Why Barcelona had to let go of Messi

Lionel Messi’s departure from FC Barcelona and his subsequent joining PSG offer important lessons in cash-flow management. All news report on this event mentioned that Barcelona’s debts were too high and it could not afford Messi any longer. The published financial statements of the club for the year ended June 30, 2020, will not give confidence to anyone with even a basic understanding of financial statements.

On the assets side, intangible assets (€620,799 thousand) dominate the balance-sheet while the liabilities side is dominated by borrowings (€708,509 thousand). Total equity is a miniscule €35,187 thousand — lesser than even deferred tax assets which have been reported at €52,713 thousand.

The low equity points to two things — club members have never brought in equity and even in the past, the club did not earn substantial profits which boosted its reserves. FC Barcelona clocked in revenue of €708,257 thousand and a loss of around €100,000.

Salaries, amortisation of player transfer fees and impairment of assets were major contributors to the losses. If we had to summarise the plight of Barcelona in one sentence, one could say that the club had robust intangible assets but extremely poor financial management.

Against this background, Messi’s astronomical salaries only added to the woes of the club. As per Spanish La Liga rules, caps are put on player salaries. Considering the fact that Messi is Messi, his salaries were at the top of the charts and were increasing every year. The only issue was that whenever Messi asked for an increase, others too joined in asking for an increase which the club could not afford.

With reluctance, Messi agreed for halving his salary but even that could not come within the threshold set by La Liga. Under the rules that govern Spanish member-owned clubs such as Barça, directors had to repay losses out of their own pockets. The club turned to the now-regular practice of swaps to report profits (at least on the books if not in cash).

Accounting swap

A swap transfer was devised with another football club Juventus whose financial statements too had a lot of pain points. Juventus sold a midfielder to Barça for a basic fee of €60 million, while Barça in turn sold a midfielder to Juventus for a basic €72 million. These sums would never actually be paid. They were invented for accounting purposes.

Under bookkeeping rules, each club could book its selling price as immediate income. The notional payments would be spread out over the years of the players’ contracts. Only €12 million in actual money would end up changing hands, the difference between the two players’ fictional prices, paid by Juventus to Barça. It was a win-win swap for both the clubs as they were able to clean up their books. Thanks to accounting principles, the directors were able to avoid taking the obligation to pay up for the club’s losses.

PSG is smiling all the way to the bank. The circumstances under which Messi arrived ensured that it paid €25 million to get him on a two-year contract with an option for a third. Even before Messi appeared in his first match, PSG got T-shirts with his name and Number 30 on it. Within days, almost a million T-shirts were sold.

The Messi episode gives some important lessons for corporates and clubs. When your cash flows are weak, you can’t afford high-cost resources for too long. When you want a player to join your club, think about what value you would get instead of the price you would want to pay. Finally, accounting standards can help in “booking” profits. With the Messi episode done and dusted, the only point of interest now would be how many goals he would score for PSG against Barcelona.

The writer is a chartered accountant