Yesterday Manchester City released their annual financial results, which you can read for yourself here. The takeaway from all this is that City posted losses of £51.6m for the 2012-13 season, down from £97.9m the previous season. The release of course raised questions over City’s ability to meet Financial Fair Play requirements, which require clubs to break even if they want to receive their UEFA license allowing them to participate in European competitions like the Champions League.
Now, I’m not going to lie. Talking about Financial Fair Play is very complicated. If I make a slight error here, please let me know as soon as possible and I’ll clear it up.
Anyway, City contend they are not likely to fall foul of UEFA’s FFP’s provisions, and they may not. There are five main reasons for this.
The first involves UEFA’s ‘acceptable deviation’ rule, which will help grandfather in FFP in order for certain clubs to get their books in order. This allows teams to post aggregate losses over two seasons (switching to 3 for the next reporting period), so long as the owners make equity payments to cover them, which shouldn’t be a big problem for City. The excellent Swiss Ramble blog has a handy chart to illustrate how it works here. Jake Cohen also produced this handy chart to break it down in Euro amounts by season:
— Jake Cohen (@JakeFCohen) January 30, 2014
The second involves exceptions to FFP’s calculation of club spending, in order to promote “good” investments. Again, Swiss Ramble, whose work I have to once again stress is invaluable in understanding how all this works, explains what those exceptions include:
However, there are two major adjustments that need to be made to a club’s statutory accounts to get to UEFA’s break-even template: (a) remove any exceptional items from [the preceding reporting period], as they should not re-occur (by definition); (b) exclude expenses incurred for “healthy” investment, such as improving the stadium, training facilities or academy, which would lead to losses in the short-term, but will be beneficial for the club in the long-term.
Third, City have also (ingeniously or evilly, depending on your worldview) further reduced their losses through the sale of ‘intellectual property’ to the tune of £42m. The Independent fills in the details on how that amount is broken down:
The first is the sale of the club’s image rights to an external company, which has reaped City £24.5m. The second is the sale of City’s services to the other clubs which it owns – the New York FC franchise which it launched last year, along with the new Melbourne Heart franchise and Manchester City Ladies FC. That “sale of intellectual property to related parties” brought the club another £22.45m and is vital to City getting anywhere near complying with Uefa’s regime.
No doubt UEFA will want to calculate “fair value” based on the market for these sales, but it’s not clear whether City are in the wrong here even though these deals include mutually owned assets. This one is pretty damn murky though.
Fourth, only for this first ever reporting period, UEFA will exclude pre-2010 player wages from the calculation if the clubs are reducing their losses over time. (Daniel Geey explains it all here). This could, according to at least one estimate, reduce expenses for City by a full £80 million in the first FFP reporting period.
Finally, despite all these rules UEFA notes it will make exceptions for clubs that are clearly working to reduce their losses. Despite the creative accounting here, City are clearly working to stay on the very generous ‘safe’ side of FFP.
— Sean (@ArsnlGooner) January 30, 2014
I know. All this is enough to make anyone skeptical about the efficacy of the break even rules if clubs like City are given such a wide berth to meet them. But some things to keep in mind. First, the acceptable deviation for losses is going to shrink gradually over time, dipping somewhere below £30m by 2018-2019. Perhaps UEFA should set a very low amount now in order to further pressure clubs to reduce their losses.
Second, that pre-2010 wage exclusion thing only applies to the first reporting period, so City can’t do that again next time. So what appears to be a work-around is in fact only a temporary reprieve.
Third, with regard to those sponsorship deals, often involving companies with close ties to club owners (or owned by club owners), FFP lives and dies on the ability of UEFA to make a judgment call on what deals constitute ‘fair value’ based on the market and are free from ‘significant influence,’ which they define as “the power to participate in the financial and operating policy decisions of an entity.” If FFP can’t enforce this rule, than it may as well not exist.
Yet while City’s £400 million (in 2011 pounds) sponsorship deal with Etihad over 10 years may seem astronomically high, Arsenal signed a £150 million deal with Puma through 2019, which so far seems not to have a strong whiff of ‘significant influence.’ The same goes for Nike and Adidas’ competition for a deal with Man United. It’s not always as clear as cynical fans think it is when it comes to clubs exploiting their brand.
My advice therefore when talking about FFP is to think not only of this season and next season and the one after that, but ten seasons from now.