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The Zlatan Ibrahimovic Transfer Analysed

Last week Barcelona sold their enigmatic Swedish striker Zlatan Ibrahimovic to Milan in a transfer that was astonishing not only because it came just 12 months after “Ibra” had moved to the Camp Nou, but also because the price was considerably lower than the amount the Catalans had paid to Inter for the mercurial forward. Although his performances in the blaugrana shirt had been a bit hit-and-miss, Ibrahimovic was by no means a complete failure, having scored 21 goals in all competitions, averaging a goal every other game in La Liga, where he helped Barcelona retain their title.

When rumours first started circulating that Ibrahimovic might be for sale, a deal appeared highly unlikely, especially as Barcelona had apparently inserted an extraordinary €200 million buy-out clause in his contract. Ibrahimovic’s agent, the colourful Mino Raiola, hardly encouraged the transfer initially with a series of negative quotes: “It’s 99.99% certain that Zlatan is staying”; “I have spoken with the club and Guardiola doesn’t want to sell him”; and “Guardiola will leave the Camp Nou before Zlatan does”.

But if a week is a long time in politics, it’s an eternity during the transfer window and a few days later Raiola was congratulating Milan’s vice-president Adriano Galliani on his ability to negotiate Barcelona’s price down from €70 million to €24 million. Making Harry Redknapp look like a rank amateur in the dark arts of wheeler dealing, it was little wonder that Raiola described this as “the greatest deal he ever made.”

"Galliani reaching for his wallet"

So the Rossoneri get to take Ibrahimovic on loan for one year with an option to purchase him for just €24 million at the end of the 2010/11 season. Furthermore, this is a so-called free loan, which means that Milan do not pay Barcelona anything for the loan itself, only having to find the cash to pay Ibrahimovic’s (lower) salary during the year of the loan.

During this saga, all sorts of figures have been thrown around, but much of what has been reported is misleading or incorrect, so it’s worth examining this transfer in some detail, in order to understand the different motivations of the interested parties. Put another way, what are the advantages of this deal for Barcelona, Milan and Ibrahimovic himself?

This transaction also highlights many financial issues surrounding transfers that fans do not generally understand that well, such as the profit (or, in this case, loss) made from a transfer, a player’s value in a club’s accounts and amortisation. Not exactly thrill a minute stuff, but unfortunately very important in these times when football has become big business.

"Heads above the rest"

OK, as our old friend Rafa Benitez would no doubt say, let’s try to establish some facts.

First, the price that Barcelona paid Inter for Ibrahimovic last year has been listed as anything between €46-50 million plus the value of Cameroon striker Samuel Eto’o who moved in the opposite direction. Barcelona’s official website listed the price as €46 million plus Eto’o plus the loan of Alex Hleb, but the Belarus midfielder refused to go to Inter, instead opting to return to Stuttgart, which resulted in the Catalans increasing the cash element as compensation. The figure that we will use for our calculations is the one quoted in Inter’s accounts, namely €69.5 million, which comprises €49.5 million cash plus a €20 million valuation for Eto’o, which we shall round up to €70 million to make life simpler.

At this point we need to understand that when the purchase of a player involves a non-cash consideration, such as a player in part-exchange, then the transaction is accounted for using an estimate of the player’s market value. This is obviously open to some manipulation, but not too much, otherwise the value would be questioned by the club’s auditors.

In years gone by, football clubs used to book the entire purchase price as an expense in the year of acquisition, which had the advantage of simplicity, but meant that a club’s profits over a number of years could be “lumpy”. However, since the introduction of IFRS (International Financial Reporting Standards), in particular FRS10 on Goodwill and Intangible Assets, clubs have used the capitalisation and amortisation method to account for player transfers.

"I'm no makeweight"

Unfortunately we now need to get a little technical in order to understand the concept of amortisation, which is how accountants reduce the value of assets over time. In this case, we mean footballers. At the end of a player’s contract, the number crunchers consider that a player has no value, as he is allowed to leave the club on a free transfer, so they write down (or amortise) his value over the length of his contract. In the case of Ibrahimovic. Barcelona bought him for €70 million on a five-year contract, so the annual amortisation was €14 million (€70 million divided by 5).

After one year his net book value in the accounts was €56 million (the original cost of €70 million less €14 million amortisation). After two years, his value would reduce by another €14 million to stand at €42 million. Simples.

There have also been conflicting reports on Ibrahimovic’s salary at Barcelona, but the figure that makes sense to me is €12 million after tax. As he benefited from the Beckham Law, where foreigners were taxed at 24% (instead of a 24-43% range), the club’s gross salary costs would have been around €15 million per annum. This is also consistent with the statement on Barcelona’s website, which referred to savings from the deal of “approximately €60 million”. Given that Ibrahimovic had four years remaining on his contract, that equates to annual salary savings of €15 million.

Actually, that raises an interesting question: if Ibrahimovic had stayed at Barcelona, how much would this have cost the club in total?

