David Owen: Liverpool and Balotelli: Why Reds set for a summer transfer profit despite £100m+ spreeLiverpool posted the biggest pre-tax loss in the Premier League in 2012-13. The previous year only Manchester City posted a bigger one. In such circumstances, you might have expected the Anfield club to be squirrelling away at least some of its Luis Suárez windfall; to be showing a modicum of restraint in this summer's transfer market in the interests of its bottom-line. All the more so with UEFA's Financial Fair Play (FFP) provisions hovering in the background.
And yet here they are seemingly about to bring pure box office Mario Balotelli to Merseyside, in a move that would take their summer transfer spending to an estimated ooh £117 million or so. That's £40 million or £50 million more than they are pocketing for the Uruguayan superstar. How can such apparent extravagance be justified?
Well, increased turnover is one answer. By getting back into the Champions League, Liverpool will probably have assured themselves of €30 million to €40 million of new revenue that simply wasn't available to them last year – and that's just in participation and performance-related money from UEFA, without taking into account a further hike in match-day income from the return of big European nights to Anfield.
Another answer is that thanks to the magic of amortisation, the Reds are still on course to book a substantial net gain on their summer transfer dealings – and they may yet offload one or two more players in the remaining days of the summer window.
How can this be when their outlay is so much more than what they have recouped? The secret lies in the lop-sided way player valuations are dealt with in English corporate accounts.
On the one hand, when a club sells a player, the gain - or loss - that it realises against the value of that player carried in its books is normally included in full in that year's accounts.
When, by contrast, a player is bought, the transfer fee is normally amortised over the length of that player's contract. If a player signs for five years, therefore, at most a fifth of the fee would be included in the amortisation charge in that year's accounts.
Let's now try to apply this to Liverpool's summer business.
Heading out of the exit door, so far, have been Suárez to Barcelona, Pepe Reina to Bayern Munich, Martin Kelly to Crystal Palace and Conor Coady to Huddersfield Town.
Suárez was bought from Ajax in January 2011 for a reported £22.8 million on what was said to be a five-and-a-half year deal. That means he had about two years of his contract to run, suggesting that his remaining book value at the time of his sale may have been around £8.3 million.
Even if you assume that his latest transfer fee was 'only' £65 million, that would still leave the Merseysiders booking a hefty £56.7 million gain on the deal.
Add in £1.5 million and £375,000 respectively for Kelly and Coady, who were both "home-grown" talent which is normally valued in the books at zero, and £2 million for Reina, who joined Liverpool so long ago that his original fee is likely to have been fully amortised, or all but, and the gains column swells to well over £60 million.
That is still, repeat, substantially less than the club has spent.
What is relevant for our purposes, however, is not Liverpool's gross summer outlay on players, but how much of this will be included in the 2014-15 amortisation charge.
While I do not have all the information for a precise calculation, my best stab is that, even with Balotelli, the amount in question is likely to be around £30 million – probably less than half the gain.
In my back-of-envelope calculation, this is made up of: Adam Lallana £6.25 million; Rickie Lambert £2 million; Emre Can £2 million; Lazar Marković £4 million; Dejan Lovren £5 million; Alberto Moreno £3 million; Divock Origi £2 million; and Super Mario himself £4 million.
What this doesn't do, of course, is tell you anything about the company's cash flow. And we will almost certainly find that the club's wage costs in 2014-15 are substantially higher than the £132.4 million incurred in the year to May 2013.
When it comes to profitability, however, I'd be very surprised to find Liverpool still at the foot of the Premier League table in 2014-15, in spite of its current spending spree. You might see this as Suárez's parting gift.
http://www.insideworldfootball.com/david-owen/15309-david-owen-liverpool-and-balotelli-why-reds-set-for-a-summer-transfer-profit-despite-100m-spreeDavid Owen worked for 20 years for the Financial Times in the United States, Canada, France and the UK. He ended his FT career as sports editor after the 2006 World Cup and is now freelancing, including covering the 2008 Beijing Olympics, the 2010 World Cup and London 2012. Owen's Twitter feed can be accessed at www.twitter.com/dodo938.
