Manchester City's £97m loss and Financial Fair Play Compliance
Rules Regulations website
Introduction
Manchester City recently announced a £97m loss in their latest 2011-12 accounts. This led to the press and commentators fervently questioning City's ability to comply with UEFA's Financial Fair Play Rules (FFPRs). The aim of this blog is to illustrate how City will be able to use various deductibles in the FFPRs to significantly reduce their losses for FFPR calculation purposes. Such deductibles come in the form of removing infrastructure costs and subtracting player contracts entered into before June 2010 (so long as losses year on year are reducing). Such deductions will almost certainly lead to a much smaller loss which although may breach the FFPRs, is likely to incur softer sanctions than an outright ban.
For a summary of the FFPR basics click here. The FFPRs will start to bite from the 2013-14 season. The rules need to be borne in mind, however, from the 2011-12 season onwards because the 2011-12 and 2012-13 accounts will be used to determine a club’s license application in the 2013-14 season. As such City's 2011-12 accounts (after the FFPR calculations have been made) will form one of the two accounting periods, for the first monitoring period, that UEFA will use to assess compliance.
Context
City explained in their press statement that:
"The application of allowable reliefs, for certain categories of expenditure and investment, position the club well for compliance with Uefa's financial fair play rules."
In making that statement, they were primarily referring to the following reliefs:
The FFPRs encourage investment in youth development and infrastructure. Such infrastructure includes stadium and training ground development and expenditure on a club’s academy. City have earmarked significant sums (around £140m over the coming years ) to enhance its training, youth development and community facilities. Thus any club has the incentive to spend in these areas, should they wish to participate in European competition, because the FFPRs do not count such investment as expenditure as part of its break-even calculation. The greater the commercial revenue growth funded by long term infrastructure investment the larger the revenue to balance against expenditure.
The second avenue that will benefit City as well as many other clubs wishing to comply with the FFPRs is the Annex XI provision. This rule is an avenue for clubs applying for a UEFA license to remove some of its wage expenditure from its break-even calculation. Annex XI(2) states that for applications for the first two monitoring periods, if the break-even deficit exceeds the acceptable deviation provisions, a club will not be sanctioned so long as:
"it reports a positive trend in the annual break-even results"; and"the aggregate break-even deficit is only due to the annual break-even deficit of the reporting period ending in 2012…[for] contracts with players undertaken prior to 1 June 2010".
Therefore, even if a club fails to meet the standard deviation target (i.e. a cumulative loss of €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. If the club as a result falls within the €45m acceptable deviation limit, UEFA will not apply any sanction. For the sake of clarity, it appears contract renegotiations after 1 June 2010 for an existing contracted player would be classed as a new contract for the purposes of this provision (see Annex XI(2)(ii)).
Importantly, this provision would appear to include the wages of a player that has subsequently left the club but had a contract with the club during the 2011-12 season. For example, from reviewing this transfer website it appears Savic, Adebayor and De Jong were sold in the 2012 summer window. Even though they will no longer be playing for City when the club submits its break-even application for the first time to UEFA in 2013, City should be able to take advantage of deducting their wages as they were at the club during the 2011-12 season and entered into a contract with City prior to 1 June 2010 without extending it further.Annex XI will provide clubs with greater room to manouvre for the first two years of the FFPRs. This is because the 2011-12 season accounts are included in:
the first monitoring period (the two year period 11-12 and 12-13); and
the second monitoring period (the three year period 11-12, 12-13 and 13-14).
This will give clubs, including City, some breathing space to deduct such wage costs from their bottom line in order to fulfil the Annex XI criteria.
Conclusion
The availability of such cost deductions for FFPR compliance purposes demonstrates that City's latest reported loss does not automatically prevent them from participating in UEFA competition. The above reliefs will no doubt reduce the headline City loss significantly. Whether it will reduce the loss by an amount that will ensure no sanction will be imposed on the club remains a very different question.The most important question however is not whether UEFA will sanction clubs, but what the sanction will be. Clubs that breach the rules by small margins will be less likely to be expelled from UEFA competition. The proportionality or reasonableness of the sanction will then have to be weighted against the severity of the breach. Although that may not sit too well with some, it is likely to be the way that the sanctions will be applied.