Before I give you the answer to that question, I advise you to take a seat. Sitting comfortably? The figure is a jaw dropping €163 million, which is made up of three elements: €70 million to buy the big fella; €75 million in wages (€15 million times five years); and an estimated €19 million in bonus payments. Looking at Barcelona’s accounts, we can see that a very high proportion of their salary costs actually comes from variable compensation, i.e. bonuses paid out for success on the pitch, so I have assumed that this would be 25% of salary (which is possibly on the low side, given the last two seasons).

This perfectly demonstrates the importance of wages in any transfer. Last summer, football pundit Jamie Redknapp said, “You can’t get cheaper than a free transfer”, when discussing Michael Owen’s move to Manchester United, but this is obviously nonsense, as it can get pretty expensive if you’re paying the player involved £100,000 a week. Even when the transfer fee is enormous, as was the case with Ibrahimovic, the salaries (and bonus) still represent more than half the total cost to the club.

"Right sort of dive"

Some might say that part of this cost will be offset by shirt sales, but you need to sell an awful lot of shirts (average profit €12) to make a dent in this. In any case, I would argue that the club would probably have sold a similar amount of shirts if they had bought another world-class forward, but for less money.

In reality, Ibrahimovic has of course been sold after only a year, which has so far cost Barcelona €88 million (purchase price €70 million plus a year’s salary €15 million and bonus €4 million).

To be fair, Ibrahimovic was bought as a direct replacement for Eto’o, so we should probably bring him into the equation and reduce the cost by the €8 million (or so) wages that Barcelona would have paid to the Cameroon striker, meaning that the net cost should be reduced to €80 million.

On the other hand, Barcelona bought David Villa for €40 million this summer, effectively replacing Eto’o after a year’s hiatus with Ibrahimovic, so this should be added, bringing the total cost for the last year to an incredible €120 million.

"Raiola - football agent extraordinaire"

Arguably, the cost is even higher, as the money paid to Inter last year enabled them to buy a whole raft of top quality players, who were pivotal in their Champions League triumph, not least when they eliminated Barcelona in the semi finals. In exchange for Ibrahimovic, Inter got Eto’o and €50 million, which they used to buy Wesley Sneijder (€13.5 million), Diego Milito (€22.5 million), Thiago Motta (€9 million) and Lucio (€6 million).

You can’t really put a price on a victory like that, but Inter received €49 million from UEFA’s central distribution, compared to Barcelona’s €39 million. That’s €10 million more, so our estimate of Barcelona’s total cost for a year of Ibrahimovic’s services has arrived at a whopping great €130 million.

Of course, when Barcelona receive the €24 million from Milan for Ibrahimovic’s sale, this will come down to “only €106 million”, but to lose that much on one deal in one year shows a distinct lack of financial judgment at the very least. To put it more bluntly, it’s staggering incompetence, especially when you consider that the loss is equivalent to more than 25% of Barcelona’s annual turnover.

Let’s focus on the sale for a moment. In real terms, the loss on sale is easy to see: Barcelona bought Ibrahimovic for €70 million and will sell him for €24 million, producing a horrible loss of €46 million. Last year many wise football men said the price paid was ridiculous and it looks even more absurd now.

However, in the wonderful world of accounting, the loss is a moving target, depending on exactly when you sell the player. It is important to realise that in the accounts, the profit from a sale is not the same as the transfer fee, but is actually equal to the sales proceeds less the carrying value in the books.

As we saw earlier, Ibrahimovic’s value in the books falls as time passes with each year’s additional amortisation. So, his value now is €56 million, but in a year’s time it is only €42 million. This means that if Ibrahimovic had been sold now, the loss on sale would have been €32 million (€24 million sales proceeds less €56 million net book value), but next year the loss would be “only” €18 million (€24 million less €42 million).

Aha, you cry, so that’s why Barcelona structured the deal as a loan with the sale delayed until next year - a smaller loss. Lovely jubbly. Creative accounting at its finest.

Not so fast, big boy.

Yes, the pure loss on sale would indeed be €14 million lower, but that ignores the fact that Barcelona still have to book that €14 million as amortisation in the coming year, as the asset remains on their books during the loan. In other words, over two years the accounting loss is exactly the same for Barcelona whether they sell Ibrahimovic now or loan the player and then sell him.

If they transfer him now, they make a straight loss of €32 million on the sale. If they go for a year’s loan and then sale, they will lose €18 million on the sale, but also have to book €14 million amortisation, giving a total loss of, guess what, €32 million.

So why on earth would Barcelona want to structure the deal in this way? I can think of three reasons:

(i) Part of the loss is postponed until the following year, so the year-on-year growth will look better in the 2010/11 accounts, which, let’s not forget, are the first ones published under the new Barcelona president, Sandro Rosell. If Ibrahimovic had been sold now, the loss in the accounts would have been €32 million, compared to €33 million expenses in 2009/10 (amortisation €14 million, salary €15 million, bonus €4 million), leading to “growth” of €1 million.

