What I don't understand about Amortisation (and maybe one of our accountant colleagues can advise) is the example used by the BBC today
https://www.bbc.co.uk/sport/football/66507341
"When a team sell a player, all of the profits go on to the accounts straight away. To use another example, Kai Havertz cost Chelsea £71m in 2020, which equates to £14m a year over his five-year contract. But when he was sold to Arsenal this summer for about £65m he had about £28.4m of value left on the books for the final two years of his contract, meaning the Blues could bank about 36.6m of 'profit'."
To me, this makes no sense, Havertz cost £71m (which they have to pay regardless of how early they sell him). They sell him for £65m so to me that's a loss. I assume me the rest of the money they paid for him for years 4 and 5 are paid for out of the £65m which is where the £36.6 comes from. It just seems a recipe for both inflated markets and storing up problems when income and expenditure are treated differently and an accounting technique which has little merit when it distorts reality so much. I prefer to think of them paying out £42.6m over 3 years, getting £65m in and making therefore £22.4m.
Even then their income may not be cash and spread out over time and that does not seem to matter.
Why can't we have a simple sum, if they buy with cash it goes into that years balance sheet, if they buy on credit it's spread out, for both the buyer and the seller.
Or am I being thick (or uncreative)
Year zero (Havertz has a 5 year contract, therefore the useful economic life of the player is expensed over 5 yrs):
Balance sheet: Credit cash £71m (purchase Havertz)
Balance sheet: Debit 'players asset' (Havertz) £71m
Year 1:
P&L account: Debit amortisation expense £14.2m
Balance sheet: Credit 'players asset' (Havertz) £14.2m
Year 2:
P&L account: Debit amortisation expense £14.2m
Balance sheet: Credit 'players asset' (Havertz) £14.2m
Year 3:
P&L account: Debit amortisation expense £14.2m
Balance sheet: Credit 'players asset' (Havertz) £14.2m
Sale of Havertz:
Balance sheet: Debit cash £65m (sale of Havertz)
Balance sheet: Credit 'players asset' £28.4m (£71m less £14.2m x 3) - residual balance of player asset after total amortisation expense - (this must equal to zero since there is no longer a Havertz 'player asset' on the balance sheet)
P&L account: Debit realised gains £36.6m (£65m less £28.4m written down player asset value)
In total Chelsea will have booked a P&L expense of £42.6m spread over the first 3 years (amortisation to date of the purchase fee - this of course ignores the players wages etc which will also be a separate expense in the accounts), however on the year of sale they will have recorded a realised gain of £36.6m net against this - overall, a £6m loss as you correctly point out (since he's sold for £65m against purchase of £71m.
