The BackPage Weekly | The Transfer Market, Chelsea, UEFA Regs and Amortisation

The January transfer window closed on Tuesday with Premier League clubs spending a record breaking £815m. The most notable contributor has been Chelsea who spent £288m (more than La Liga, Serie A, the Bundesliga and Ligue 1 combined).

A free-spending Chelsea is nothing new but what is novel is the approach taken by Chelsea’s co-owner Todd Boehly to the length of contracts being handed out. Whilst atypical in football, Boehly’s approach is more commonplace in US sports and his part-ownership of the LA Dodgers is likely to have influenced the approach Chelsea have taken.

No doubt there were several factors behind Chelsea’s approach, but the accounting benefit achieved by amortising the costs over the duration of the long-term deals (and thus the associated cost control upsides) are likely to have been central. The approach has led to much media coverage, but also the irk of rival clubs and it has led to UEFA confirming it will be amending its cost control rules to limit the length of permitted amortisation to 5 years.

But why is amortisation important and how does it work?

Under FIFA’s Regulations on the Status and Transfer of Player’s (Article 18), player contracts are limited to 5 years. However, if the national law of a relevant territory allows for longer durations, the national laws will prevail and be determinative. Under UK employment law there is no limit on contract duration. So, Chelsea’s approach may well be compliant with FIFA’s regulations and likewise, until now at least, there has been no limit on the period for which transfer costs can be amortised.

By spreading the transfer costs over 8 (or more) years, Chelsea have been able to spend significantly yet remain within the parameters of both the Premier League’s and UEFA’s cost control rules on permitted spend. By way of example, Mykhailo Mudryk has an 8½ year contract (a new record for the Premier League) where he is reportedly paid £97,000-a-week. The total initial fee of £62m (excluding add-ons) paid to Shakhtar is, however, not recognised in full in Chelsea’s 2022/23 accounts. Instead, and as Swiss Ramble has detailed (here), a pro-rata £4m liability is placed on this year’s accounts with a £7.25m liability for subsequent years of the contract, allowing Chelsea to spread the cost of the transfer (from an accounting perspective) in the same way as they do his £5m per season wages. By contrast, if Mudryk’s move came in summer 2023 when amortisation will be restricted to 5 years, the annual liability for cost control purposes would be £12.4m. Chelsea have therefore taken advantage of a significant reduction on the recognised cost for each full year of Mudryk’s contract by moving for him in January.

Chelsea is likely to offload some of its squad during the next window. However, unlike the accounting treatment for transfers in, the profits made from transfers out will be booked immediately thereby further positively impacting the club’s accounts.

The outcome of deploying this strategy is that Chelsea have secured prodigious talent with contract security, have protected their accounts from reflecting the real term spend, and (given the £209m generated from sales over the last 2 years) have done so while remaining within the cost control regulations.

This approach is, of course, not without risk notably that their long-term signings don’t perform as expected. However, Chelsea is clearly betting on their signings coming good and with UEFA confirming it will close this amortisation loophole by the next transfer window, other clubs will not (for now at least) be able to follow suit.

It will be interesting to see what impact, if any, Chelsea’s approach this window has on the transfer market and player valuations when the window reopens in the summer. UEFA’s rules on amortisation may be more restricted, but the summer will also be the last transfer window before FIFA’s new agents regulations (FFAR) take effect, and it wouldn’t be surprising if this becomes a short-term driver for further significant player movement.