Following recent press reports, we now have a much better idea about the sanctions that are reportedly being offered to Manchester City and PSG. It is now up to the clubs to decide whether to accept the terms or risk a potentially more severe punishment. The punishment reported in the press raises a number of interesting questions:

Why is City’s fine so large?

When City filed their accounts, on the face of it they looked to have nominally passed the FFP Break Even test (after permitted exclusions). So even if a few items are adjusted downwards, it was not immediately apparent why they have been given the same punishment as PSG (a club that failed hugely and seem to have made little effort to comply). However on examination, City’s large fine seems to be due to some of the detail within the FFP rules - this is probably also why the club are reported to be so unhappy with the terms being offered to them.

The FFP rules include a provision to allow clubs to exclude wages paid in 2011/12 season to players who were at the club when the rules were introduced (May 2010). City have advised the press that around £80m of wages fall into this category. Without this exclusion City fail hugely.  Crucially, the exclusion can only be applied if a number of criteria are ALL met. One of these criteria is that the wages paid to these long-standing players were “equal or higher than the deficit of the reporting period ending in 2012”. See page 94 of FFP Toolkit for relevant section

During 2011/12 City reported a loss of £97m. After a number of permitted exclusions are made, City’s adjusted deficit for the 2011/12 season is probably around £78m - If the relevant excludable wages were £80m, City are therefore right on the edge, with only a couple of million lee-way. Crucially, press reports suggest that the Etihad deal was adjusted downwards (and possibly a £13m Intellectual Property sale may also have been reduced by the CFCB).  This would have been enough to ensure the wages exclusion could not be used. Rather than City recording a narrow fail, they are probably looking at a technical fail of over £100m - a figure that would seem to put them in the PSG bracket.

I am grateful to @MatsRy for first raising this as a potential issue. Matts is well worth following on Twitter and for example recently broke the news that QPR have mortgaged their parachute payments. 

Will City’s fine cause future Break Even issues?

There seems to be a difference in opinion in the media about whether Man City’s £50m fine will count towards any future FFP Break Even test.  Some have reported that the fine would be excluded  - on the face of it, this makes sense as it would make it harder to pass the test in future years.  However as they stand, the FFP rules don’t currently contain the provision for fines to be excluded.

Interestingly, BBC’s 5 Live’s @richard_conway reports that the fine is actually a phased deduction from central Champions League prize revenue over three seasons.  If this were the case, then it seems likely that the deduction WOULD impact the Break Even test present issues in future years.  

The accounting treatment of the fine has other interesting dimensions. From this season (2013/14), new spending constraint rules have been in place in the Premier League. These restrict wage increases to a maximum of £4m per season, or to the value of a club’s ‘Own Revenue Uplift’ if greater than £4m. This Own Revenue Uplift is effectively made up of changes in Commercial income, plus profit on player trading, plus changes in Champions League revenue. The issue for City is how the ‘fine’ will be treated by the Premier League for the purposes of revenue uplift if it represents a reduction in Champions League Revenue. If Conway is correct, it seems likely that the UEFA’s sanction would restrict the club’s ability to increase their wage bill next season (although the club recently forecasted an increase in Commercial Income for the 2013/14 season).

It is worth pointing that City’s last reported wage-bill was much higher than the previous year’s as it included Mancini’s pay-off. In previous years, City, like other PL clubs have categorised managerial pay-off as one-off Exceptional items (rather than as Wages). By boosting their wage-bill in the 2012/13 season, the club have insulated themselves against some of the impact of  the PL constraint rules and also against UEFA’s proposed/intended punishment. It will be interesting to see if following events at UEFA, Premier League clubs consider objecting to City’s unusual treatment of Mancini’s pay-off.

I am grateful for the input of @Nazdagama into this piece. Naz is an an Investment Banker working in Italy and active on Twitter.

Related Party Transactions and the Premier League

As we know, Man City (and PSG)’s auditing team didn’t classify the Ethiad (or QTA) deal as a Related Party Transaction (i.e. a transaction with someone connected to the club, potentially for an inflated value).  However, according to press reports, UEFA’s CFCB panel seem to have made a different call.

Interestingly, the Premier League and UEFA differ on how to determine whether a deal is a Related Party Transaction . Whereas UEFA will look at the deals and make their own decision on whether they are Related, the Premier League’s spending rules will rely entirely on the classification used by auditors employed by the club. Only if the deal is determined to be a Related Party Transaction can it be adjusted to ‘fair-value’

It will be interesting to see if clubs now press for a review of the Premier League’s approach.

City’s accountancy team

City’s punishment suggests that City may have scored an own-goal when they recruited a crack team from Deloittes accountants to work round the rules. Reportedly at great expense, they recruited the same Deloittes team who drew up the FFP rule as their dedicated account-preparation team. The rationale was that they should know where the loop-holes were within the rules. Mindful of this, UEFA brought in rival firm PWC to carry-out their audit of City’s accounts. It is interesting to wonder whether inter-firm rivalry contributed in any way to the outcome. As things have panned-out, despite City’s endeavours, they have been treated in the same as PSG (a club that adopted a fairly naïve and foolhardy approach the Break-Even rules).