11 Sep 2012 13:41:15
{Ed002's Note -
The Demystification of the Financial Fair Play Rules (FFPR)
Introduction
I will try and simplify and summarise the FFPR and give examples where I can.
Putting aside all of the "mother country" fluff, the fundamental purpose of the FFPR is to:
(1) Ensure that clubs are operating within their means with transparent financial reporting. Example: Arsenal has debt which they can manage from the money they make as a club (good). Anzhi has a very low turnover given the amount of money they spend on players through donations from wealthy owners (bad).
(2) Protect creditors. Example: When Portsmouth went bust they owed money for players (the extreme case being Glen Johnson who had moved to Liverpool but Portsmouth still owed Chelsea for), money to local businesses (tradesmen who had worked at the ground, newsagents etc.), utility companies, the police et al (bad).
(3) Encourage responsible spending. Example: Liverpool under Hicks and Gillett borrowed money against the value of the club in order to buy players (bad).
(4) Protect the long-term viability of European club football. Example: They want to avoid the scenario of clubs entering administration or going out of business.
The FFPR apply to all UEFA club competitions and will actively come in to force from the end of June 2014 taking account of the financial monitoring period (the season just finished) and the two prior reporting periods (the two seasons before that). So when they first start, the FFPR will look at the 2013/2014 returns, and they will give consideration to the 2011/12 and 2012/13 figures.
I should make clear that it is not the full accounts of a club that are being considered, but just the "relevant" income and the "relevant" expenses. "Excluded" expenses are critical to the FFPR calculations. To this end, all clubs will need to effectively produce two sets of accounts. An audited set which are provided to Companies House and the relevant revenue organisations, and a second audited return laying out the "relevant" income and the "relevant" expenses for the purpose of the FFPR.
Relevant Income
(1) Match day gate receipts. Example: The money made by the club from paying fans attending games. This includes income from cup games when played away from home where a proportion of the gate money goes to the away side.
(2) Broadcasting rights. Example: Television income for games, money provided for radio broadcasting.
(3) Income from commercial activities. Example: Sales of bobble hats and rattles, club shop income, licensed income (e.g. DVD sales). In the future you can expect to see income from other media (e.g. streaming of games on a pay-per-view basis to the web and phones) increase.
(4) Prize money. Example: income from the Premier League, Champions League etc..
(5) Sponsorship. Example: Shirt sponsors (Standard Chartered, Samsung etc.), shirt manufactures (Adidas, Warrior etc.).
(6) Advertising. Example: Companies who buy time on video screens during games or hoardings at the stadium.
(7) Other operating income. Example: Payments made to a club for playing friendly matches in the Far East.
(8) Income from transfers: Example: All income from the sale of a player regardless of payment being due to previous clubs, the player himself etc. as they are allowable expenses which will later be deducted.
(9) Excess proceeds on the sale of tangible fixed assets. Example: The money Arsenal from converting part of Highbury in to apartments and selling them.
(10) Other income: Example: Interest on investments.
Relevant Expenses
(1) The costs of running the business (confusingly referred to as "the cost of sales" by accountants etc.). Example: Wages, ground maintenance, lighting, telephones, IT equipment, travel costs, policing costs etc..
(2) Employee related benefits and associated costs. Example: Costs of providing insurance, dental care, medical, employer NI contribution, housing, loyalty bonuses etc..
(3) Other operating expenses. Example: Payments for advertising, legal fees, agent fees, accounting fees, payments to players in relation to transfers, payments to player's previous clubs, etc..
(4) Amortisation or transfer costs. Example: The total amount of money paid to another club to transfer a player or, if a club decides to do so, the amortised cost for that year (where a club is spreading the cost of the transfer out over the length of his contract for accounting purposes).
(5) Finance costs. Example: Bank charges, interest on loans etc..
(6) Dividends. Example: The owners may take a dividend from the profits a club makes as income.
