Liverpool and Financial Fair Play: How It Affects Their Champions League Hopes

Having not kicked a ball in the Champions League since December 2009, Liverpool fans are understandably anxious to seal their participation in next year’s top UEFA competition.

However, following the introduction of UEFA’s Financial Fair Play (FFP) rules, finishing in a top position in the Premier League is no longer enough to secure qualification. For Liverpool fans, there is a new worry: recently released club accounts showing a combined loss of over £90 million for the 2011/12 and 2012/13 seasons combined—as per The Telegraph.

This figure is well above UEFA’s maximum permitted loss over two seasons of €45 million (£37 million). So could participation be snatched from Liverpool’s grasp?

The good news for Liverpool is that their entry into next year’s Champions League is essentially saved by the fact that they have not qualified for the UEFA competitions taking place this season (2013/14). All of the 231 clubs taking part this season had to provide UEFA with their accounts for the two previous years (2011/12 and 2012/13)—these are currently being assessed to see if any clubs exceeded the permitted loss figures.

Tim Hales/Associated Press

As Liverpool didn’t take part in the competition, they were not required to submit their accounts and cannot be punished this year. If Liverpool’s accounts had been assessed this season, they would certainly have failed the FFP "break-even" test and would have received a sanction. This could have resulted in a ban for Liverpool (although the current preferred UEFA sanction appears to be to permit a club to participate but to impose a "salary cap" on their registered UEFA squad).

Liverpool will be allowed to compete in next season’s Champions League (assuming they qualify) without any immediate penalty. But what happens after that?

Over the course of next season, UEFA will assess Liverpool’s FFP over three seasons (2011/12, 2012/13 and 2013/14) and they would receive a sanction in June 2015 if their losses are shown to have exceeded £37 million over the three seasons combined. Given that their losses over two seasons was £90 million, at first glance this doesn’t look good for the club. However FFP is somewhat complicated, and the picture is not as bleak as it might appear.

Michael Regan/Getty Images

There are essentially four factors that all come to Liverpool’s aid:

1. The £50 million loss recently announced for 2012/13 includes a number of one-off costs that are unlikely to be repeated.
2. By including the 2013/14 accounts in their break-even test, they can include the new increased TV deal revenue.
3. UEFA allows certain types of expenditure to be excluded from their break-even calculation.
4. Liverpool paid high wages during the 2011/12 season and can use a further transitional exclusion.

Liverpool will be fully aware of the complicated workings of the rules and appear to have sandbagged a number of negative financial items this season which will improve the look of future accounts. The 2012/13 accounts include, for example, £10.7 million for player impairment—essentially paying up some player contracts for fringe.

This generated a one-off hit this year but will reduce wage costs and amortisation (the gradual write-off of transfer fees) in future accounts. In addition, Liverpool made a loss of £12.7 million on player sales—this is expected to be only a £1 million loss next season.

When the 2013/14 accounts are published, they will include an additional £25 million of income relating to the new BT Premier League TV deal—details as per The Guardian. This extra revenue will continue at this level for three seasons (an extra £25 million will considerably help FFP compliance). The combined effect is that Liverpool may well report a small profit in their 2013/14 accounts.

All clubs are helped by the fact that UEFA permits expenditure on youth and community development, plus some finance costs, to be excluded from their break-even test—this helps Liverpool by nearly £30 million over the three years that will be monitored.

Clive Brunskill/Getty Images

Even with all these adjustments, it is not quite enough to get Liverpool over the line. However, one final factor will ensure Liverpool pass FFP next year; they can use an exclusion that permits the deduction of wages paid in 2011/12 to players on pre-June 2010 contracts. This exclusion can only be utilised if certain complicated criteria are met (one of which is a reducing trend in losses over 2012/13 and 2013/14). Liverpool will be able to use this rule to exclude at least £50 million.

Even if the exclusions aren’t quite enough to put Liverpool into a net credit over the monitoring period, UEFA permits clubs to lose up to £37 million after all exclusions have been applied—consequently Liverpool will be well inside the FFP limits.

Projected Loss Over 2011-12, 2012-13, 2013-14 Seasons		£83m
Readjusted loss total		£4.5m
Exclusions
Youth and Community Spend		£18.9m
Depreciation		£9.6m
Wage exclusion (pre-June 2010 contracts paid 2011-12)		£50m
Total exclusions		£78.5m

Liverpool are therefore set to pass FFP without receiving any sanctions. And once in the Champions League, the additional £25-50 million annual revenue should help them comply in future years.

Ed Thompson is the author of www.financialfairplay.co.uk and a respected authority on matters FFP. You can follow him on Twitter @edthompsn.