However, with the sale slipped by 12 months, the only expense this year is €14 million amortisation, giving a “growth” of €19 million (compared to the €33 million expenses). That will do very nicely with Rosell looking for as large profit as possible in order to demonstrate his financial acumen, which was a key part of his election campaign.

(ii) A straight loan would have been too risky. If Ibrahimovic had flopped in Milan, Barcelona would have had to take him back and his value would have further diminished. On top of that, the Beckham Law has now been revoked, so the cost to the club of his salary would need to be increased to cover the higher tax, as his contract has been agreed “netto”. Equally, Ibrahimovic could be a great success, increasing his value, but that would have been too much of a gamble.

(iii) Ibrahimovic remains as an asset on Barcelona’s balance sheet. Probably not that significant a factor in all honesty, but it helps improve the club’s net assets figure (assets less liabilities), which has been under a great deal of scrutiny with all the talk about Barcelona’s indebtedness.

"Shut the door on your way out"

Of course, the argument that Barcelona’s loss would be lower this year might be invalid if a brave auditor decided to ask the club to book an impairment provision against the obvious reduction in the value of the asset. It’s difficult for the club to argue that he’s still worth €42 million in June 2011, when the club has set the price at €24 million the very next month. In that case, they would have to book the full €32 million loss in the 2010/11 accounts.

Enough accounting already. However much you dress it up, it’s still a poor deal. In fact, there’s a case for saying that Barcelona will not even get €24 million, as Milan will not pay the whole fee next year, but over the following three years. Given the time value of money, even in these times of low interest rates, that means it is probably only worth around €23 million, once the payments have been discounted. Furthermore, Barcelona will also continue to pay Raiola his annual 10% commission on Ibrahimovic’s salary (€1.2 million a year for four years), as the player did not unilaterally break his contract.

The reality is that Barcelona backed themselves into a corner. As Milan appeared to be the only game in town, Barcelona had absolutely no leverage during the negotiations. They really should have tried harder to interest other clubs in the player, so that they could encourage a bidding war, especially Manchester City, the one club that has the riches to pay a much higher price, as we saw with Yaya Toure. City’s absence from the negotiating table seems even stranger when you consider Ibra’s connection to their manager, Roberto Mancini, who had bought him when he was at Inter.

"What does Rosell think of the deal?"

In fairness to Barcelona and their new president Rosell, the situation is in some ways reminiscent of the old joke, when an Englishman asks for directions and an Irishman replies, “If I were you, I wouldn’t start from here.” Rosell can also say that it is indeed an expensive mistake, but it’s really Joan Laporta’s expensive mistake, as it was the former president who over-paid.

And there are actually some redeeming aspects to this deal from Barcelona’s viewpoint. From a football perspective, they have offloaded a player who did not neatly fit into the team’s fast, flexible passing game and was not really part of Pep Guardiola’s plans for the future. The relationship with the manager had obviously broken down, so if Ibrahimovic had remained, he might have been an unhappy, disruptive influence in the dressing room. In short, Ibrahimovic had become surplus to requirements.

As Sporting Director Andoni Zubizarreta explained, “Even with the financial loss, this was the best option.” While it might be good to see the football take priority over money, Zubizarreta also pointed that “the total salaries of the squad have gone down by 5%”, so the financial issues have also been taken into consideration, which is hardly surprising given the hits that Barcelona’s accounts have taken in the last few months.

"David Villa - new kid in town"

This was backed-up by vice-president Josep Maria Bartomeu, who claimed, “We’re very pleased with the way things worked out. We’ve saved €60 million and taken in €24 million.” This might well be the truth, but, as we have seen, in no way is it the whole truth. Even if the savings over the next four years are probably higher at €75 million, if you include an estimate for bonuses, the central point remains the same.

Incidentally, a few people were under the impression that the €60 million savings mentioned on Barcelona’s website arose from a combination of the €24 million sale plus three years of salary at €12 million, but Bartomeu’s statement gives the lie to that, as it explicitly mentions the €24 million on top of the savings. In addition, as Ibrahimovic was on a five-year contract, four years of salary costs have been saved, not three (Milan pay his wages from this year).

Barcelona’s savings in the accounts over the next four years will be even higher, as amortisation is also a factor. With the loan arrangement, Barcelona book amortisation next year, meaning three years will be saved. That would produce another €42 million (3 x €14 million) to add to the €75 million cash savings, resulting in a grand total of €117 million coming off the accounts between 2010 and 2014 (though this will obviously be offset by David Villa’s cost).

"The other side of the tracks"

In essence, Barcelona have decided to cut their losses here, observing the economic principle of “sunk costs”, which are costs that have already been incurred in the past and cannot be recovered, so you should move on. No use crying over spilt milk (even if it’s bloody expensive milk).

The other point worth making is that Barcelona have produced the majority of their first-team squad from La Masia, their renowned youth academy, so they can afford to make a few costly blunders in the transfer market. This deal in isolation is dreadful, but the club should probably be judged on its overall recruitment policy, including those players developed in-house.