Excluded Expenses
(1) Depreciation of tangible fixed assets. Example: The loss, if any, in value of the stadium, cars, IT equipment etc..
(2) Costs associated with the intangible fixed assets (other than player registrations). Example: goodwill, franchises, trademarks, copyrights etc..
(3) Expenditure on youth development activities. Example: All youth development expenses (housing, schooling, travel, medical etc.) are excluded from the calculations.
(4) Community development activities. Example: Outreach programmes, donations to the local community and charities, provision of equipment etc..
(5) Tax expenses. Example: Monies paid to the Inland Revenue, VAT etc..
(6) Finance costs related to construction of tangible fixed assets. Example: The interest on the £300M loan to build a new stadium.
(7) Interest payments on old loans (pre June 1, 2011). Example: Any interest due on a loan taken out for whatever purpose before June 1, 2011 is excluded from the calculations.
(8) Certain expenses from non-football operations. Example: This does not really apply to British clubs, but in other European countries clubs are often "sporting clubs" and have basketball, football, hockey team etc. all under one business.
The Calculation
FFPR calculates from a club's "relevant" income and the "relevant" expenses whether the club is running at a surplus (profit) or deficit (loss) within a Monitoring Period (e.g. 2013/14). From this the FFPR decides if a club has met the "break even" requirement or not. This is not met if the "relevant" expenses exceed the "relevant" income by more than 5M euros (an acceptable deviation).
If the club exceeds this acceptable deviation, the owners of a club may contribute toward correcting it to a maximum of 45M euro over a rolling three year period (30M euro from 2015/16 on). Example: If Club X made a loss of 50M euro in 2013/14 due to the purchase of players, the calculation will ignore the first 5M euro and assume an owner contribution of 45M euro and there would not be an issue. However, for the two years following, there would be no allowable owner contribution as the full allocation had been used. If Club Y made a loss of 30M euro in 2013/14 due to the purchase of players, the calculation will ignore the first 5M euro and assume an owner contribution of 25M euro and there would not be an issue. But in this case, for the two years following, there would still be 20M euro allowable as owner contribution to cover further losses.
The Punishment
The Threat: If a club has been determined to have violated the "break even" requirement for a season it may be excluded from the next season's UEFA competitions.
Likely Situation: If a club can show it has been moving in the right direction and doing what it can to overcome financial issues, perhaps brought on by a recession (e.g. in Spain) then I would expect a strongly worded letter as a warning. Perhaps by then end of the 2016/2017 season, If a club has been determined to have violated the "break even" requirement for several seasons then it may be excluded from the next season's UEFA competitions.
UEFA are willing to make some exceptions to the rule and have already said they will consider:
(1) The quantum and trend of the break even result. Example: Chelsea has spent a lot this summer rebuilding an aging squad, so even with considerable additional income from winning the Champions League it could violate the "break even" requirement. However, spending less next season will show the club moving in the right direction. Expect a strongly worded letter in a couple of years time.
(2) Debt situation. Example: A possible "get out" for Barcelona, Real Madrid and Manchester United should they have a bad season and need to violate the "break even" requirement. Consideration will be given to the existing debt and the ability of the clubs to service that debt. The trend of the debt reducing and an excuse of "one bad season" and "need to rebuild the team" would likely result in a slapped wrist.
(3) Fluctuating exchange rates. Example: All non eurozone countries need to report the FFPR figures in euros which could fluctuate due to the exchange rate, whereas a number of the UEFA figures are fixed amounts (e.g. the 5M euro acceptable deviation).
(4) Projected figures. Example: UEFA will allow clubs to show that they are moving in the right direction if they provide projected figures showing that the "break even" requirement will be met in the following season.
(5) Force majeure. Example: Any extraordinary events or situation arising that is beyond the club's control will be taken in to account.
