Manchester City's owner Sheik Mansour bin Zayed Al Nahyan waves with chairman Khaldoon Al Mubarak ahead of their English Premier League soccer match at the City of Manchester stadium in Manchester

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:

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.

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.

Comments (4)

  1. Football certainly has managed to go a long way to not merely equalling, but possibly one day surpassing, the North American sports in substituting insanely boring financial machinations for anything related to sports.

  2. You leave out something crucial in this article though… Nowhere in the report do City mention FFP. They do that on purpose. As Simon Mullock from the Mirror has highlighted:

    “Mancheser City do not want to validate a UEFA regulation that they believe contravenes European law”

    In other words, they are of the belief that UEFA can not possibly enforce any sanctions whilst under EU law… They’re not bothered.

  3. Good to see someone reporting on this but some more research should probably have been done.

    Starting with the pre-June 2010 player amortisation/ contract agreements: just look at MCFC’s current squad. The only player this currently applies to is Jolean Lescott as far as contracts are concerned. Most of the current side have been signed after this period, starting with Milner (Aug, 2010).

    The annual £40m sponsorship fee from Etihad was very clever – I can’t see it being marked down at all as it isn’t exactly unfair value (most of the top clubs in the league can command £30m for shirt sponsorship alone).

    Secondly, the clubs that have been purchased and are connected to City are related parties, whilst turnover of these clubs combined is unlikely to exceed the money they have just ‘payed’ for intellectual rights. Funded by the same owners..

    For all the accounted accommodations City are still around €80m off where they needed to be over the two years, or c. €125m if you include the allowed losses UEFA are allowing for. That’s a lot, particularly when you factor in that Platini et co. will have watched the club spend roughly €100m in transfer fees alone in the summer.

    What they have going in their favour are two things;
    - They are cutting their losses and in a position to continue doing so (a better performance in this year’s Champions League & the Premier League’s new tv rights being but two) and there is a clause for this.
    - As bad as they have been PSG make them look like Scrooge.

    There is also the possibility that they could win the Champions League this season. Do so, and UEFA will find it almost impossible to punish them with exclusion.

    On the other hand consider this; were Manchester United to finish 5th this season you can expect that all hell would break loose if UEFA did exclude City, but even more so if they didn’t.

    • To your first point, here’s Daniel Geey: “Therefore, even if a club fails to meet the standard deviation target (i.e. a cumulative loss of over €45m) in the first two monitoring periods, the club can, so long as its losses are reducing, REMOVE ALL WAGE COSTS from their 2011-12 accounts for players whose contracts were already in place prior to 1 June 2010.”

      All caps mine. This includes WAGES, not transfer fees, for players who were on the books in the 2011-12 season, which may include players who have since moved on from the club in that time. Zabaleta, Carlos Tevez, Emmanuel Adebayor, etc. Those wages likely add up to a substantial amount, particularly for Tevez.

      To your second point, you’re correct, but it’s not strictly clear that it violates FFP rules. For one, the sale isn’t strictly a sponsorship deal but a sale of ‘intellectual property.’ So I’m not certain that ‘significant influence’ would apply here. I don’t know the turnover of the other clubs matters as FFP is interested in club finances, not the club’s holding party’s finances.

      Perhaps more reading should have been done.

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