UEFA Financial Fair Play

Some commentators have speculated that the reason for Chelsea’s burst of activity is to somehow beat the UEFA Financial Fair Play rules, as the next set of accounts (2010/11) is the last year where the numbers are excluded from UEFA’s break-even calculations, but this merely betrays a lack of accounting knowledge. The reality is that when a player is purchased, his cost is capitalised on the balance sheet and is written-down (amortised) over the length of his contract. Importantly, this means that the cost of Chelsea’s recent purchases will be included under Financial Fair Play via the amortisation charge.

In this way, amortisation can have a big influence on a club’s results. For example, Manchester City’s player amortisation has grown significantly from £6 million in 2007 to £71 million in 2010. On the other hand, the slow-down in Chelsea’s transfer spend has seen their amortisation fall from £83 million to £38 million in the last five years.

Although a few journalists have suggested some accounting trickery, whereby clubs would choose to book all the huge transfer spend now as a cost, so that it would not impact future accounts, this seems extremely unlikely to me. While it is true that UEFA's regulations do allow football clubs to choose "an accounting policy to expense the costs of acquiring a player’s registration rather than capitalise them", the key point is that this must be "permitted under their national accounting practice."

This is highly technical, but in my view this is where their argument falls down. Ever since the introduction of IFRS (International Financial Reporting Standards), in particular FRS10 on Goodwill and Intangible Assets, major clubs have used the capitalisation and amortisation method to account for player transfers, so it would be difficult for Chelsea (or anybody else) to argue that the "income and expense" method had suddenly become appropriate.

UEFA have all but confirmed this in a recent statement, when they clarified the issue: “There is no doubt that transfers now will impact on the break-even results of the financial years ending 2012 and 2013 – the first financial years to be assessed under the break-even rule.” This was further underlined by Andrea Traverso, the Head of Club Licensing and Financial Fair Play at UEFA, who explained, “All clubs must amortise all transfer fees.”
I suppose that there is always the possibility of a club booking a massive impairment provision in 2010/11, which would dramatically reduce the value of their players in the accounts, but have the advantage of reducing future expenses. However, this has the whiff of earnings manipulation and is unlikely to be accepted by UEFA.


However, they don’t need to be absolutely perfect by then, as wealthy owners will be allowed to absorb aggregate losses (so-called “acceptable deviations”) of €45 million (£39 million), initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million (£26 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount). Note that these sums represent aggregate losses, not a yearly loss, as I have seen some people erroneously report.

For how new signings will be calculated into FFP read this as an example......



2. New Signings

The 2009/10 accounts ran up to 30 June 2010, so do not include the cost of any new signings after that date, which means that we need to add the wages and amortisation for Torres, Luiz, Ramires and Yossi Benayoun. Taking Torres as an example, his wages have been estimated at £150,000 a week, which works out to £8 million a year, while the annual amortisation is £9 million (£50 million transfer fee divided by the 5.5 years of his contract), giving a total of £17 million. Although players’ salaries are not divulged, we can make reasonably accurate estimates for the others, which give us a total of £36 million of additional costs for these four players.

The £17m is what Torres is costing them per year in expenses including his transfer fee.

However, they don’t need to be absolutely perfect by then, as wealthy owners will be allowed to absorb aggregate losses (so-called “acceptable deviations”) of €45 million (£39 million), initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million (£26 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount). Note that these sums represent aggregate losses, not a yearly loss, as I have seen some people erroneously report.

free_cat wrote:

However, they don’t need to be absolutely perfect by then, as wealthy owners will be allowed to absorb aggregate losses (so-called “acceptable deviations”) of €45 million (£39 million), initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million (£26 million) from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount). Note that these sums represent aggregate losses, not a yearly loss, as I have seen some people erroneously report.

This part it's the only part that actually talks about financial fair play, rest is about accounting that I already was aware of. However, this leaves a lot of doubts:

1) Is this approved?
2) How will UEFA control the accounts? Will they hire their own auditors or they will rely on club's auditors? Club's auditor's have been proved to be extremely easily influenced by the Club to show the financial results the Club wishes.
3) How can they avoid creative ways to go around the injection of equity? E.g.: If your loss surpasses the 45m€ in three seasons, you ask a Qatari friend to close a sponsorship deal with your Club and you pay him in the Cayman Islands the difference.

My veredict: FFP rules will barely have any effect. We might not see 100+ milion losses a season as Man City or Chelsea did for a few seasons, but they can in reality be close to that, but actually showing much less.

sportsczy wrote:Salary cap, luxury tax and revenue sharing is the only way to create fair play. There's a reason why almost every NFL team in the US is worth over $1 billion, regardless of location... it's an impossible task to monitor financial performance unless you force the clubs to follow US-style public-company reporting requirements.

I think this is going to fail miserably.

windkick wrote:Correct me if I am wrong, but don't Ligue 1 teams get relegated instantly if they get in serious debt? Which is a reason why you rarely see French teams going crazy spending cash they don't have

Will UEFA’s Financial Fair Play help Arsenal?

Many fans believe that the FFP regulations will benefit Arsenal, as they force clubs to live within their means if they wish to compete in Europe. The theory was that this would lead to the demise of the big spending, benefactor model, while encouraging those teams who adopted a self-sustaining approach. Clearly, Arsenal will have no problem complying with the new rules, but other leading clubs are maybe not so badly placed as once feared.

Real Madrid and Bayern Munich have been consistently profitable, thanks to their huge revenue, while Barcelona have also reported regular profits except when there is a change in club president. Even Manchester United now make profits despite their ample interest payments.

Clearly, FFP will be more of a challenge for clubs like Manchester City and Chelsea, who make huge losses, but UEFA have made it easier for such clubs to conform. First, UEFA’s break-even calculation is not exactly the same as a club’s statutory accounts, as it excludes certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community development activities.

"Most ox-cellent"

Second, wealthy owners will be allowed to absorb aggregate losses (so-called “acceptable deviations”) of €45 million (£39 million), initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions.

If that wasn’t enough, clubs will be allowed to exclude wages from players signed before June 2010, so long as they are reporting an improving trend in their accounts. Granted, that “loophole” only exists for the first two monitoring periods (2013/14 and 2014/15), but it will buy the clubs time to improve their finances.

Finally, there has to be a concern that accountants and lawyers will look to bend the rules. Wenger accused Manchester City of doing just this with their £400 million Etihad deal, “They give us the message that they can get around it by doing what they want. It means financial fair play will not come in.”

In short, FFP may not prove to be the cavalry coming over the hill that some imagined for Arsenal. If it is, then it will be a good few years before it bites.

Lex wrote:It sounds like it's going to be a giant headache to actually enforce, especially since clubs are going to find a dozen sleazy way to weasel their way through the loopholes they'll obviously find

arabprince wrote:Are big baths legal under IFRS? I know they aren't under GAAP.

If this is all about accounting, then teams won't suffer. An accountants job is to know the numbers and shot things connect, they'll be able to fudge numbers no problem.

free_cat wrote:

arabprince wrote:Are big baths legal under IFRS? I know they aren't under GAAP.

If this is all about accounting, then teams won't suffer. An accountants job is to know the numbers and shot things connect, they'll be able to fudge numbers no problem.

That's not an accountant's job.

An accountant's job is to reflect in a comprehensible way, in this case using named accounts and numbers, the real financial situation of a company (in this case club) as accurate and truthfully as possible.

What you are describing is the job of a fraudulent accountant/auditor.