(6) Until then end of 2014/15 only - Ongoing reductions in wage costs. UEFA will be flexible over the "break even" requirement if a club can show that their wage bill has been reducing and with the exclusion of wages of players signed before June 1, 2010 they would have met the "break even" requirement. Example: An escape route for the likes of Chelsea prior to this season with Drogba, Anelka, Bosingwa, Kalou, Cech, Terry, Lampard etc. wages excluded from the calculations. A possible future escape route for the likes of Barcelona.
The Issues
There are a number of matters that UEFA still need to figure out and a number of concerns that certain clubs and certain national associations have. Off the top of my head:
(1) Loopholes: Whilst UEFA has done what it can to block any potential "loopholes" it is well aware that exclusion of wages for players signed before June 2010 is one it has introduced itself, and one that will be popular with the higher paying clubs as a short term escape route through to the summer of 2015. The matters of excessive sponsorship will be addressed via a cap to thwart the concerns over the likes of Manchester City abusing the rules. The cap has yet to be finalised but will require ratification.
(2) Soft Sponsorship: UEFA are concerned at the aggressive approach to obtaining sponsorship some clubs are taking. Questions are being asked about the ethics in clubs having airline travel partners, photocopier partners etc.. The Spanish clubs have raised this as a concern.
(3) National Sponsorship Variations: As we have seen tobacco sponsorship leave Formula 1 UEFA would like to see alcohol sponsorship out of football. We already have a situation where sponsorship by alcohol related businesses are forbidden in certain countries. Wealthy breweries are now focussing their sponsorship in other countries thereby creating a perceived imbalance in what income clubs are able to obtain in sponsorship. The French and Russian clubs have raised this as a concern.
(4) National Financial Distribution Variations: Concerns exist in countries where different models are used for distributing prize money, contributing to the grassroots game and distributing income from television and other media broadcasting. This led to an original request (rejected) from a number of clubs to restrict the FFPR to only the wealthiest of clubs, those with a turnover in excess of xM euros.
(5) National Taxation Variations: There is a considerable difference across UEFA nations in taxation, and this is seen to be reflected in the wages paid to players. The Spanish clubs have raised this as a concern.
(6) Third Party Ownership: Countries that allow third party ownership of players are seen to have a distinct advantage in being able to keep the costs of transfer fees low as they are only paying for a proportion of a player. The English clubs have raised this as a concern.
The Great Fear
Without going in to too much detail: (a) A number of clubs take the opportunity a once or twice a year to discuss various issues including changes in rules, television rights, the power of UEFA, exploitation issues for new technology streams, etc.. These discussions, the last of which were in late August, also always turn to the possibility and structure of a breakaway pan European league. Several are ex-G14 clubs, several are not, and some clubs decline involvement in such discussions. (b) The plan is that at some point a number of clubs would break away from their national leagues and UEFA. They accept that they would be banned from all existing club competition and the players would initially be banned from all FIFA competitions as well, but know that FIFA would be looking to negotiate in any case. It would be the end of UEFA in all probability and UEFA are very aware of this. It would also result in a restructuring of many of the national leagues. (c) The clubs would renegotiate their television rights, rights of distribution via other streams etc.. (d) It remains the greatest fear of UEFA and all major national authorities that one day this will happen. {Ed002's Note -
Thanks 002 for putting that together for us. I might have to get my lawyer to explain some of that tho lol. But thanks for taking the time. Very interesting stuff. In your opinion, does FFP have a realistic chance of succeeding? Or would UEFA crumble if teams threatened to create a breakaway league?
Thanks again
Ezdee {Ed002's Note - I think it will happen but I think any significant attempt at a sanction could result in a legal challenge. So one fear might be that it is toothless.}
LEGEND ED!!
What is the problem of the super rich investing their own personal money into clubs like Chelsea and City, PSG and Anzi have? All it does is makes those individuals poorer, not that club as a whole. I understand that clubs should work within the their financial restrictions but if Usmanov wants to give Arsenal 500m to take us to the top why shouldn't he.
The rules will always be bent by using the likes of Man City's 400m sponsership deal so this will not overly effect the top dogs!
