FSM


Feature Football Finance Short Term Cost Controls, Profitability and Sustainability


Andy Turner, Audit and Business Advisory Partner at Mercer & Hole, provides an update on Football Finance.


The Premier League Financial Fair Play regulations (now known as Profit and Sustainability regulations) were established to prevent football clubs from getting into financial difficulty. Although they have been amended several times, there continues to be requirements to provide information by certain deadlines and significant sanctions for Clubs that breach the rules. It has become an important factor for


all football clubs and their finance teams to model the impact of these regulations when preparing forecasts and making financial and commercial decisions.


The Basic Rules


There are some basic rules to follow around 1. Short term cost controls, (effectively the total of the players’ service costs) the limits of which are set out below; and 2. Profitability and Sustainability (the maximum allowed amount of accounting loss), which is allowed to be made over a three year period. All of which are discussed below:


1. Short Term Cost Control


Players’ service and image contract cost payments


£m £m 74


81


costs and image contact payments has not increased more than the following levels compared to 2012/13.


2016/7 £19m


2017/8 £26m


2018/9 £33m


(ii) That the excess increase over and above the above figures arises as a result of contractual commitments entered into on or before 31 January 2013, and or have been funded by club own revenue uplift as compared with the like figures in contract year 2012/13 and/or averaged three year trading profit.


Debts


There are also various rules around payment of debts the main one being that clubs must ensure that HMRC liabilities in respect of PAYE and NIC are no more than 28 days in arrears.


2. Profitability and Sustainability


2016/7 2017/8 2018/9 £m 67


If the above costs are exceeded the club


has an option to be assessed either on (i) the prior year basis or (ii) the 2012/3 base year basis.


Prior year basis


If a Club is assessed on the prior year basis it needs to demonstrate that the total of the clubs players’ service and image contract payments has: • not increased by more than £7m when compared to the previous contract period, or,


• any excess over and above the £7m arises as a result of contracts entered into before 31 January 2013, or,


• has been funded by Club own revenue uplift as compared to the previous contract period, and or average three year player trading profit.


Base year basis


If the club elects for the base year basis the club must satisfy any of the following (i) That the sum of the club’s players’ service


8 FSM


If the aggregation of a club’s earnings in either of the two prior year’s results in a loss the club must submit a calculation of its earnings before tax for the current year and the two prior years. If this aggregation results in a loss of


up to £15m, the board will need to be comfortable that for the following year


the club will be able to pay its liabilities and fulfil its obligations. If this aggregation results in a loss in excess


of £15m, the club will need to provide future financial information to cover the period from the last accounting reference date until the next two year ends by 31 March in the relevant season. This is a calculation of estimated aggregate earnings before tax until the end of the second year based on this information is needed and, where funding is required, evidence of secure funding. If the aggregation of the three years results


in a loss in excess of £105m (reduced by £22m for each season in the prior years if that club was in the football league) this is treated as a breach of the rules.


Impact on finance teams


Finance teams will need to be involved more than ever before in commercial decisions to ensure that the impact is fully understood. This will help decision makers determine what is ‘affordable’ under the regulations. They will need to help with the structuring


of certain transactions to ensure regulation compliance and that sufficient headroom around the regulations is maintained. Financial information both historical and


projected will need to be produced on a timely basis in order to comply with the requirements to supply certain financial information by the relevant deadlines. Care will need to be taken where clubs


have sponsorship or other arrangements with related parties to ensure that it can be demonstrated that such transactions are at fair value. This can be a very complex and difficult area. All of the above require the finance teams


to have more input in order to safeguard compliance with the regulations. These regulations have often been


criticised as some say they protect the status quo of the larger clubs and do not allow the smaller growing clubs with wealthy owners to compete on an even platform. Additionally, the fair value rules around related party transactions are difficult to determine. Whilst this is a debate for football, one thing is clear; the rules are here to stay and finance teams need to be ahead of the game.


Collaborative approach


As mentioned above for or all of this to work smoothly it requires a combined and transparent approach from those within the club. Finance teams need to agree controls and budgets but by working together with those in responsibility, from the stadium and facilities managers to the ground staff to the safety and security managers to ensure a collaborative system also understands their requirements may change significantly throughout the season. When the safety, security and experience of the fans, players, staff and visitors is paramount to a successful football club, a harmonious environment must be created whilst the regulations and legislation in place must be adhered to.


Andy Turner Partner, Mercer & Hole E: andyturner@mercerhole.co.uk T: 020 7236 2601


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