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David Luiz to PSG: what it means for Chelsea's finances

We break down the deal from a financial perspective and explain how it affects Chelsea's bottom line.

Gonzalo Arroyo Moreno

David Luiz has just been sold to PSG and the transfer fee is a record-breaking £48m, according to the Telegraph's Jason Burt.

There will be a time for comiserating the departure of one of Chelsea's fan favorites, but right now, there's a busy transfer season ahead of us, so it behooves us to quickly move on and start looking at how the Luiz deal impacts Chelsea's bottom line from the perspective of financial fair play accounting (which, for Chelsea, is really the only sort of accounting that matters).

Of course, no one would begrudge you for asking why, in light of the mere fact that this very deal transpired, financial fair play matters at all.

One week ago today, PSG agreed to significantly limit transfer spending this summer as part of its FFP settlement with UEFA's Club Financial Control Body (CFCB).

Shattering the world transfer record for a defender by £13m* doesn't exactly sound like PSG is exercising fiscal prudence, does it?

* The record remains with PSG, and simply shifts to a different Brazilian centreback, as this deal broke the £35m record PSG set to bring Thiago Silva to Paris from AC Milan in the summer of 2012.

PSG is thought to be under the same restrictions as Manchester City with regards to summer transfer spending. The CFCB imposed a net transfer limit of £49m (€60m) on Manchester City this summer. This means that if Manchester City wants to spend more than £49m in total transfer fees this summer, it will have to sell players in order to offset the overrun.

Given that the Manchester City and PSG settlements are very similar in other aspects, it's safe to assume that PSG's transfer limit is very similar to Manchester City's. The £48m transfer fee sits just under the limit, but it also leaves PSG with very little wiggle room to make additional deals this summer without first selling some players.

I'm very surprised that PSG is willing to spend so much money on Luiz and it seems an overt poke in UEFA's eye that the club would splash this sort of cash so soon after coming to an agreement on at least a modicum of financial austerity, but PSG is *technically* still complying with terms of the settlement.

Addressing the settlement, PSG's president Nasser Al-Khelaïfi proclaimed, "our ambition to build one of the best and most competitive European Football clubs will not be undermined by these measures." He's definitely a man of his word, but it will be interesting to see what, if any response UEFA has to this deal.

Chelsea supporters should be happy to let PSG test UEFA's resolve vis a vis FFP enforcement, and turn our focus onto what the deal means for Chelsea.

Chelsea originally purchased Luiz from Benfica in January 2011 for around £26.4m (£21.4m plus Nemanja Matic, valued at a £5m offset). He was signed to a five and a half year deal at £75k per week.

When Luiz signed the five and a half year deal, the £26.4m transfer fee was amortised over the life of the contract for accounting purposes. If you've been reading our various financial analyses on WAGNH, you're likely already well-aware of the concept of amortisation by now. However, for newcomers (welcome!), amortisation is the process by which an expenditure is paid off over time on the books, and it is a uniform accounting practise employed by football clubs (i.e. it's not just something Chelsea decided to do on its own to make the books look better).*

* Note that this is just an accounting practise. In reality, Chelsea likely paid Benfica the full £21.4m (plus Matic) immediately. Similarly, PSG will likely be paying Chelsea the full £48m immediately or in a few installments over the next few months.

Luiz's transfer fee, then, was reduced to £4.8m annually (£26.4m spread evenly over five and a half years).

However, Luiz signed a new five-year contract in September 2012. The remaining book value of the transfer fee was then re-amortised over the new five-year deal.  Put simply, book value is the remaining portion of the transfer fee that has not yet been accounted for on the books due to amortisation.

A year and a half of the original transfer fee (£7.2m) had already been paid off on the books, and as such the remaining book value of £19.2m was re-amortised to £3.84m annually.

When a player is sold, however, his entire book value becomes due. Given that Luiz had three years left on his contract, the remaining book value on his transfer fee was around £11.5m

So, the £48m transfer fee is partially offset by the remaining £11.5m of Luiz's book value.

Therefore, for the purposes of FFP accounting, Chelsea's total profit on the Luiz sale is £36.5m, which is an absurd amount of money for Jose Mourinho's third-choice centreback.

Chelsea will record the entire £36.5m profit from the sale on the 2014-2015 financial statement (which differs from when a club purchases a player and the transfer fee is amortised over the life of the player's contract).

Given that Chelsea is in perfectly fine shape with regards to complying with UEFA's financial fair play regulations, this transfer had nothing whatsoever to do with FFP, and had everything to do with capitalising on PSG's affinity for Brazilian centrebacks and selling high on a player that was deemed surplus to requirements.

To wit, Chelsea stands to increase revenues by more than £80m, to an incredible £340m this season. For perspective, the new Premier League broadcasting deal and new adidas deals alone represent an additional £50m per year in revenues. The club certainly didn't need the money to either 1) comply with FFP, or 2) pursue Diego Costa, [insert star player here], and a new platoon of youngsters to add to its army of loanees.

For those who are angry with Jose Mourinho (or Marina Granovskaia or Michael Emenalo) because Chelsea just sold an eminently likable and exciting player, I would suggest that such anger is severely misplaced. As another legendary football coach once said, "If they want you to cook the dinner, at least they ought to let you shop for some of the groceries."

I remain a big fan of David Luiz and he was certainly a staple in my footballing diet, but that matters little if Jose Mourinho is allergic to him. Mourinho has proven time and time again that he is the best chef in Europe, so if he's not going to put Luiz on his menu, well then, why let him spoil on the counter when he can fetch a nice price at the market?

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