For Milan, this looks like a fantastic deal. It’s not just that they have negotiated a cut-price €24 million, but they only have to start making payments next year, when their cash flow will be significantly better, since 11 players’ contracts come to an end, reducing the wage bill by around €70 million a year (though they will obviously have to replace some of these players). Much of the transfer fee will be funded by Milan selling Klaas-Jan Huntelaar to Schalke 04 for €14 million and loaning Marco Borriello to Roma for €2 million (with an option to buy for a further €13 million).

"Meet El Presidente"

Milan have bought “un campione”, as Ibrahimovic has brought success wherever he’s been (seven successive league titles for four different clubs in three different leagues). Along with the purchase of Brazilian striker Robinho, he will bring some much-needed flair to a Milan team that has been toiling in Inter’s shadow the past few years. This will help boost president Silvio Berlusconi’s popularity after he had been severely criticised by fans for his lack of spending.

As for Zlatan, he has come out of this affair rather well. He took a 33% pay cut (from €12 million to €8 million) and without this sacrifice, it’s not entirely clear whether the transaction would have gone ahead, as he has effectively subsidised the deal by reducing Milan’s overall costs. OK, the lower wages are still a huge amount of money, but I’m not sure that every player would have done the same.

In addition, Barcelona did not pay Ibrahimovic a “golden goodbye”. There had been talk of a huge leaving bonus, presumably to compensate for the salary reduction, but in the end Raiola confirmed that nothing was paid. Cynics may argue that this was possibly influenced by Eto’o losing his court claim for a pay-off equivalent to 15% of his transfer value, but other players might have dug their heels in and refused to budge without a sweetener.

"Where did it all go wrong?"

Maybe the boy just wants to play. In a remark reminiscent of Eric Cantona, he is reported to have said, “You don’t buy a Ferrari and just leave it in the garage.” He also promised not to leave Milan “until we’ve won everything”, which is a bold statement of intent, albeit one that could prove expensive to his new employers.

Hopefully, the magic will return to his game and San Siro will once again witness “Ibracadabra”, for at his best Ibrahimovic is one of the most exciting talents in world football.

What's Happening With Barcelona's Finances?

Just a few weeks ago, everything looked wonderful at Barcelona. They had won La Liga for the second season in a row, once again finishing ahead of Real Madrid. Despite their bitter rivals breaking the world transfer record twice last summer when buying Kaka and Cristiano Ronaldo, they could not match the talents of Xavi, Iniesta and Lionel Messi, who was voted FIFA World Player of the Year.

Although they could not repeat the previous season’s Champions League triumph, being unable to find a way past the defensive wall built by Jose Mourinho’s Inter in the semi finals, Barcelona did subsequently provide most of the players for the Spanish team that won the World Cup in South Africa.

“Glory days”, as Springsteen once sang.

However, July was not so kind to the Catalan club – at least from the financial perspective. Early in the month came the surprising news that the club had been forced to seek a sizeable bank loan of €150 million in order to overcome short-term problems with their cash flow. Incoming president Sandro Rosell was quick to explain that the credit request had initially been made by the previous Barcelona board under Joan Laporta’s presidency, “knowing that there were insufficient resources.”

Rosell blamed the former regime for this sad state of affairs, “We have taken over a club in debt and with liquidity problems, but we are resolving them.” Worse still, he claimed that the money was needed “to pay the important commitments such as the salaries of the players, coaching staff and employees.” Failing to pay the players is serious stuff, which was highlighted when the club sold defender Dmytro Chygrynskiy back to Shakhtar Donetsk for €15 million, which was €10 million less than they had paid for him only a year earlier, with Rosell confirming that the sale was motivated by financial requirements as well as sporting considerations.

As if that were not bad enough, the club then shocked the sporting community when they announced a major restatement to the accounts previously published at the AGM for the year up to 30 June 2010. The new vice-president for economic affairs, Javier Faus, said that an audit had revealed a series of adjustments that turned the €9 million profit declared by the former treasurer, Xavier Sala I Martin, into a massive loss of €80 million – that’s a huge difference of €89 million. The auditors’ proposed changes reduced revenue from €446 million to a still impressive €409 million, while increasing costs from €429 million to an unprecedented €478 million.

How can this be? What on earth is happening with Barcelona’s finances? This is mes que un loss by anyone’s standards.

The first point to make is that even in an age where we have International Financial Reporting Standards (IFRS), accounting is not quite as black-and-white as people might imagine. There is a considerable degree of judgment applied over which revenue and costs should be recognised in the accounts. Even Faus admitted that the old accounts were not “fixed”, but the new board had simply taken a far more conservative approach, “We opted for caution.”

"Laporta and Rosell - best of friends?"

One of the fundamental accounting conventions is prudence and it does look like Laporta had a tendency to count his chickens before they hatched. On the other hand, you can be too careful. As an analogy, if you believe that it’s going to rain, you might take an umbrella with you when you go out, but you probably wouldn’t refuse to leave the house just in case you get wet.

