What does amortisation mean in economics? Why do sports clubs say, for example, that they cannot sell a player because they paid 100M for him and he is not yet amortised?
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The sports club example is unknown to me, but amortisation is pretty simple. Basically it comes down to the fact that an intangible asset may lose value over time. The lost value van either stem from a decrease in the perceived value of the asset, or from a market-related decrease in the actual value. Say, for example, you developed software that addressed a specific problem. At first, the software is deemed exceptionally valuable, but over time, someone else might improve on some aspect of the software, rendering their version more useful, and rendering yours less so. You therefore can’t recognise the software at it’s original value since its lost some usefulness, and thus, it is amortised to better reflect it’s real value to the company.
Businesses spend a lot of time and effort to keep track of how they are spending money, and is the business becoming more valuable or not.
Suppose a business buys a $1M machine for their factory. Are they $1M poorer? No, they traded $1M in cash for a machine worth $1M. The value of the business did not change. However, eventually that machine will wear out and become worthless. When, we do not know exactly, but we make a guess. Let’s say 10 years. To keep things simple, the business will say that it has lost $100,000 in value every year it owns the machine. This is amortization. We amortize the $1M cost of the machine over it 10 year life.
To the business, this is just like if you or I bought something on a payment system, and it takes 10 years to pay it off.
Now, suppose the machine becomes worthless after 5 years. It wears out, or becomes obsolete, or whatever. The business can throw it away, but it is still on their books as an asset worth $500,000. So if they throw the machine away, they no longer have an $500,000 asset, and they take a charge of $500,00 against their profits.
Now, substitute football player for machine, and you can see how a team might find it expensive to let a player go. If they cannot sell him for the remaining estimated value, they will take a hit to their bottom line.
Other people have already gone into detail so I’ll add one more thing which is to say that Amortization is more of an accounting concept than an economic one.
In accounting, assets are amortised (for intangible assets like intellectual property, branding, reputation) or depreciated (tangible assets like machinery and buildings) over their useful life until they reach 0 or are disposed of.
Players are treated as intangible assets in a company’s balance sheet and are amortised over the course of the contract. I can’t speak to what the person meant in your example, but if the player’s market value is below the value in the club’s books (this is the original cost minus amortisation to date) and the player is sold at market value this would decrease the value of the club itself, which would be a problem for the owners/shareholders if they wanted to sell. It also reduces profit and the amount that can be paid as a dividend to those shareholders.
For example, club buys player for 1m on a 10 year contract, 1 year passes and the player is amortised 1/10 and is now worth 900k on the books. However the player is not performing well and the club wants to sell. Another club offers 500k because of the poor performance. The club doesn’t want to sell because it would make a 400k loss on the sale.
In the above example the player would realistically be impaired rather than amortised, but that’s a discussion for another day.
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