UEFA has recently become concerned with the reckless financial behavior being undertaken in leagues across Europe. FootyFinance says “It’s about damn time.” In the past three years the Premier League has seen its first bankruptcy, La Liga sporting multiple clubs which cannot pay their staff, and Greece on the verge of implosion.
In response to the increasingly worse state of soccer finances UEFA has adopted its Financial Fair Play Rules (FFPR) beginning on June 1, 2011. Below are the most important features from the release. In some sections I have made it the language more readable but in general I have kept interpretation to a minimum so that no details are missed. I will do an analysis in a future post.
The rules apply to all UEFA club competitions. Here are the key points:
INTENT OF THE REGULATIONS
These regulations aim:
a) to further promote and continuously improve the standard of all aspects of football in Europe and to give continued priority to the training and care of young players in every club;
b) to ensure that a club has an adequate level of management and organisation;
c) to adapt clubs’ sporting infrastructure to provide players, spectators and media representatives with suitable, well-equipped and safe facilities;
d) to protect the integrity and smooth running of the UEFA club competitions;
e) to allow the development of benchmarking for clubs in financial, sporting, legal, personnel, administrative and infrastructure-related criteria throughout Europe.
Furthermore, they aim to achieve financial fair play in UEFA club competitions and in particular:
a) to improve the economic and financial capability of the clubs, increasing their transparency and credibility;
b) to place the necessary importance on the protection of creditors by ensuring that clubs settle their liabilities with players, social/tax authorities and other clubs punctually;
c) to introduce more discipline and rationality in club football finances;
d) to encourage clubs to operate on the basis of their own revenues;
e) to encourage responsible spending for the long-term benefit of football;
- f) to protect the long-term viability and sustainability of European club football.
FFPR evaluates a club’s Relevant Revenue (Income), Relevant Expenses and the resulting aggregate surplus or deficit within a Monitoring Period.
If a club has been determined to have violated the Break Even Requirement (defined below) in a Monitoring Period it may not participate in next season’s UEFA competitions.
UEFA may make exceptions to the rule. See EXCEPTIONS
A Monitoring Period consists of three Reporting Periods: the current year ( T ) and the two previous years ( T-1 and T-2 ).
Reporting Periods are annual accounting periods, the endpoints of which do not have to coincide with the end of a calendar year (i.e. a club’s Reporting period can be May 23rd every year if it wishes).
The initial phase of FFPR includes the 2011/12 and 2012/13 seasons, in which UEFA will begin to keep financial records.
The first full Monitoring Period begins in 2013/14 with any consequences to be seen in the 2014/15 season. Results from 2011/12, 2012/13, and 2013/14 will be considered for the first period.
DEFINITION OF REVENUES AND EXPENSES
Relevant Revenues are:
- gate receipts,
- broadcasting rights
- sponsorship and advertising
- commercial activities
- other operating income
- profit or income from disposal of player registrations
- excess proceeds on disposal of tangible fixed assets
- finance income
Relevant Expenses are:
- cost of sales
- employee benefits expenses
- other operating expenses
- amortisation or costs of acquiring player registrations
- finance costs
Excluded Expenses are:
- depreciation/impairment of tangible fixed assets [stadia, training grounds etc]
- amortisation/impairment of intangible fixed assets (other than player registrations) [goodwill, brand value, etc.]
- expenditure on youth development activities
- expenditure on community development activities
- any other non-monetary items
- finance costs directly attributable to the construction of tangible fixed assets
- tax expenses
- certain expenses from non-football operations
The following indicators are taken in combination with the Break Even Requirement when determining whether a club is in compliance with FFPR
- Going concern – the auditor’s report for period T-1 expresses concern over the club’s ability to continue to operate
- Negative equity – the annual report disclose a net liabilities position that has deteriorated compared to the previous year
- Break-even deficit – the club reports deficits for periods T-2 and T-1
- Overdue payables – the club has outstanding payables as of June 30 of the current UEFA competition year.
BREAK EVEN REQUIREMENT
Break Even Surplus is when Relevant Income exceeds Relevant Expenses
Break Even Deficit is when Relevant Expenses exceeds Relevant Income
The Break Even Requirement is considered fulfilled if none of the four indicators above are breached:
- the club has a break-even surplus in both T-2 and T-1
The Break Even Requirement is considered fulfilled if one of the four indicators above is breached but:
- the club has an aggregate break-even surplus for the period T-2, T-1 and T
- in the case of an aggregate break-even deficit over the Monitoring Period any surplus from Reporting Periods T-3 and T-4 maybe included in the calculation to bring the Monitoring Period back into surplus.
- the club is allowed to run an aggregate break-even deficit deficit in any Monitoring Period of EUR 5m or less (“Acceptable Deviation”). This includes Monitoring Periods which add in surpluses from T-3 and T-4.
- An aggregate break-even deficit for any Monitoring Period greater than EUR 5m constitutes a failure to meet the Break Even Requirement.
If a club has a break-even deficit which exceeds the Acceptable Deviation (failing the Break Even Requirement) it can be brought back within the limit through capital contributions by equity participants or related parties. Contributions from equity owners are payment for additional equity, contributions from related parties must either be unconditional gifts or income transactions.
Contributions are limited to the amounts below for their respective Monitoring Periods:
- 2013/14 – EUR 45m
- 2014/15 – EUR 45m
- 2015/16 – EUR 30m
- 2016/17 – EUR 30m
- 2017/18 – EUR 30m
- UEFA has not yet set the capital contribution limit for future periods
The amounts listed are aggregate, the total amount contributed for the three years (T-2, T-1, T) in the Monitoring Period may not exceed the limit. Ex. If 45m was contributed in 2013/14 then no contribution in 2014/15 is possible as the limit for the rolling three year period has already been reached.
Contributions from equity participants are payments for shares through the share capital or share premium reserve accounts.
UEFA has the discretion to make exceptions to the Break Even Requirement. They may take into account some or all of these factors:
- “The quantum and trend of the break-even result” – The size of any deficit relative to a club’s income and the whether the trend is improving or not.
- “Impact of changes in exchange rates” – Adverse movement of exchange rates for clubs which must convert their results into Euros
- “Projected break-even result” – If the projected break-even result for the reporting period T+1 foresees a surplus, it is likely to be viewed more favourably than if the break-even result for the reporting period T+1 foresees a deficit. UEFA may look further ahead as well.
- “Budgeting accuracy” – If the club has shown that it can accurately forecast its results.
- “Debt situation” – UEFA may take into consideration all aspects of the club’s debt (amount outstanding, maturity, convenants, ability to service, etc.)
- “Force majeure” – extraordinary events or circumstances beyond the club’s control
Additionally for Periods 2013/14 and 2014/15 clubs have leeway to run a break-even deficit greater than the Acceptable Deviation if:
- they can show that their financial situation has been improving over the course of the Monitoring Period AND
- the deficit has been directly due to the wages of players signed prior to June 1, 2010.
The full document can be seen here.