In fairness to the previous board, their results were unaudited. In fact, it’s a great achievement for the club to release draft accounts just a few days after the books closed. Most companies do not do this, as there are invariably numerous discussions with the auditors before the final figures are agreed. By the way, Deloittes are not new to the club, but have been auditing the accounts for many years, so there’s nothing too sensational about their role in the restatement.

There are three categories of adjustment to the accounts, which relate to television (€56 million), player transfers (€12 million) and land (€21 million). The largest is a €38 million provision for a legal dispute with TV company Sogecable, which the new board has decided to fully cover, even though they believe that they have a strong legal case. This is a long-running dispute, but, interestingly, Deloittes did not require a full provision in last year’s accounts.

Still on television, two adjustments were made for payments from current TV rights holder Mediapro, totaling €18.5 million. The first one is for a €16 million bonus payment that Laporta booked, even though it comprises four annual payments of €4 million until 2013. The auditors decided to only include this year’s money, leading to a €12 million adjustment. This could be argued either way, but given the long-term nature of the payments and Mediapro’s well-publicised difficulties, this correction is probably fair enough. Barcelona also have a legal dispute (another one) with Mediapro worth €13 million, which the auditors have only included at 50%, as it is not certain that the case will be won, leading to a €6.5 million adjustment.

Similarly, there are two adjustments for player transfers. In the case of Thierry Henry, even though his free transfer to the New York Red Bulls was only finalised in July, Faus claimed that the contract was signed before the end of last season, meaning that the remaining €8 million amortisation should be booked in the 2009/10 accounts. In yet another legal dispute (how much do Barcelona spend on lawyers?), the club is owed €4 million from Espanyol for the transfer of midfielder Raul Baena, which the auditors have not included, again because payment is far from guaranteed.

"Happy days"

Like animals boarding Noah’s Ark, the land adjustments also came in “two by two”. Very little of the proceeds from the sale of the Sant Joan Despi land has been received to date, despite the contract being completed, so the auditors have reduced this income by €15 million. Unless they seriously believe that the money will not be paid, this looks a bit too cautious to me. Usually, you do not wait until the money is received before recognising the income. In addition, two valuations were provided for the land at Viladecans: Laporta’s expert suggested €17 million, while Rosell’s appraiser estimated €5.7 million. Using the wisdom of Solomon, the auditors split the difference, producing a €5.7 million adjustment.

Without examining all the details behind these adjustments, it is impossible to say whether they are justified or not. My gut instinct is that they are overly prudent. What we can say with confidence is that none of these adjustments impact the club’s cash flow, as they are simply accounting entries for provisions and revaluations.

Given the striking drop in profitability, you have to ask whether Barcelona set a completely unrealistic budget for 2009/10.

On the face of it, looking at the projected growth from the 2008/09 results, you would have to say no. Revenue was only budgeted to increase by €20 million from €385 million to €405 million and almost all of that growth was due to €40 million profit on sales of assets (players €25 million, land €15 million). Yes, that’s the same land sale that the auditors adjusted this year. All other revenue streams were largely unchanged with marketing revenue actually forecast to decline, as they did not anticipate a repeat of the previous season’s spectacular trophy wins.

They also forecast €13 million cost growth from €362 million to €375 million, but this looks less reasonable. Player amortisation was budgeted to increase by almost 30% (€16 million), reflecting the impact of new players, but salaries were hardly increased at all. This never made sense to me and, as we shall see, this proved to be hopelessly optimistic. There was also an attempt at cost containment with other expenses cut by €6 million. All in all, former economic vice-president Joan Boix described this as “a very balanced and austere budget.”

So how did the actual 2009/10 results compare to this budget?

Using the figures after the audit adjustments, we can see that the revenue was pretty much in line. In fact, it was actually €4 million better than budget, as the negative variance due to the non-booked profit from the land sale was more than compensated by the core revenue. Marketing revenue was €7m above budget, thanks to more royalties from Nike and higher merchandise sales, while television revenue, the source of so much concern, ended up €16 million better than budget (11% higher than last year), mainly due to more money from the Champions League, following the 30% increase in the total pool. Although match day income was slightly lower than budget, it rose by 3%, helped by a 7% increase in the number of members.

However, the stand-out variances against budget were in the costs, which were an awful €103 million worse, coming in at a grand total of nearly half a billion Euros. The audit provisions are the reason for the €66 million adverse variance in other expenses, but the real damage is done in salaries. Adding together all staff (sports and administration) produces a jaw-dropping figure of €263 million, which is €36 million worse than budget. Put another way, the budget was out by 16%, which is a hell of a lot in just 12 months. It’s not as if they’re trying to forecast the lottery numbers, for heaven’s sake.

"Is the club down for the count?"

In fact, after all the audit adjustments, the total shortfall against budget is a round €100 million. Ouch. The solid revenue growth of 6% has been obliterated by terrifying cost growth of 32%. Granted, a considerable chunk of this is the result of once-off provisions, but much of it is down to player expenses – amortisation and salaries.

