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Financial Fair Play criteria, what’s it all about

by Phil Gregory

With the new Financial Fair Play rules all over the papers along with a sackful of misconceptions of how they’ll actually work I thought it’d be worthwhile to have a look at them and see what’s what. Without further ado….

The new Financial Fair Play (FFP) criteria assess the financial situation of a club according to the profit and loss account. That simply means that the amount of debt itself doesn’t matter, what is important is the impact of the costs of the debt (interest) on the bottom line, along with all the other costs common to football clubs.

The FFP however doesn’t just simply go by the losses that the club makes, it has a system of relevant income and expenses. This means that a substantial loss on the club accounts doesn’t necessarily rule the club out of European competition, what matters is whether the costs are considered relevant (and of course, the income streams too).

Relevant income is fairly self-explanatory, it includes matchday, TV, commercial and other operating incomes (the latter is simply a blanket term for all the small operations a club may run that doesn’t fit under the first three criteria). Relevant expenses are also as you’d expect and they include amortisation of player registrations (more on that later), finance costs and dividend payments.

What it doesn’t include is depreciation of assets that a club hold (not usually too substantial), but most interestingly the costs of youth development and community schemes are exempt (whether Barcelona’s other sporting ventures are included under community schemes I’m not sure, but if they were excluded as an expense it would improve their bottom line by over £20m). Naturally the exemption for money spent on youth development is attempting to instil an attitude of “train your own youngsters” as opposed to throwing cash around every summer, a move I fully back.

The rules themselves are staggered in their implementation, with a EUR45m loss the maximum allowed in 13-14 and 14-15, which drops to EUR30m for the three seasons following that. At that point, a new lower amount will be implemented, to be decided by the UEFA executive committee at some point in the future.

Once the proposals are fully in place, a maximum break-even deficit of  EUR5m deviation is allowed, which makes sense for clubs at the mercy of exchange rates. However would it be too much to expect clubs to make sure they are sufficiently inside the criteria so they don’t get undone by the ebbs and flows of exchange rates and/or revenues? Budget conservatively, and plan for worst-case scenarios etc? Maybe I’m just a traditionalist…

The FFP criteria don’t solely base the break-even verdict on the previous season’s profit/loss result, it is actually calculated as the sum  of the three years’ results. If the FFP criteria were in play for upcoming 10-11 season, the considered period would be 09-10, 08-09 and 07-08 accounts. The idea of using the sum profit/loss over the last three years makes sense: if a club have turned substantial profits for the previous few years, spending a substantial amount on a player in a single year could be argued to be sustainable, despite tipping a single year’s result into the red. If for those periods, a clubs relevant expenses were greater than their relevant incomes by more than EUR45m, the club would be referred to the “Organs for the Administration of Justice” for action according to UEFA’s disciplinary rulebook. I’d hope that failing to meet the criteria would gets clubs summarily expelled for European competition, but that remains to be seen.

A point to note is that actual transfer spending itself doesn’t come into the break-even calculation, it’s the cost as a result of the loss of value of the players’ registration (amortisation) that is considered instead. This has a big impact. Remembering that amortisation is calculated as the transfer fee paid for the player divided by the length of the contract , then any significant transfer spending is actually spread out over a number of years. If a club spent £100million on players all of which were on 4 year contracts, the club would be charged £25m per year, meaning that if a club were to be breaking even, they could afford significant one-off transfer spends, as the cost is spread over the lengths of the players’ contracts. Another point to note is that you only pay amortisation for players you sign: players that come through the academy have no value on the books and so have none of the associated costs.

While that does leave a bit of a sour taste in the mouth, it does throw up an amusing situation: despite what most pundits and sportswriters seem to think, City can’t just spend big before the regulations come into play. All City are doing is storing up massive amortisation charges which, as they are charged over the length of the players’ contracts, takes a good while to shift.

The break-even result is converted into Euros, so exchange rates will have a role to play for Premier League clubs considering the impact of the proposals. There’s also a good idea in there that the Financial Control Panel can request more information from the club if the yearly account show debts as being more than 100% of turnover or wages account for more than 70% of turnover (I’d have gone for 60%, personally but there you go).    