Well the rich always get richer...thats the fact of life, this is just UEFA's way of making it a level playing field for those big clubs who dont have that benefactor.
The two big spanish clubs outweigh their counterparts mainly due to television rights and the history of their clubs in attracting players.
The Italian league still attracts players from south america, as they are influenced by the memories of the 70's 80's and 90's and the fact that its easier for most players to play their trade there without strict Visa injunctions.
From my perspective, the italian league has stopped the money from owners bit, as they can no longer sustain that level without the income...even wealthy owners need money to survive and not just support a failing team, as AC milan showed this year.
barcelona and madrid have spend the same amount of money this transfer window, which is in line with the FFP.
they had around 35 mill to spend and they spent even less with sales and loans.
the french league has only one albatross which is PSG, but the other clubs try to live within their means and they are a league which mostly sells its valuable assets.
The bundesliga has been one of the best run leagues financially for over the past 8 years, on average, although 1-2 clubs are in the red....they rather get relegated than be in debt...FC koln anyone? the fact that they did not build around poldi as they had no money.
This move is designed by UEFA to aim ENGLISH teams, there is no doubt that the rest of europe and probably every top member of UEFA dislikes the english teams.
we have seen the infractions arsenal and wenger have received for minor issues.
Anyway City and chelsea will continue to beat the system...theres a loophole in ever corner. the fact is their owners are driven by being no1. if they cannot they will simply loose interest and this will only give rise to something else.
Portsmouth 2.0
If FFP is implemented then by 2020, i can put my moneys worth, abramovic and sheikh mansour will flog heir clubs, they just dont have the assets or marketing power to be what arsenal or utd or liverpool are.
take this into consideration. we have not won a single trophy in 7 odd years and we are the 3rd -4th richest club in the world.
Since abramovic took over he has spent roughly half the value of arsenal and holds around 800 mill against chelsea which is arsenals value. so basically that clubs worth a pound(token value) if in administration. {Ed002's Note - I think you have rather misunderstood Chelsea's finances.}
Great post, thanks so much for taking your time to put that together- it actually makes a lot more sense to me now.
It appears, in many ways quite political, with uefa trying to play hard ball with 'certain' clubs... but at the same time having to play a bit of a balancing act. So how effective this is going to be, we'll have to see.
I wouldn't plan my future on it, to be either more (the likes of arsenal, etc, etc) or even less (city, chelsea, etc) competitive.
Personal view? I suspect more of the same.
LG
Ed sorry I would have said more than 'legend Ed' but I hadn't actually read it until just now as I've been unable to until 15 mins ago.
Thank you so so much for taking the time to do this and post it, honestly that is amazing.
I won't comment now apart from just saying because I saw a glimpse of it just now - but the whole argument about rich owners investing what they want is probably the footballing equivalent of monopolization? And as such must be regulated? Anyway I look forward to digesting all of this and trying to figure out what it means...
I have to admit though, on the surface of it, it seems like we are wasting our time in such a criminal way trying to comply with all this b*******. There is every loophole you could possibly want to protect the biggest clubs despite their debts and wage bills, it is actually a disgrace. Wenger is a mug if he thinks 'not spending in order to comply with FFP rules' will benefit us. This has confirmed what we all fear! That if a club wants to avoid getting a rap, it will, and easily.
Metal Gooner
Thanks a lot Ed this is really helpful. My question is this: What is your opinion on Arsenal being so hopeful of the FFP rules coming into force? Also do you think Arsenal will ever be able to compete with the likes of Chelsea and Man City in the transfer market?
Thanks a lot {Ed002's Note - Unless there is a late legal challenge you can expect the rules to come in on schedule. Arsenal do fine in the transfer market from money the club generates. Chelsea needed to refresh an aging squad this year hence their spending (which has not quite finished). Manchester City will need to fall in line at some point - and I think most of their significant spending is complete.}
Accidentally ended up commenting anyway...woops.
Metal Gooner
Cheers mate! Really useful.