The second charge was based on the method Derby have been using to deal with the fees they have paid for players in their annual accounts. Players are considered as intangible assets for accounting purposes, and like all other assets, they have values which depreciate over time. How you do this is called amortisation.
Thanks to the Bosman ruling, players have no value to their clubs at the end of their contracts as they can leave for free, so the vast majority of clubs amortise the cost of buying a player in a straight-line basis over the course of their contract. So, for example, a player bought for £4 million on a four-year deal would cost most clubs £1 million a year in amortisation charges, with the player being worth £3 million after one year, £2 million after two years and so on.
Derby, however, did it their way, and it was not even the different way the EFL thought they were doing it when it charged the club. Confused? So was the EFL.
According to the club, at some point in 2015, chief executive Stephen Pearce and the club’s long-standing auditor Andrew Delve decided the usual method was not fairly accounting for the club’s nous in the transfer market, which helped them buy young players, nurture them and sell them on before the end of their contracts.
So they stopped amortising in a straight line to zero and started to apply what they called an “expected recoverable value” to each player, on the basis that he would be sold before entering the final year of his contract. So, to repeat the example above, Derby might decide that the £4 million signing would be worth £3 million after the third year of his contract, reducing the annual amortisation costs over that period from £1 million to £333,333, with the final £3 million being charged to the club in the fourth year of the contract.
The benefits of doing it this way? 1) it initially reduces a club’s costs and 2) gives the club an extra degree of control over its expenses at the end of a financial year. The flipside? The club will realise no profit in their accounts when they sell that player for £3 million after three years, not the £2 million gain it would have been if they had amortised in a straight line.
Derby started doing this in 2015-16 and added a small note in their 2016 accounts to say they were now amortising their players’ values to a “residual value”. This note was repeated in 2017 and 2018 before anyone at the EFL realised this could pose a problem when you are assessing whether a club has breached the P&S threshold or not.
Not that the league grasped what this really meant until shortly before the hearing commenced in July, when the EFL learned from the club’s witness statements that Derby were not, as the league thought, allocating a “residual value” of more than zero to a player at the end of this contract, which would have been deeply problematic given the Bosman ruling, but was using its own estimate of a player’s resale value up until the final year of his contract.
The panel, which was comprised of two QCs and a forensic accountant, was unimpressed with the league’s failure to work out what Derby were doing before charging them but was positively damning of the accountancy expert the league put up to make the case that the club’s practice was contrary to the applicable accountancy standards.
Professor Peter Pope, an academic with no recent experience of working in accountancy, was criticised by the panel for failing to understand that independent witnesses in arbitration hearings are not meant to be so dogmatic and partial in their views, particularly when asked for opinions on subjects when there is clearly a range of views.