Folded football stadium

Keeping onside with football’s Financial Fair Play (FFP)

Paul Burchett, Senior Manager, Forensic Services
Folded football stadium
The worlds of accounting and football finance invariably overlap, and even more so in the modern era where the financial implications at the highest level can run into the multi millions and even billions. In recent years it has very much been the mission of the Premier League, the English Football League (EFL), and Union of European Football Associations (UEFA), to manage the financial stability, and long-term sustainability, of clubs involved in domestic and European competition respectively.

This has historically been targeted in two main ways:

  1. restricting the spend a club can make on player wages and transfer fees by comparison to a set ratio against its revenues
  2. by setting a cap for losses that can be sustained by a club across a rolling three-year period which, if breached, could see a club suffer sanctions.

Originally termed ‘Financial Fair Play’ or ‘FFP’, there is a gradual establishment move towards calling it ‘Financial Sustainability Regulations’ as it is felt there is no ‘fair play’ in comparing the financial position of traditional footballing powerhouses like Bayern Munich and Real Madrid, to more recent additions to the higher footballing echelons, such as Bournemouth and Brentford. Unpicking and understanding the financial regulations in football can seem about as complicated as trying to understand the use of Video Assistant Referee (VAR) in the modern game.

Restricting club spend

The first regulatory rule on spend has been the subject of much press coverage in recent seasons, with club income generally earned through three main revenue streams:

  1. matchday income
  2. broadcast income
  3. commercial deal income (e.g. stadium, shirt sponsorship).

There have been accusations that such revenues are vulnerable to being ‘massaged’ to allow extra spend to take place. In Manchester City’s case certain ‘sponsorship’ income was alleged to in fact be direct investment from the owner (not allowed above certain de minimus levels under the current rules to cover losses).

This restriction on revenue sources particularly irks those clubs with owners who have particularly deep pockets, for example the likes of Stoke City who, with a reported annual bonus to the chairperson of its parent betting company Bet365 of over £200 million, would have no problem at all in financially supporting the football club. The target here is very much about ‘levelling the playing field’, less the actual playing field, but rather the rules of the financial playing field applying to all.

UEFA have recently re-addressed this mechanism and have set new ratios (of relevant transfer and wage costs v’s revenue) of 90% (2023/2024), 80% (2024/2025), reducing to 70% from season 2025/2026 onwards. Clearly, clubs need to be mindful of future revenue streams, particularly with regards to sponsorship deals which often have clauses in place that reduce their annual commitment if clubs are not performing on the pitch. Not making the Champions League, or dropping out of the Premier League into the EFL, for example, has significant financial ramifications, notwithstanding the parachute payments Premier League clubs dropping into the EFL receive for three further seasons.

Setting a cap for losses

The second regulatory rule adopted, both domestically and in Europe, is a financial limit on the level of losses that can be borne by a club, subject to fines, squad size restrictions or a points deduction if not adhered to. Domestically in the top flight, the current cap is £105 million across a rolling three-year period, while in Europe UEFA has recently started phasing in a revised (and increased) €60 million limit across a similar three-year rolling period (provided these losses can be covered by the club’s owners or a related party). A club is assessed on its reported profit or loss, subject to certain sums that do not form part of the overall profit calculation (e.g. academy costs).

It is generally recognised that despite the rules applied by FRS102, there is still the opportunity for some clever ’window dressing’ to make the accounts appear better than they might otherwise look, so any opportunity to either increase revenue, or reduce costs, would be to the advantage of a football club in meeting its sustainability targets. And this leads to the current hot topic of amortisation – let’s first rewind to the curious tale of Derby County FC.

Derby FC

Derby County, currently plying their trade towards the top of League One, were embroiled in a sporting legal battle with the EFL around both the sale and valuation of their stadium and their approach to the amortisation of players; the former point was ultimately not challenged but the point on amortisation went through several hearings and judgments. Amortisation, in simple terms, is the cost of depreciating an intangible asset over its useful economic life, which for football clubs is chiefly represented by the contractual registration fees of their playing staff.