The wages were already very high, but €263 million is a scary figure. To place that in context, big-spending Real Madrid “only” paid out €187 million in staff costs last year (though it may have increased since then). The club identifies three reasons for the increase: new signings, contract improvements and variable compensation. The bonus payments were worth around €40 million, so Barcelona are, to some extent, victims of their own success.

As you would expect, the wages to turnover ratio has been on a rising trend and now stands at 68% (using Deloitte’s definition of revenue). This is by no means terrible, being within UEFA’s suggested maximum of 70%, but must be a concern. As a comparison, it’s about the same as Chelsea, though it is much worse than Manchester United (44%) and Arsenal (46%). It’s also lower than 13 clubs in the Premier League, though these clubs do not have anything like a €400 million turnover. Whatever. But what is indisputable is that the increase in salaries is the logical result of their (how shall we put it?) “generous” transfer policy.

As indeed is the increase in player amortisation to €71 million, which is even higher than Real Madrid (€64 million) and a lot more than even the most profligate English club (Chelsea €59 million), though Manchester City (€47 million) might get close after their third summer spending spree in a row. Of course, Barcelona have been no slouches in that department, splashing out around €90m last summer on bringing new players to the Camp Nou, including the unpredictable forward Zlatan Ibrahimovic, that man Chygrynskiy and two Brazilians: the veteran full-back Maxwell and the promising striker Keirrison. This year, they picked up Valencia’s prolific striker David Villa for €40 million, but the amortisation on his transfer fee will only be reflected in next year’s accounts.

Enough about the P&L, what about the balance sheet?

The major concern is obviously the debt, which Javier Faus said was “the biggest in the club’s history.” We’ve not been given the full details yet, but the adjusted figure released by the club was gross debt of €552 million (net debt €442 million). However, we do know that this represents total liabilities and is thus misleadingly high, as it includes trade creditors, accruals and even provisions. In fact, Rosell and his cohorts should be ashamed of this needless scaremongering, which is not consistent with standard accounting practice – or, indeed, UEFA’s definition, which explicitly states, “net debt does not include trade or other payables.”

As an example of how absurd the total liabilities definition is, just look at how high other clubs’ gross debt would be using this measure: Real Madrid €683 million, Liverpool €578 million and Manchester United €1.1 billion. Even Arsenal, which is regarded as the template for financial sustainability, would have “debt” of €767 million (though it’s come down a lot since the last annual accounts). This places Barcelona’s €552 million firmly into context. To use an old adage, you have to compare apples with apples.

Under UK accounting practice, net debt includes bank overdrafts and loans, owner and/or related party loans and finance leases less cash and cash equivalents. Under this definition, Barcelona’s net debt in last year’s accounts was actually only €20 million, compared to Rosell’s total liabilities of €489 million.

The truth is that Barcelona’s real debt lies somewhere between the narrow UK accounting definition and the new board’s widest possible measure.

"Keep your eye on the ball"

In fact, UEFA’s definition of net debt also includes the net balance owed on player transfers, which is probably the most reasonable approach to take, as this is an important part of Barcelona’s business model. Again, we have no way of knowing how much Barcelona owe to clubs for other players, though last year’s books included just under €90 million. This is why Laporta could truthfully claim last year that “the ultimate proof that Barca has a solid economic base is that we didn’t have to make any new debts when signing new players this summer”, as he was only referring to bank loans. However, this is not the whole story if money is still owed to other clubs on those transfers.

Whichever way you look at this, what is very clear is that net debt has increased by well over €100 million in a year, which is obviously not something to be proud of. The previous board gave two reasons for this significant increase: €65 million for outstanding taxes and €60 million for the transfers of Ibrahimovic, Villa and Chygrynskiy.

Since the accounts were closed, Barcelona have secured an additional €155 million loan from a group of banks led by La Caixa and Banco Santander, but this is unlikely to have greatly increased their total debt, as my guess is that this was largely used to pay off existing liabilities like the tax bill and some transfer payables. It would make sense for them to pay off short-term liabilities with longer-term debt. Often, when clubs have problems with debt, it’s not so much the magnitude that’s the issue, but the timing of the repayments. That’s why Arsenal’s long-term debt is not a concern, but Liverpool’s short-term debt is.

Even with this new credit, Barcelona’s bank loans are relatively low. Laporta’s AGM presentation gave a figure of €114 million, though for some reason this included a €57 million tax credit, so presumably the real bank loan was (coincidentally) €57 million. If the additional €155 million were to be added to that, the total bank loans would be €212 million. This is all speculative in the absence of a detailed balance sheet, but the point is that such a bank loan is eminently serviceable with annual revenue of over €400 million.

This has effectively been confirmed by Rosell, “The club is not bankrupt, because it generates income. The banks know that we have a business plan that will allow them to recover the money.” That confidence is supported by the club’s recent record, as it made profits six years in a row before this year’s loss. Faus confirmed that this is “not a dramatic issue”, as Barcelona has hidden assets worth over €250 million that are not reflected in the balance sheet, such as youth players and real estate. He also pointed out that the club has on its books the best player in the world plus eight players who have been world cup winners, so it’s not all doom and gloom.

