Understanding FFP
If you want to understand how UEFA's Financial Fair Play rules work, the best place to start is with this six-minute video recorded May 2012:UEFA FFP rules document
You could download and read the full UEFA document, but it is a really tough read! You will need several hours to plough through this document and you might need some basic accounting knowledge. http://www.uefa.com/MultimediaFiles/Download/Tech/uefaorg/General/01/50/09/12/1500912_DOWNLOAD.pdf
However UEFA have now issued a much clearer document to explain the rules - the attached document was produced for journalists to help them understand FFP:
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FFP Press Kit EN_FINAL_en _1_.pdf Size : 505.653 Kb Type : pdf |
FFP explained
The finances of clubs will be monitored by UEFA to ensure that they don't lose more than a specified amount. If clubs go over the threshold they will not be given a licence to play in the UEFA competitions (i.e the Champions League and Europa Cup). To even out one-off events the monitoring will eventually be done over a three year period (although the first Monitoring Period looks at the accounts over two years). The first Monitoring Period has started and will look at the finances of clubs in the 2011/12 and 2012/13 seasons. Club accounts are always produced after the season ends so we are unlikely to know the first results of the 2011/12 season until Autumn 2012.
The following table summarises the maximum permitted deficit/loss (or 'Break Even Deficit') that a club can make.
There are a few important nuances:
Stadium development and Youth costs
The Break Even Deficit figure does not include the cost of stadium development or expenditure on any youth team programme. For FFP calculations, any expenditure on these items is excluded.
Amortisation
See attached video which explains how players contracts are accounted for - this is an important part of FFP:Although we often talk in terms of players being 'bought' or 'sold', what actually changes hands is 'the right to acquire the player's contract'. The cost of buying the 'right to acquire the player's contract' needs to be amortised (or written-down) evenly over the duration of the contract. For example, a player who cost £50m on a 5 year contract needs to be amortised at the rate of £10m a year. At the end of a player's contract, their 'book value' will therefore be zero. The amount amortised each year needs to be counted as a 'cost' in the club's FFP Break-Even calculations.
If a player is sold before the end of their contract, FFP rules require that the difference between their book value at that time and the saleprice needs to be accounted for immediately in the club's accounts. Using the above example, the player signed for £50m on a 5-year contract would have a 'book value' of £20m when he has only two years to run on their contract. If he was then sold for £35m, the club would actually record a £15m profit for that year for FFP purposes (£35m - £20m). Where a club extends a players' contract, the book value at the time the contract was re-negotiated would need to be amortised over the duration of the new contract. These rule applies to all players on a club's books, irrespective of when they were signed (i.e. even if acquired before the commencement of the first FFP Monitoring Period).
Players signed before 1 June 2010
To ease the transition of FFP, the wages of any player signed before 1 June 2010 are not included in FFP Break Even calculations for 2011/12. However this concession is for one year only and the wages are included for season 2012/13 and beyond. It is important to remember that the his concession only applies to an impacted player's wages (the amortisation of the cost of acquiring the player's contract needs to be carried in full over every year of the contract). N.B. Where a player was originally signed before 1 June 2010, and negotiates a new contract before the end of
the 2011/12 season, the player's re-negotiated wages would need to be included for the full new contracted amount within the FFP calculations for 2011/12.
Owners Equity
A club is only able to make the maximum Break Even Deficit in a Monitoring Period when a corresponding amount of equity is injected into the club.
Where the owner is not willing or able to inject equity, the club is only able to make a maximum loss of E5m over the first two-year Monitoring Period.
Fair Value
UEFA are keen to ensure that owners do not artificially inject cash into the club as a way of circumventing the FFP rules. Consequently they are
set up a dedicated panel to review transactions made with 'connected parties' to ensure the transactions are carried out at a 'Fair Value'.
'Connected parties' include the club owners and any family of owners who can influence the club. The panel are able to assign a 'Fair Value' rate
to a transaction for the purposes of FFP calculations. The 'Fair Value' may not necessarily be the same as the Market Value.