A club can also fall foul of the criteria if their auditors believe there is a danger of the business not being able to continue as a going concern (hello Liverpool) while you’d be hauled in for disciplinary proceedings if you had overdue tax or transfer payments.

So far so good. Now we know how the FFP will work, let’s have a look at some of the weaknesses. Despite the break-even calculation being calculated as the sum of the previous three years, there is a caveat whereby if they fail to meet the criteria during that period, they will consider the financial results of a further two years ago in the aggregate. To me, that’s a bit shoddy. Sure, you can argue that if they made the profits four years ago then they can service the current deficits, but the way that a further two years are considered only if you fail to meet the criteria smacks of watering down the proposals to me. If they want to recognise profits in the more distant past, why aren’t they also recognising the  losses?

It’s just a shame too that it isn’t spelled out in black and white that failure to meet the break-even criteria, having any overdue payables or having any doubts over your ability to continue as a going concern results in a denial of entry into European competition. Otherwise there is always the concern that the rules have an element of flexibility that will be extended to the big names but not the smaller sides.

My other concern with the break-even condition is the fact that it is an arbitrary number of EUR45m. Whether any level of losses is dangerous to a business is dependent on the size of the loss compared to the club’s turnover. If Arsenal, Barcelona or Manchester United turned a EUR45m loss, it wouldn’t be anywhere near as worrying as a smaller side such as Villa or Everton turning a similar sized loss. EUR45m is a number set to stop the big sides turning losses of any more than that, but this is European competition: is it not much, much more serious if a Polish team can enter Europe despite turning a loss of let’s say EUR10m, perhaps equivalent to it’s entire turnover?

If it was up to me, there would be an upper limit, a figure beyond which losses cannot go as well as a condition whereby the break-even criteria is a deficit of no more than let’s say 10% of relevant turnover, with a maximum loss allowed up to EUR45m limit, regardless of turnover. So smaller sides couldn’t get away with smaller losses unless their turnover was sufficient to support it, while the traditional European powerhouses would most likely still be bound by the upper limit. This would help deal with debt in the smaller European leagues, as well as the smaller sides within the big European Leagues, but would it risk creating a closed shop? Smaller sides have to make losses in order to reach the promised land and then break even from the additional revenues, but by this model, they wouldn’t be granted the revenues, and so the top four would sit comfortably at the top of the table. I’m certainly in two minds.

Anyway, that’s enough on the FFP proposals. I don’t profess to have touched on everything, but I hope that’s given you a solid idea of what they’re about and what the issues are with them. The big one is to remember that transfer fees aren’t considered in the criteria, it’s the cost resulting from the player acquisition, the amortisation. I’m sick to death of UEFA’s pdf’s, but at some point in the near future I’ll do the sums for a variety of Premier League sides and see who’ll meet the criteria and who won’t.

___________________________________

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18 comments to Financial Fair Play criteria, what’s it all about

  • WalterBroeckx

    If I get it right Phil, this means there will be not direct penalty for not living up to the rules but the clubs in trouble will have to face a committee and they wil decide if the go in or not?

    The rules are being very flexible. I wonder if my compatriot JL Dehaene has anything to do with it. Because if he does I predicted it over here a few months ago. I then said that if he would import the way Belgian politics operates in to these rules the rules would be open to many interpretations and there will be a lot of backdoors to be opened to escape.

  • Gooneraside

    Good article, Phil.

    It would appear (if I read it correctly) that the FFP leaves plenty of scope for backdoors, loopholes, and much abuse. For example, why did they not simply make a five year rule instead of a three year rule? As it is, “a bit shoddy” doesn’t go far enough to explain it.

    Of course, we can still expect to see clubs gambling that this year’s loss will be offset by entry to the CL next year. Good luck to them.

    Fortunately, this all sounds like SEP (someone else’s problem for those unused to that acronym) and something with which The Arsenal won’t be concerned. So, neither shall I.

  • WalterBroeckx

    On the other hand Uefa has slammed the door in Mallorca’s face and denied them entry in Europe because they were bankrupt (same for Portsmouth) at the end of last season. But who is Mallorca after all.
    Would they do the same with Barceloanus or Real Mad?