The reality is that Barcelona can always tap into credit from Spanish banks. You simply cannot imagine a scenario where a local financial institution would be responsible for making the emblem of Catalonia bankrupt, given that its customer base is largely made up of the club’s supporters. Indeed, this loan has been given at a very low rate of interest (Euribor plus 2.5%, by all accounts), which indicates the positive credit rating that the club still enjoys with the banks, though this may well be a “friendly”, somewhat political rate.

On the other hand, there has to be some concern that the club is experiencing any financial problems at all after two years of fantastic success on the pitch, especially as so many of the first-team has emerged from their own academy (the famous La Masia). It makes you wonder what would happen to their numbers if the team suddenly stopped performing. Then, there are the generic economic difficulties in Spain, as the country faces one of the worst recessions in Europe with spiraling unemployment and a genuine credit crunch.

"Shout, shout, let it all out"

This is epitomised by the problems affecting Mediapro, who have a seven-year deal, due to expire in 2013, worth over €1 billion for Barcelona’s TV rights. These are so severe that the company has sought bankruptcy protection over a dispute with Sogecable, who, you might remember, are also in litigation with Barcelona. Last year, Laporta described the agreement with Mediapro as “the best contract on the market” regarding TV rights, but Rosell might well disagree. Although the new president said that Barcelona had been given assurances that the money would be paid, this was only a “verbal guarantee of payment”, unlike the bank guarantee supporting Real Madrid’s contract with Mediapro. If that’s true, that’s astonishingly inept.

However, in the event that Mediapro went under, “the cancelling of the contract would be immediate” and it is difficult to believe that another television channel would not want Barcelona’s broadcasting rights. They might pay less, but it is extremely unlikely that the club’s TV revenue would disappear altogether.

Of course, there’s a broader danger here, as the other clubs in La Liga attempt to implement collective bargaining with the potential negative implications for the business models of the “big two”. Clearly, both Barcelona and Real Madrid will resist this with all their might, as it would obviously mean a hefty reduction in their revenue, but such a change might not be catastrophic.

"How do you spell DNA?"

First, even with the Premier League’s collective model, the big clubs still enjoy by far the highest share of the total pool, as the distribution model is geared towards those finishing higher and the number of times a team is shown live on television (inevitably the top clubs). Second, if the Spanish league becomes more competitive, then it may become a more marketable product globally, which would increase the fees paid for overseas rights. Indeed, Real Madrid president, Florentino Perez, has already been pushing for an earlier kick-off for some La Liga games, so that they are more convenient for Asian TV audiences, “The change is vital if the Spanish league is to compete with the English.”

But are Barcelona too dependent on TV revenue? Well, it’s definitely very important, but it actually accounts for only 39% of their total income. As a comparison, only three clubs in the Premier League have a better (lower) proportion than that: Arsenal 34%, Manchester United 36% and Chelsea 38%. In fact, Barcelona enjoy a very balanced mix of revenue: television €151 million, commercial €121 million and match day €116 million. So, even if they were to lose 100% of their TV income (hardly a realistic assumption), they would still receive €237 million, which is not much less than clubs like Chelsea (€248 million) and Arsenal (€270 million).

The club’s revenue growth has been mightily impressive, up from €123 million in 2003 to €387 million in 2010. So their revenue has more than tripled in seven years with Xavier Sala i Martin describing this year’s revenue as “the largest income of any club in the world including the United States.” However, as the old saying goes, “turnover is vanity, profit is sanity.”

"Say hello, wave goodbye"

That’s absolutely correct, but another expression is even more important, namely “cash is king”. The reason why companies fail is cash flow problems. It does not matter how large your revenue (or profits are), if you do not have the cash to pay suppliers, the tax man or your players, then you are going to hit the rocks. In Barcelona’s case, the latest cash flow statement we have is from the 2008/09 accounts and this did not indicate any difficulties. There was a net cash inflow of €6 million, entirely consistent with the €7m reported profit, with net financing of only €16 million (the €29 million bank loan less €13 million repayments).

It does not take a genius to realise that there must have been a degree of financial mismanagement, if not downright incompetence, over the last 12 months, if you move so far from that healthy position that you need to take out a loan in order to pay your players. OK, this was exacerbated by the fact that Barcelona pay their players’ salaries twice a year, and this July’s payment was inflated by the high bonus payments, but even so.

The club’s cash flow predicament may have been brought about by doubts over when the Mediapro payments would be received (40% of the annual fee is due at the beginning of the season), but frankly it could have been for any number of reasons.

"Laporta warmly welcomes Rosell"

Some have speculated that Laporta only left Rosell enough funds to either make the payroll or buy new players, but not both, thus forcing the new president to not make any marquee signings in his first summer. Others have attributed the shortfall to the purchase of David Villa, when Barcelona for once had to pay the entire transfer fee upfront, due to Valencia’s own financial travails. On the other hand, some have claimed that the liquidity crisis was caused by Rosell’s decision to cancel the scheduled price rise in season tickets, as the previous board’s (unpublicised) request for a bank loan had assumed this additional revenue as part of their business plan. This meant that Rosell had to re-submit a modified loan request.