Break Even Deficit must be decreasing
The rules state that a club's Break Even Deficit has to be reducing in order to achieve the licencing criteria. Therefore, even if a club were to
report a deficit that was below the maximum Break Even Deficit over a Monitoring Period, the club would still fall foul of the rules if their deficit was not reducing year-on-year.
Applying for a UEFA Licence
As qualification for the UEFA competitions is usually only decided at the tail-end of the season, clubs need to apply for a Licence at the start of
the season - i.e. before they know if they have actually qualified for the UEFA competitions
Monitoring where UEFA identify a risk
If a player is sold before the end of their contract, FFP rules require that the difference between their book value at that time and the saleprice needs to be accounted for immediately in the club's accounts. Using the above example, the player signed for £50m on a 5-year contract would have a 'book value' of £20m when he has only two years to run on their contract. If he was then sold for £35m, the club would actually record a £15m profit for that year for FFP purposes (£35m - £20m). Where a club extends a players' contract, the book value at the time the contract was re-negotiated would need to be amortised over the duration of the new contract. These rule applies to all players on a club's books, irrespective of when they were signed (i.e. even if acquired before the commencement of the first FFP Monitoring Period).
Players signed before 1 June 2010
To ease the transition of FFP, the wages of any player signed before 1 June 2010 are not included in FFP Break Even calculations for 2011/12. However this concession is for one year only and the wages are included for season 2012/13 and beyond. It is important to remember that the his concession only applies to an impacted player's wages (the amortisation of the cost of acquiring the player's contract needs to be carried in full over every year of the contract). N.B. Where a player was originally signed before 1 June 2010, and negotiates a new contract before the end of
the 2011/12 season, the player's re-negotiated wages would need to be included for the full new contracted amount within the FFP calculations for 2011/12.
Owners Equity
A club is only able to make the maximum Break Even Deficit in a Monitoring Period when a corresponding amount of equity is injected into the club.
Where the owner is not willing or able to inject equity, the club is only able to make a maximum loss of E5m over the first two-year Monitoring Period.
Fair Value
UEFA are keen to ensure that owners do not artificially inject cash into the club as a way of circumventing the FFP rules. Consequently they are
set up a dedicated panel to review transactions made with 'connected parties' to ensure the transactions are carried out at a 'Fair Value'.
'Connected parties' include the club owners and any family of owners who can influence the club. The panel are able to assign a 'Fair Value' rate
to a transaction for the purposes of FFP calculations. The 'Fair Value' may not necessarily be the same as the Market Value.
Break Even Deficit must be decreasing
The rules state that a club's Break Even Deficit has to be reducing in order to achieve the licencing criteria. Therefore, even if a club were to
report a deficit that was below the maximum Break Even Deficit over a Monitoring Period, the club would still fall foul of the rules if their deficit was not reducing year-on-year.
Applying for a UEFA Licence
As qualification for the UEFA competitions is usually only decided at the tail-end of the season, clubs need to apply for a Licence at the start of
the season - i.e. before they know if they have actually qualified for the UEFA competitions
Monitoring where UEFA identify a risk
Where a club is viewed to be 'at risk' of failing to comply with the FFP requirements, UEFA intend to request interim financial reports in advance of the accounts that are produced at the end of the season.
UEFA publishes their 8 punishments for breaching FFP rules 4 April 2012
At the UEFA conference in Istanbul, UEFA ratified three more disciplinary measures for clubs that breach FFP rules. As I outlined in my article on 7 Feb, five measures had previously been agreed at the Nyon Conference in January. The full menu of punishments now reads:
- Reprimand / Warning
- Fine
- Deduction of Points
- Withholding of Revenue from UEFA competition
- Prohibition to register new players for UEFA competitions;
- A restriction on the number of players that a club may register for UEFA competitions
- Disqualification from a competition in progress
- Exclusion from future competitions
Financial Fair Play for Championship
Financial Fair Play for League 1 and League 2 clubs
An explanation of the above rules for clubs in the Football League can be found here.
