UEFA FFP and Chelsea's 12-13 Accounts

Introduction

Chelsea recently announced a £49.4m loss in their latest 2012-13 accounts. It was of significant interest that the press release stated that:

“A long-term objective was financial sustainability, and the subsequent implementation of Financial Fair Play by Uefa and by the Premier League has brought that to the top of the agenda for football clubs. We are pleased therefore that we will meet the stipulations set down by Uefa in their first assessment period.”

Chelsea explained that they would comply with UEFA’s Financial Fair Play Rules (FFPRs) which include only making a €45m loss over the 11-12 and 12-13 seasons. What most analyists presumed was that a big part of the club’s compliance policy was to use the UEFA FFPR Annex XI relief.  The aim of this blog is to illustrate how Chelsea are unlikely to be able to remove the costs of player contracts entered into before June 2010 because the club’s trend is actually getting worse. This is due to the club making a profit in 2011-12 (£1.4m)  but a loss in 2012-13. Such deductions would have certainly lead to a much smaller loss for FFPR compliance purposes.

The Basics

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 Chelsea’s 2012-12 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.

The Annex XI Relief

This provision  is an avenue for clubs applying for a UEFA license to remove some 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 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. 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.

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).

Chelsea Ramifications

In an excellent blog on Chelsea Jake Cohen calculates that the club could have benefitted from up to £79.3m of wage costs that could have been deducted if the club’s trend had been positive. No doubt that if the club makes a smaller loss in the second monitoring period (for the 13-14 accounting season), then the trend will be positive and it can take advantage of this cost reduction in the 2014-15 monitoring period covering 11-12, 12-13 and 13-14 accounting periods.

Conclusion

Not being able to benefit from the Annex XI relief (at least for this first monitoring period) according to the latest Chelsea press release appears not to have made a material difference in complying with the FFP break-even regulations. It still however is likely to be a major cost reduction relief for a number of other clubs wanting to play in European competition. To take advantage of the relief, clubs have to ensure their losses are reducing.