Untold Arsenal: Arsenal News. Supporting the Lord Wenger in all he does » 2010 » August » 12
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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They don’t like our youth in the youth teams