  • Like the Acronym ASIDE
    Looks like plenty of grey areas for the “bigger clubs” to weasel their way in.
    FUFA have a real chance to clean up football and to stop it destroying itself financially.
    This would encourage teams to drop wage bills and if its done accross the board theres no reson why it wouldnt work.
    In turn it might actually be possible to take your family to a match without blowing the rent money.
    Premier league has allot to answer for when you look at the quality and affordibility of the bundesliga and dutch league.
    In my humble opinion and not saying I could do it any better but I genuinley think fifa couldnt be run any worse than it is currently and they only seem to change something when its in dire straights.

  • Micheal

    You know what saddens me, Phil…? The very fact that these mere rules are being enforced during the storm of corruption in world football. Does anybody really think these financial restrictions have intimidate rich-clubs (or rather b*tch clubs) like Man City, Man Utd, Villa or Liverpool from lavishing their millions (or rather not their millions) on anything that moves… I think not… FICK FUFA and UEFAgget are bunch of corrupt discriminating crooks… Ever ready to suck on any billionaires’ money-c*ck… A few years ago, I thought Lord Wenger is “gooner” pioneer and teach world football about pure authentic club management and make his critics eat their words… Now, these b*tch clubs have broken many rules and ethics to be successfull… I will pray to God that Arsene’s hard-work ethical approach will eventually overcome these reign of evil upon football… My dad once told me “A smart-guy makes everything out of nothing and a dumb-nut makes nothing out of anything…”

  • TommieGun

    Thanks for the article. I am, actually, quite happy about these rules. Sure, no law is perfect. But the fact of the matter is taht someone there came to the conclusion that a football club should not be a losing enterprise. That is the principle and the rules follow it. As the penalty (exclusion from european activity) is severe, flexibility is necessary to ensure that injustice can be prevented (true, it can also serve as a loophole but in my opinion it is better to have a legal system that enables discretion, rather than a rigid one). Finally, I don’t think that the rich clubs will easily weasel their ways around those regulations, as the mere exposure to the risk of being eliminated from european activity will serve as an adeqaute detterent, plus for sure it will cut down the crazy spending (i.e., clubs will at least try to live within the boundries of Eur45mil).

  • walter

    Hey TommieGun, thanks to you I just discovered I’m a bit of a moaner on these FFP rules. 😉

    I must admit that I had hoped for more in fact. In my daily job I have to check if things are according to the law or not. And believe me the best thing for my job is that the rules are clear and no exceptions. But over here they make the rules and then make so many exceptions that at the end of the day there are no clear rules and it all is very foggy.
    Maybe it has something to do with my job that I ask for clear rules that cannot have all kinds of explanations according to all kinds of situations. In this case I like black and white rules.

  • Phil

    I suppose flexibility can be good, but when flexibility is granted to an organisation with such a dubious record… I’m still skeptical. How and why it isn’t set out in stone that failure to meet the criteria will result in exclusion from European competition is beyond me, too. There’s enough flexibility in the staggered implementation of the proposals as well as the “acceptable deviation” that some hard and fast rules on the punishments wouldn’t be draconian.

  • Dark Prince

    So eventually, as i’ve been saying all this time, the bigger teams can get around this obstacle. Unfortunately, the financial rules are only a problem for teams which are on verge of administration. Which, in this case, doesn’t apply to any big teams as of now.

  • Richard B

    When things change (rules, technology etc.) we tend to assume that the effects will be immediate and we wildly overestimate the short term impact that will occur. Likewise we tend to underestimate the long term effects. The original dotcom bubble was a major manifestation of this.
    Some isolated impacts are already being felt in this country. Portsmouths ban and the resignation of Martin O’Neil (because he couldn’t manage under rules that would force him to bring down Villas salary/revenue ratio) are two more obvious ones. The almost non existent transfer market last January was another.
    How things will pan out over the next year or two is difficult to predict. The one thing we can say is that Arsenal are perhaps the only club who will not have to alter their long established strategy by one iota. But if you do have to change you will have to deal with the unexpected consequences of those changes. O’Neil could be just the first of many who can’t cope and Barceloaners balance sheet the first of many to be re-examined and found to be a deal less strong than first assumed.
    Complacency could be Arsenals major threat in the short to medium term.