It has surely become obvious by now that there is more than a hint of politics in this whole mess with FC Barcelona caught in the middle of a deeply personal battle between the incoming and outgoing presidents. Although Laporta and Rosell were colleagues on the board between 2003 and 2005, they have famously fallen out and now only communicate through lawyers. Rosell was elected on a platform of sorting out the financials, so he is hardly going to say that everything is “hunky dory” once he’s put his feet under the desk. Having said that, it is equally clear that Laporta would like to go out with a bang: financial stability as well as sporting success.

"Yes! We've been paid!"

To my mind, the generous provisions made by Rosell smack of what the Americans call “big bath” accounting, which is a very common occurrence in the business world. What happens is the newly appointed CEO attempts to get all the bad news out of the way in his early days, which has two advantages. First, he can blame any problems on his predecessor; second, it gives him a lot of flexibility to demonstrate future profit improvements, as and when the provisions are released. We have seen many examples of this in the banking sector, but we don’t have to go that far to see a precedent: this is exactly what happened in 2003 the last time that there was a change in Barcelona’s president. This may be overly cynical, but it would not surprise me at all if Rosell painted a very different picture in 12 months time (after the first glorious year of his presidency).

Although Laporta has not responded publicly to the accusations made by the new board, perhaps mindful of his ambitions in regional politics, one of his former deputies, Xavier Sala i Martin, has said plenty, including an ironic analogy for the accounting adjustments where he thought that the new board should take the credit for the 2009/10 La Liga triumph, as the trophy had not yet been delivered. This is possibly a bit harsh on Rosell, who did after all gain a resounding majority of members’ votes in the presidential election, but the former treasurer went further, claiming that this might be an elaborate plan for the new board to make excessive profits in their first year, which would apparently allow them to get back the enormous bank guarantees deposited as part of the presidential campaign. I have no idea whether this is true, but it certainly demonstrates the level of antipathy between the two sides.

In fact, there have been so many contradictory statements coming out of Barcelona, that it’s almost impossible to distinguish the wheat from the chaff. How can a club need a €150 million loan to pay its wages, but the next minute also have a transfer budget of €50 million (sorry, €89 million after player sales)? That’s some transfer pot for a club with cash flow problems. Until we can examine the comprehensive financial statements, it’s difficult to get to the bottom of this, but something doesn’t add up.

"I'm heading that way"

What is clear is that Barcelona need to somehow improve their financials. The most immediate action should be to cut costs and they have plenty of scope to do this with a couple of obvious targets. They have already started the process of reducing the enormous wage bill by offloading Thierry Henry and Rafael Marquez to the New York Red Bulls and selling Chygrynskiy to Shakhtar and Yaya Toure to Manchester City. The latter two sales also provided the double whammy of bringing in €39 million of sale proceeds. There may be more to come here with Alex Hleb and Martin Caceres likely to go on loan, though it now seems unlikely that the high-earning Ibra will leave this summer.

It’s also surely not beyond the club to negotiate a bonus scheme that pays out less than the additional revenue generated from any success. Portsmouth also fell into the trap of losing money after their FA Cup win, but you would hope that Barcelona’s executives were slightly more competent than the miserable shower at "pay up" Pompey.

On the revenue side, they could re-introduce the idea to increase season ticket prices, though this would admittedly be tricky in the current economic climate, especially as the stadium is already not filled to capacity.

But there is a far more obvious opportunity in commercial revenue, where the club has already agreed that there is “scope for future growth.” In particular, they could sign a lucrative sponsorship deal. Barcelona have famously never had a shirt sponsor, instead paying UNICEF for the privilege of having their name on the kit, but Rosell has already raised this idea during the election campaign. As a comparison, Real Madrid receive €20 million a year for shirt sponsorship, while Liverpool have secured a €24 million deal, despite their decline. I would think that Barcelona could charge a premium for the privilege of being the first corporate name on the blaugrana shirt, so this could be worth €25-30 million.

"We've got Cesc Fabregas"

Of course, there are many that would like to see Barcelona fail after their unseemly pursuit of Arsenal captain, Cesc Fabregas, which has dominated this summer’s transfer talk. This culminated in an extraordinary statement last week, where they admitted that none of their bids “exceeded €40 million”, which is either massive disrespect to a player of Cesc’s talent or demonstrated a new-found sense of financial prudence. Take your pick.

In a way, the desire for Barcelona’s future prospects to be hamstrung by financial woes is perfectly understandable, as they have undoubtedly sullied their saintly image with their constant tapping-up and inability to shut up about Cesc’s Barcelona DNA, but it looks like reports of their demise might be a little premature. After all, if things get really desperate, they could always raise €100 million by selling Messi.

So are Barcelona going bankrupt? No way, José.