Financial Fair Play: Everything You Need to Know About Controversial Rule

Karl Matchett@@karlmatchettFeatured ColumnistJuly 25, 2012

Financial Fair Play: Everything You Need to Know About Controversial Rule

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    Financial Fair Play: you've heard all about it, but what does it actually mean?

    UEFA's new prerogative is apparently to level the playing field in a monetary sense, forcing clubs to spend within their means and only pay out what they can bring in themselves.

    The essence behind the idea, of course, is to rule out the long term effect of the sugar daddy owner, the rich kid plaything buying players with oil and to prevent future occurrences of teams falling into states of disrepair, uncaring ownership and, even ultimately, financial ruin.

    See Portsmouth as a case in point.

    Let's take a look at the finer points of Financial Fair Play—FFP—and understand what it really means to clubs out there on a day to day, season to season basis.

What's the Basic Idea Behind FFP?

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    There are four core ideals to the thinking that FFP will help clubs:

    • to promote greater transparency of what clubs are earning, and therefore should be spending
    • to ensure clubs "live within their means"
    • to see that clubs pay their ongoing debts in a timely manner
    • and to make clubs sustainable, long term businesses

    UEFA wants clubs to be more accountable for their actions and their spending in the wake of many teams carrying unsustainable debt, spending more than they earn and failing to pay off their creditors.

    A real worry of the governing body of Europe is what they are calling "many clubs [have] reported repeated, and worsening, financial losses".

    Think Portsmouth over the past few weeks. Rangers this summer. Leeds United previously. And several clubs besides.

    They have been unable to pay their staff wages, national social insurance fees or taxes and a mix of other industries and companies who were owed money. The financial collapse of a club has led almost always to the sporting collapse of the same, and this is what UEFA is keen to avoid.

The Accounting Basics

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    Depending on your outlook, maybe there is no such thing as "accounting basics." Either way, let's take a look at the key functions of accountancy which will be used in FFP.

    First off, any stadium development costs, and likewise any costs associated with youth football development, will not be taken into account. This is due to UEFA wanting clubs to invest in their youth structure and become self-sustainable—not to mention giving better coaching from a young age to potential players.

    Obviously, the biggest factors at many clubs are transfer fees paid and wages. Both of these are important components, but not in a straight forward way.

    For example, let us say a team signs a player on a four-year contract for £20 million. In accountancy terms, this £20 million is not "payable", or perhaps better to say declarable, up front—though under the terms of the agreement between the two teams involved in the transfer, money may indeed exchange hands immediately.

    Instead, the cost of the transfer is amortised over the length of the player's contract, in this case four years.

    This means that each "reporting period," the club will effectively spend (20 divided by four) £5 million on this player.

    Indeed, under FFP rules the club could sell the same player for only £15 million two years after buying him and record a profit, despite receiving less than it paid for him originally.

    This is because the value of the player has amortised to £10 million with two years left on his deal, meaning the club would record a £5 million profit if they then sold him for £15 million.

    Wages will be taken into account for FFP, but this will be touched on in more detail further along.

Ongoing Monitoring

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    All UEFA clubs are to be assessed in an ongoing, continuous cycle that covers a three-year period.

    FIFA's own documentation explains it clearly, according to UEFA.com:

    Clubs are assessed against the break-even requirements over three reporting periods: the reporting period ending in the calendar year that the UEFA club competitions commence (T), the reporting period ending in the calendar year before commencement of the UEFA club competitions (T-1) and the preceding reporting period (T-2).

    As an example, the monitoring period assessed in the season 2015/16 covers the reporting periods ending in 2015 (T), 2014 (T-1) and 2013 (T-2).

    This indicates that over a rolling three-year time frame, clubs need to have a viable and sustainable business model that allows them to break even, or at least show a downward trend if they are not yet breaking even.

    With the monitoring due to start during the 2013-14 season, only two "reporting periods" will be covered in that first assessment; essentially the years ending 2013 and 2012 (i.e. the European campaign just finished and the one about to begin).

    Therefore, clearly, transfers made this summer—such as Zlatan Ibrahimovic to PSG—will be taken into account when drawing up clubs' yearly balance sheets.

