Last Monday the summer transfer window closed for the big European leagues. Not surprisingly the Premier League in England set the pace with the twenty clubs gross spending reaching over $1.3B. That number blew away the previous high of just over a $1B set just twelve months ago.

The other big four European leagues combined spent $1.7B gross with Spain leading the way. Actually it wasn’t so much a case of Spain as the usual suspects Real Madrid and Barcelona. The total gross spend by clubs in Spain’s top league was $690M and Barcelona accounted for over $200M of it and Real Madrid another $175M.

Twenty years ago Serie A would have almost certainly been the top spenders but that is far from the case now. Italy’s top clubs spent a little over 30% of that expended by their Premier League counterparts but still edged out the more financially stable Bundesliga.

The penalties levied by UEFA on PSG of France’s Ligue 1 had an impact although the previously big spending club still managed to spend $81 to sign David Luiz from Chelsea. Going into the semi-final of the World Cup against Germany the Brazilian was being written up as a national hero for Brazil and an inspirational figure. Less than two hours later after Germany had beaten Brazil 7-1, Luiz bore the brunt of the criticism and PSG went from big spending club to one that you might have thought had just signed Coco the Clown.

Twelve months ago Monaco was one of the biggest buying clubs but during this summer it triggered an abrupt about face and became a selling club. With PSG and Monaco largely choosing to retrench, France once again became a large exporter of soccer players.

But the focus on the gross spending of England’s Premier League clubs leaves a very incomplete picture. Not only do clubs buy but they sell as well and a more important number is the net spend not the gross.

When you take a closer look at the money coming as well as going out then we can see that spending is not out of control as many would suggest but rather things are pretty much where they were last summer. For as much as spending increased more money came the other way and was close to matching the increase in gross spending.

But even more important to the immediate financials results of clubs is the accounting treatment of transfers. The way transfers in and out are booked may also allow some clubs to show a hefty profit in the transfer market even though they may have spent a lot more than they brought in.

Let’s say Team United spent $100M on buying four new players and signed each to a four year contract. To help pay for the new recruits Team United sold four players for a combined total of $60M. That means Team United would show a net transfer spend of $40M for this summer.

However, a loss of $40M is unlikely to show in Team United’s financial statements for this year. Team United must amortize the four new players over the length of their contracts. So rather than costing Team United $100M in one year it will actually be booked as $25M per year over four years.

Then there are the players that have been sold. Let’s say two of the players were youth products and never cost Team United a transfer fee. The other two were bought for $20M each two seasons ago. The youth products would have zero value on the balance sheet while the other two that cost $20M each will now be carrying book values of $10M each.

The sale of the four players will generate an immediate profit of $40M (transfer fees $60M less book value of $20M). The overall effect of spending $100M and taking in $60M is not a loss of $40M but rather a book profit of $15M for this year. The new acquisitions are booked at a cost of $25M but that is more than offset by the profit of $40M and so Team United will show a profit on player transfer activity of $15M for this year.

Each deal is different but we can make some general assumptions about ins and outs and estimate how much impact the recent transfer window may have on the financial statements of Premier League clubs for this year.

Let’s assume that on average the players recently signed for combined fees of $1.3B are given four year contracts.

Let’s further assume that the players sold by the clubs were valued on the books at 35% of the proceeds they generated.

This is what happens.

It is a benefit for one year but as long as transfer fees continue to increase – or at least plateau - well-planned and organized clubs will be able to take advantage of the amortization principle. Depending on individual situations the numbers will change but a reasonable estimate is that clubs that spend at a ratio of 2.5 to 1 against transfer fees received will in all likelihood still book a profit on transfer activity in that year.

However, that assumes that transfer fees continue at this present level or increase. Should the transfer market catch cold that the leverage currently offered will turn quickly and then work against clubs.

Notes - Net Value ps means net value prior to sale; Amortized py means amortized per year