It defines itself as the first French agency to measure the fair financial value of soccer players. The Lyon-based company Ginkyo Ratings has developed a scientific methodology based on 200 indicators, which provides precise and valuable data to be included in the accounting balance sheets of professional clubs. Olympique Lyonnais and OGC Nice have already been won over. Interview with Pierre Caillet, the agency's methods director, who explains the methodology.
Acteurs de l'économie-La Tribune. Why create an agency to measure the fair financial value of soccer players?
Pierre Caillet. The financial equilibrium of soccer clubs is very dependent on sporting performance, in other words, it is the fact of winning the maximum number of matches that is the law: in this context, the human capital-player is the main asset of soccer clubs.
French soccer clubs have a huge asset: the recognized quality of their training centers. These centers allow the creation of the human capital of today and tomorrow. However, this is still only partially recognized.
It is all the more difficult to take this into account because there is hardly any satisfactory methodology for evaluating it and because the accounting doctrine excludes from the balance sheet of clubs the human capital created internally (from the training center). This is a new approach.
What is the fair value of human-player capital?
The fair value of a soccer player is the amount that could be obtained by the club, at the annual closing date, for the sale of that player in a transaction with another club under normal market conditions. The value considered is not the value of the player as an individual, but the value of the sporting activity that the player can produce for the team.
This fair value is recognized by everyone in the club. However, since financial statements only record cash flows, they only reflect a tiny part of it. As a result, "outside" shareholders, investors and financial analysts sometimes have a blurred and often minimalist view.
You define the human-player capital, i.e. the professional players that make up a football team, as a of a soccer team, as a hidden asset. What does this mean? ?
The specific case of transfers of professional soccer players allows clubs to value player contracts as intangible assets. This recognition corresponds to the acquisition by the club of a contractual right to which the player's professional activity is subject. It is understood that the core of the club's performance is provided by the players. But accounting has its limits. There is indeed a paradox that consists in accounting for the human capital-player acquired in a certain way and that created in another way. The one acquired by the club (players bought during the mercatos) is activated in the balance sheet at its acquisition cost and amortized over the duration of the contract, while the player generally continues his professional ascension. The one created by the club (players from the training center), on the other hand, is not accounted for, as it has not been the subject of any financial transaction.
As a result, the bulk of the value of human-player capital escapes accounting normalization. For example, according to a study we conducted in 2017, the consequence is stark: in the financial arena, soccer training clubs play with only 14% of their workforce...
What are the issues for soccer clubs in this evaluation and accounting?
The preparation of financial statements taking this aspect into account is a new exercise made possible by the application of the Thesaurus-football standard, developed internally. This involves accounting for the human-player capital at its revalued amount corresponding to its fair value at the closing date.
This innovation is part of the approach initiated in 2011 by the French Minister of the Economy and Finance, Christine Lagarde. This exercise was carried out for the first time for a Ligue 1 club, in this case Olympique Lyonnais, on June 30, 2016 (the balance sheet closing date) and will allow the club's financial statements to be completed and enriched. With a more accurate description that is more in line with reality, the main challenge of accounting for human-player capital is to enrich the club's financial communication with important and significant information. In particular, it is important to secure the club's relationship with its shareholders, who do not take sufficient account of unrealized capital gains.
Is soccer a special case in terms of accounting for player-human capital?
In professional sports, and in particular soccer, players are bound to their clubs by specific time-limited contracts that reinforce the notion of control and "ownership".
These characteristics correspond to the definition of an intangible asset as defined by IAS 38 and IAS 36. However, such recognition is only permitted when the contract is the result of a financial transaction. Players trained by the club are therefore not considered as intangible assets, even though they are under contract with the club that employs them and are the result of significant investments (training center). However, this reasoning can be explained by a technical inability to measure, evaluate and value the fair financial value of the player in a reliable and auditable manner, without him having been the subject of any transactions. The application of the principle of prudence, which results in the systematic amortization of the player contract over the term of the contract, can be explained in the same way.
What is the method of valuation and financial assessment of the fair value of soccer players?
We first identify the elements that make up this capital. We therefore proceeded to construct a common evaluation framework composed of standardized qualitative and quantitative indicators. In the end, this evaluation framework includes some 200 indicators describing, for each position (attack, midfield, defense), seven categories of assets (capital). Each of these indicators is given a score on a measurement scale by a panel of independent evaluators. The method used thus makes it possible to objectify criteria that until now were considered subjective. All these rating indicators are quantitative, calibrated, weighted and based on the market value of the players (BIG 5) over the last five years. This information forms the baseline data. We then measured the relationship between the synthetic indicators obtained and the players' market values. And we found a strong relationship between human qualities, key competencies and market values. After performing a large number of impact tests, we arrived at the formulation of a robust mathematical valuation model. The particularity of this mathematical financial valuation model is its interpretability, which allows it to be audited by third parties. This specificity authorizes the publication of an extra-accountable financial balance sheet taking into account the human capital of the player.
How does the financial balance sheet of a soccer club look with this new element?
The accounting doctrine prevents the publication of the balance sheet and income statement including the human capital-player. However, nothing prevents soccer clubs from doing so in their annual reports in two different documents. The IC-Football Report is a non-accounting financial report dedicated to the human capital. It allows to reveal its existence that the accounting does not allow to
the balance sheet. This is a real enrichment of the club's balance sheet. In the end, the activation of player-human capital leads to an increase in the club's total assets and, in return, an increase in equity.
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