Bearing in mind that any initial purchase of a player broadly has no immediate impact on profit (the transaction is solely reflected in the balance sheet – an asset in, countered by money going out or a creditor being established); rather it is the amortisation costs posted each year to its profit and loss, and/or the ultimate profit or loss made upon any eventual sale of a player, which impact a club’s margin.

The approach adopted by Derby County, different from all other clubs, was to assess the expected ‘recoverable value’ of each player at each season end. The club argued this better reflected the economic use of a player as their value would not necessarily reduce on a regular basis each season, the underlying argument being some players get better over time, some worse, some stay broadly the same, but ultimately once their contract is wound down their carrying value is reduced to zero. The club argued this made accounting sense, however the impact on the amortisation costs posted to profit and loss was an estimated £30 millon of ‘savings’, this being the difference between the amortised amount based on Derby County’s approach and the amortisation cost if a straight-line approach for amortisation, spread equally across the life of the contract, had been applied (the approach used by all other clubs).

After several rounds of legal and accounting argument were exchanged between Derby County and the EFL, a panel eventually ruled that the only economic benefit a club can rely on when purchasing a player is the benefit it draws from using that player in its matchday squad and so the only logical way to amortise that value is on a straight-line basis over the life of the player’s contract. It was ruled that to apply any other approach would be to argue the existence of an “active market” per the requirements of FRS102 where you can trade players without limitation at any time, however the panel concluded this could not be argued given the inherent restriction of transfer windows, players and agents’ wishes, squad size and related cost implications. The outcome was that Derby County were docked ten points which ultimately cost them their Championship tenancy at the end of the 2021/2022 season.

Chelsea FC

And this neatly turns us to the current case of Chelsea FC, bearing in mind the straight-line approach that needs to be taken to amortising any transfer fee, the only real way in which you can reduce the costs posted against profit in each year, is to extend the length of the contract. Cue the recent transfer of Mykhailo Mudryk, from Shaktar Donetsk, for an initial £62 million (rising to £89 million with add ons) making him the most expensive Ukrainian player in history. Now if this add on value was amortised over, say, a five-year contract, the club would need to bear an amortised cost of £17.8 million each year.

However, Mudryk’s registration has been purchased on an extended eight and half year contract, through to the close of the 2030/2031 season, which is an amortisation charge of £10.5 million a year. That difference of £7.3 million a year directly improves the profit and loss account of Chelsea FC which, by contrast to a five-year contract, improves the bottom line over that timeline by some £36 million.

And Mudryk has not been the only purchase by the club across the summer of 2022 and the winter 2023 transfer window which, under the stewardship of co-owner and Chairman Todd Boehly, has seen player investment approaching €500 million. Other notable long-term contracts have been agreed with: Marc Cucurella (six-year deal); David Fofana (six-year deal); Benoit Badishile (six and half year deal); Wesley Fofana (seven-year deal); and Noni Madueke (seven-and-a-half-year deal).

However, problems can arise regarding such long contracts - if you sell the player after, say three or four years, any profit arising for that period will be significantly reduced as the carrying value of the player’s contract will still be relatively high; or, if the player picks up a long term injury, or loses form, the club still have the commitment (subject to selling his registration to another club) both in terms of the annual amortisation cost and the player’s wages which, for the very top players, can be anything from £10 million a year upwards.

UEFA’s constitution sets out that contracts should be no longer than five years in length but with the important proviso that this does not apply if local laws allow it to be longer, which is the case for the UK and most European countries. Given the increasing number of unusually long contracts recently handed out by Chelsea, however, UEFA is reportedly putting plans in place to effectively restrict amortisation periods to a maximum of five years, although the actual length of contracts could still be longer.

Sit back and watch club accountants and law teams from various jurisdictions, in the months ahead, enjoying that particular battle.


How we can help

Our Forensic Services team have worked on a significant number of football related cases, including loss of profits, agent disputes, and accounting applications; we are always happy to have an initial no obligation discussion on any matters where we can add value and advice. For further information, please contact Martin Chapman, or your usual Crowe contact.

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Martin Chapman
Martin Chapman
Partner, National Head of Forensic Services