Chelsea, Manchester City, PSG and what UEFA Financial Fair Play means

Here's a look at the intricacies of the UEFA Financial Fair Play agreement and the implications of its measures.

UEFA approved the Financial Fair Play regulations in May 2010 in efforts to encourage rationality in club operations and reverse the trend of increased expenditure on transfer fees and salaries, which has been stimulated by football’s inflated economy due to wealthy owners and clubs’ credit spending to remain competitive. At the very core of the agreement is the obligation to break even and run at a surplus with clubs found to be running at a deficit vulnerable to suspension from UEFA competitions.

The Financial Fair Play framework monitors the club on its preceding three-year finances and is due to fully come into effect in the 2014/15 season when assessments will be made on clubs’ bookkeeping from the 2011/12 season.

Worryingly, Chelsea and Manchester City ran at deficits of £72m and £179m respectively for the 2010/11 season and accounted for half of the Premier League’s total debt. In comparison, Arsenal, Tottenham and Manchester United, despite their overall debt, recorded a positive cash flow. UEFA’s monitoring process does not take the said season into account but the accounts are reflective indicators of the work each club must do to meet the Financial Fair Play requirements that prevent contributions from the clubs’ benefactors.

Following the disclosure of the club’s statements, Chelsea Chief Executive Ron Gourlay said that the club were in a ‘strong position’ to fulfil the break-even requirements. Indeed, the club’s sacking of Carlo Ancelotti and subsequent hiring of Villas-Boas accounted for a combined £41m of the spending without which the club would have run at a similar, lesser loss as clubs such as Aston Villa.

Chelsea and Manchester City have nevertheless circumvented some of the restrictions of the Financial Fair Play agreement in signing controversial sponsorship deals with companies closely tied to their owners. Manchester City signed a record £400m deal with Abu Dhabi-based Etihad Airways for its stadium naming rights and Chelsea have recently signed a sponsorship deal with Russian energy company Gazprom to whom Abramovich sold his controlling stake in Sibneft for £8 billion in 2005. Gazprom did however similarly agree a deal with UEFA that will likely exempt Chelsea from an investigation.

It was announced yesterday the total spend in transfer and loan fees between clubs had reduced by 34% in the first half of the year with the main factor attributed to weakened global economies. An accompanying factor was accredited to UEFA’s Financial Fair Play with European teams subscribing to the rigidity of the regulations.

The necessity to comply with the agreement has seen Italian teams sell to namely PSG: Lavezzi, Thiago Silva and Ibrahimovich have moved to the French capital for a combined €90million. How PSG will adhere to the Financial Fair Play remains to be seen but even perennial spenders City have not yet signed a player. Likewise, Real Madrid are yet to spend and Barcelona have only bought in Jordi Alba for £12m. Chelsea’s expenditure thus far on Eden Hazard and Marko Marin totals £43m, which is still less than the £47m prize money they received for winning the Champions League.

Even so, transfer fees have remained consistent for the very best players as substantiated by the figures for Thiago Silva, Ibrahimovich and Hazard and this can be ascribed to the method in which the signed player’s fee is recorded in the accounts.

Whilst we talk of players being bought and sold outright with (often) upfront payment of the whole transfer fee, the cost in signing the player is amortised. That is to say if a player signs for £40m on a four-year contract, the player’s fee is spread across each year of his contract at £10m per year. Whilst the fee may be payable immediately upon completion of the contract, the club in its accounts will spread the cost over the years of the contract so the team does not take a £40m hit in one year. After each year the player’s value as an asset to the club decreases at £10m per year; the value of the £40m player after two years would be £20m. If the player were to be sold at £35m after these two years, the sale would conversely represent a profit of £15m to the club in its accounts because of the player’s book value of £20m rather than his initial fee.

As complex amortisation is, the bookkeeping rules outlined in the Financial Fair Play allow margins in transfer expenditure and favour big-spending teams. It also greatly benefits clubs who sign players on long-term deals as the amortisation can be spread across more years than the three-year monitoring process. Furthermore, what we could in theory see is clubs in danger of failing the requirements forcing major, long-serving players to leave because they present the maximum profitability in the club’s financial assessments.

What will change, as witnessed this summer, is the number of these excessive transfer deals with clubs having to work to a budget to not outspend their means. An accompanying principal of the break-even requirement is that the Financial Fair Play will promote youth development at club-level; youth investment will not be counted in the club’s expenditure. With clubs financially unable to make as many big money moves each summer, clubs should look to nurturing their own talent to strengthen their squads and UEFA hope this will in turn enrich European football on both the club and international level.

The guidelines of UEFA’s Financial Fair Play are explicit in their measures. What remains to be seen is the resolve of Europe’s governing body to implement it and uphold it. And although each club are endeavouring to adhere to it, how severe UEFA is with clubs that fail its financial assessment will largely define the success of the Financial Fair Play.

images: © geetarchurchy, © Julian Mason