  • TommieGun

    @ Walter – Thanks for your response 🙂

    I can only guess what you do for a living, but coming from the other end of the law, it’s not always black and white. Sure, if you’re the guy whose in charge of deciding who gets a building or zoning permit, it makes your job easier to have clear rules with no exceptions. But is it the best solution for society? Maybe this poor bloke who built the small, yet illegal extension to his porch, shouldn’t be fined and the extension shouldn’t be destroyed? And that other rich guy who “annexed” a part of the public park to his back yard should be put on probation (or jail)? I don’t know. That’s why we have judges in judiciary system and not computers. I admit it’s all a bit philosophical.

    @ Phil – I read the regulations just now, admittedly, very briefly and not with a CPA’s spectacles so if I missed something, my apologies. It seems to me that you are unhappy with the wording of article 63(4), which give a lot of discretion to the “Organs for Administration of Justice” (pfft.

    Yes, the words are not explicit, but look at article 57, which enforces all clubs to stand within the break-even rule. I think that a blatant disregard to the break-even rule – we ARE talking about numbers, in the end of the day – cannot be ignored.

  • Fem Dee

    I totally agree with TommieGun and Richard B. It may seem a victory to Dark Prince’s long held opinion but it mostly will not.

    1. It is too much a risk to take for the big clubs.

    2. Once some clubs are debarred, it will be great pressure on the administrators not to be blatantly and consistently partial. So, if they manage to squeeze a big club in this year and it makes no effort to change its ways, it be more difficult each year to keep squeezing the club in.

    3. Because it is an Europe-wide rule, it may even be difficult for a “big” club in a particular country to lobby or gain the sympathy of the officers from other countries. More difficult than the influence that the big club will normally wield on its country’s FA.

  • Phil

    I certainly hope you commenters are right. Perhaps my inner cynic was out, but I was expecting clear-cut sanctions for failing to meet the regs and was disappointed when they weren’t forthcoming.

    The “can’t lie with numbers” are argument is correct in theory, but with grey areas existing in the “relevant income and expenses” bit, one party could argue the deficit is X, while the other party could feasibly argue it is Y.

  • WalterBroeckx

    Tommiegun, you guessed what I am doing for a living. 🙂 LOL. Its the exceptions on the exceptions on the exceptions that drive me mad at times. And those exceptions are exceptions one rules who can be explained in 17 ways. Okay, I think I have exagerated a little bit on this. 😉

  • IvoryGoonz

    Better have something that nothing at all. They’ll just have to tune it.

  • Clerkenwell Gooner

    Hello, Liverpool indeed.

    Because this just came in from the Dept of Christ On A Bike:

    Sources close to the process confirmed today that no firm offers, with the required proof of funds, have been received, and it is not thought likely that any will be delivered tomorrow. That means Liverpool’s owners, Tom Hicks and George Gillett, will be hit with another £2.5m, the penalty fee they are being charged by the Royal Bank of Scotland for every week the club is not sold.

    Imposed on Hicks’s and Gillett’s Liverpool holding company, Kop, as part of the refinancing last April of £237m in loans from RBS, the £2.5m weekly penalties will, according to sources close to the arrangement, amount to an additional £60m if the club is not sold by 6 October, when the loan expires. That would mean RBS will have racked up more than £200m in interest and fees since it loaned Hicks and Gillett £185m to buy Liverpool in February 2007.

    £2.5 mil penalty charge every week, £200 mil interest charges on debt since 2007! These people should be disbarred from ever “buying” anything ever again! Not even a fucking bar of soap!

    sauce: http://www.guardian.co.uk/football/2010/aug/12/liverpool-bids-deadline-day

  • walter

    Clerkenwell,
    when Tony would read this I think he would write a great article on this.

    Yeah, why didn’t we do like Liverpool did over the past years to win something….

  • Tom

    This article/blog provides much better info regarding the FPP

    http://swissramble.blogspot.com/2010/05/uefa-say-fair-play-to-arsenal.html