above must cover some element of transfer fees. I do agree that directors can make a judgement about what liabilities need to be included when it comes to contingent liabilities / provisions etc.