when the media refer to debt, they actually mean total liabilities.
This includes what might be described as operational debt, such as: (a) trade creditors (payables) for amounts outstanding on bills for products or services received, e.g. rent, electricity; (b) money owed to staff, e.g. wages earned by staff paid at the end of the month, bonus payments; (c) other accrued expenses (accruals), which are the same as payables except no invoice has yet been received; (d) provisions, which are an estimate of probable future losses, e.g. legal claims; (e) and, most bizarrely, deferred income for payments received for services not yet provided, e.g. season ticket revenue for matches to be played in the future.
That last one highlights one danger of using liabilities as a definition for debt, as season ticket money received in advance is clearly not a bad thing, as UEFA explain: “It is recorded as a liability, as accountants consider the cash received as not yet being fully earned until the matches take place. This is a liability, but not a debt that will have to be paid back.”
So, much of Madrid’s €590 million and Barcelona’s €578 million debt includes liability for what might be termed normal operations. If we apply the same definition to Manchester United, they have debt (total liabilities) of just under €1 billion (£824 million converted at a rate of 1.20). Even Arsenal’s debt on the same basis is €524 million, which the journalists would no doubt describe as “eye-watering” if they were talking about others and not their template for a well-run club. To use an old adage, you have to make sure that you are comparing apples with apples.
Of course, if you wanted to make a club’s debt look as bad as possible, then you would absolutely use the total liabilities definition
The net debt reported in an English club’s financial statement will be in line with IFRS (International Financial Reporting Standards) and essentially covers purely financial obligations, such as overdrafts, bank loans, bonds, shareholder loans and finance leases less cash. On this basis, the gross debt of Madrid and Barcelona at €146 million and €150 million respectively is not only considerably smaller than the figure highlighted in the press, but is also much lower than Arsenal €310 million and Manchester United €551 million.
The difference is not quite so large for net debt, as both United and Arsenal have substantial cash balances, but the Spanish clubs are still lower: Madrid €48 million and Barcelona €89 million. Arsenal are much of a muchness with €117 million, while United are the outlier with a hefty €370 million.
In their Financial Fair Play (FFP) guidelines, UEFA introduce a third definition of debt which lies somewhere between the narrow calculation employed in annual accounts and the widest possible measure of total liabilities: “A club’s net player transfers balance (i.e. net of accounts receivable from players’ transfers and accounts payable from players’ transfers) and net borrowings (i.e. bank overdrafts and loans, owner and/or related party loans and finance leases less cash and cash equivalents).”
They go on to explicitly state, “Net debt does not include trade or other payables.” However, it does include the net balance owed on player transfers, which is a reasonable approach to take, as this can be an important element in the business model adopted by some football clubs, e.g. this amounts to €76 million at Madrid (actually down from €111 million the previous year and an astonishing €211 million in 2009), though it is only €12 million at Arsenal, which probably comes as no surprise to those fans that have been exhorting the club to spend some money.
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.