    [Quoted text taken from UEFA's own downloadable FFP Press Kit, from uefa.com]

Break Even... or Not

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    Okay, so, an assessment on any team in particular has been done and it seems it doesn't break even for the past two reporting periods.

    What next?

    Well, not a lot, in all honesty.

    At this point, teams don't have to break even. In fact, they potentially never have to break even.

    For starters, there is an allowance within the FFP rules for teams to have a "maximum aggregate deficit" of €5 million—in other words, they can fall €5 million short of breaking even with no penalty implied against them.

    This is then increased to (a further) €45 million deficit for the first two rolling over assessment periods, assuming that the "equity participants"—what most people would call the owner, majority shareholder or investment vehicle that owns the club's parent company—are willing to foot the bill.

    In laymen's terms, what that means is that the Roman Abramovich's of the world are allowed to spend almost €50 million more of their own money into the club, unaccounted for in terms of breaking even, over each of the next two monitoring periods.

    From 2015/16 and for the three seasons thereafter, this will decrease to €30 million.

    It is expected to continue to decrease in the future, though no date nor decision has been taken.

    So... even with the €5 million acceptable deviation out the way, and the "rich owner's" €45 million investment taken care of, if the club is still showing nothing approaching breaking even, is it then in trouble?

    Actually... no.

    If the side can show a positive downward trend in the annual break-even accounts of individual years, in addition to a solid future business strategy, then it can say that it is en-route to self-sustainability, it just simply hasn't arrived yet.

    In addition, the club can attribute any high wages of players signed before June 2010 as a reason of failing to break-even over the reporting periods in question.

    For those of you wondering, yes, Carlos Tevez's deal would come under that particular exemption, as he signed in 2009 for Manchester City.

Fair Value Panel and Other Potential Problems

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    It's not all clear-cut and ready to enforce the law, as you can see.

    In addition, there are a number of criticisms aimed the way of FFP as it does perhaps not adequately cover all aspects of differences in accounting between nations, amongst other things.

    The Fair Value Panel will be set up to look at deals that sponsor or otherwise make payments to a club to ensure that these are not merely an alternative way of owners pumping money into their clubs to circumnavigate the €45 million cap.

    Other questions remain, such as tax in different countries being subjected to different rates, which can make a big difference in player wages paid.

    In addition, charity and parachute payments in England at present count toward "costs" of a club under the FFP scheme. Naturally, English sides are keen for UEFA to agree to discount any charity payments made to avoid any potential problems with the top sides dishing out money to the smaller clubs in lower down leagues.

What If a Club Runs Afoul of the Rule?

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    If and when UEFA decides a club has failed to implement FFP sufficiently, it will retain the power to impose sanctions on these teams.

    Depending on the severity of the issue, these punishments can range from monetary fines to exclusion from UEFA competitions and withdrawals of licenses.

    This seems the most harsh deterrent of all, as the Champions League is a great source of income to competing teams.

    Chelsea, the victors of the competition in 2012, saw an estimated prize fund income of almost £50 million as a result of their success, according to the Guardian.

Will UEFA Implement Its Own Rule?

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    We'll refer to UEFA's own documentation again:

    The fact that more than 100 clubs were refused licences in 2011/12 shows both the continuing need to improve standards and that the system is actively enforced.

    The system's credibility depends on consistent application of the regulations, and an independent auditing company annually checks the licensing department of all 53 member associations. In addition, UEFA, in cooperation with independent auditors, also conducts compliance visits to check that licenses have been correctly granted.

    So, UEFA certainly claims that it is already imposing measures to ensure clubs are up to scratch financially, even though the first FFP control period is yet to get underway.

    The message is loud and clear from Europe's governing body: It wants clubs to be responsible for their own futures and have the discipline and ability to spend only what they can afford.

    It will be an interesting season ahead as the first of the reporting periods come to a close and the actual FFP auditing takes place—and we are able to witness first hand what the outcomes of those are and, more importantly, what UEFA's reaction is to those who are not compliant.

    [Quoted text taken from UEFA's own downloadable FFP Press Kit, from uefa.com]

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