UEFA’s ‘new’ Financial Fair Play (FFP) regulations, approved at the end of June in a meeting of their Executive Committee, have given clubs previously hampered by the original regulations more of a licence to spend.
It is not a complete overhaul of the FFP regulations, more an adjustment to give clubs greater room for manoeuvre. The basis of FFP still remains, including the punishments for failing to comply:
- A club’s accounts are assessed to see whether they hit the ‘break-even requirement’. UEFA calls this a ‘monitoring period’. The last three balance sheets are assessed in judging whether a club meets the break-even requirement.
- Clubs can lose an aggregate of €5m over the last three reporting periods (i.e. the last three financial statements). This can increase to €30m over the last three reporting periods providing the extra losses are covered by a club owner or major shareholder. This is sometimes misunderstood to mean €30m each year – that is not the case, and never has been the case. The loss of €30m is an aggregate over the three periods – the sum of the profit or loss in the three balance sheets assessed by UEFA in a given period.
The question is ‘how’ the adjusted regulations have allowed Milan, and others, to go from making huge losses and spending precious little, to spending €20m plus on numerous players. The key change lies in the introduction of voluntary agreements.
The main mechanism that has clubs excited is the voluntary agreement UEFA have introduced. Here is an outline of what it is, and how it works:
- A voluntary agreement is an arrangement that clubs can apply for, and enter into if accepted, with UEFA, if they meet one of the following conditions:
- They have a licence to play in UEFA competitions, but didn’t qualify for one the season before the voluntary agreement comes into place
- Have qualified for a UEFA competition and fulfil the break-even requirement
- Have been subject to a ‘significant change in ownership or control within the 12 months before the application deadline for the voluntary agreement’. (N.B. the application deadline is 31 December before the season in which the agreement comes into place)
- Clubs cannot enter into a voluntary agreement if they are subject to sanctions within the last three years as a result of breaking FFP within the last three reporting periods.
- The idea is that clubs can apply to enter into a voluntary agreement with the aim of complying with the break-even requirements of FFP – i.e. falling within a €30m loss over several reporting periods.
- The agreement will set out a series of break-even targets, both annual and aggregate break-even results, for four projected balance sheets. These targets are tailored to each club’s situation. This is important, and means no two voluntary agreements will be the same. UEFA has not set hard targets that will apply to all voluntary agreements, giving them room to negotiate with clubs regarding losses over the next four years.
- Clubs that apply must provide UEFA with balance sheet projections for the next four years, complete with projected profit and loss and cash flows based on ‘reasonable assumptions’.
- UEFA have stated that owners or shareholders must submit a commitment to make monetary contributions ‘for an amount at least equal to the aggregate future break-even deficits for all the reporting periods covered by the voluntary agreement’. UEFA have also insisted this commitment must be presented as a legally binding agreement between club and owner/shareholder, to prevent the latter walking away in four years’ time and leaving the club unable to meet the requirements of the voluntary agreement.
Although the voluntary agreement is the big winner for the majority of clubs, there are a number of smaller adjustments that have proved favourable:
- Operating in a ‘structurally inefficient’ market is now taken into account when UEFA assess a club’s finances during a given monitoring period. This will be defined as a ‘comparative analysis of the top division clubs’ total gate receipts and broadcasting rights revenues relative to the population of the territory of the member association’. So if you’re a club in a large country making relatively little through gate receipts and TV revenues, UEFA will account for this when assessing break-even requirements.
- Spending on women’s football is now excluded from the expenses on a balance sheet, bringing it in line with money spent on youth development, which was excluded from the original FFP regulations.
- There has been a clarification on stadia spending. Previous regulations only mentioned money spent on the ‘construction’ of facilities was exempt from expenses in a break-even assessment. The updated regulations also add ‘substantial modification’ of a facility, alongside construction.
UEFA has also tightened up a few areas to prevent clubs circumventing the rules and artificially meeting the break-even requirement:
- Income ‘in respect of a player for whom the club retains the registration’ can now no longer be used to help a club break even, and is removed from the total revenue a club generates when UEFA analyse the accounts. Revenue gained from moving a player on can only be included if the club transfers the player permanently – so no hefty loan fees can be used to boost revenue.
- The concept of ‘significant influence’ has been quantified. UEFA determine significant influence as a party or parties that can influence financial decision making, without actually having control of it. Influence can be gained by share ownership or through an agreement, such as sponsorship. UEFA now define any party providing more than 30% of a club’s revenue during a given reporting period as having significant influence, and they are now also categorised as a ‘related party’, which means that the income is subject to investigation as to whether it represents ‘fair value’. It is designed to prevent questionable situations, such as that involving Manchester City and Etihad, both of whom share an owner, and which saw the latter pump significant funds into the club via a wide-reaching sponsorship arrangement.
How does this allow Milan to spend?
Milan meet two of the three conditions needed to apply for a voluntary agreement, so there is no doubt that this is the route they are planning to take. Even if there is no change in shareholding at the club, they are still eligible to enter into a voluntary agreement.
The important part is whether they can convince UEFA that they can meet the break-even requirement over the next four years, demonstrating revenue growth significant enough to fall within a €30m loss – UEFA does not have to accept an application.
Committing to cover losses is not a problem for Milan – President Silvio Berlusconi has been covering losses via holding company Fininvest for a number of years now, and if the proposed sale of a large stake in the club to Bee Taechaubol and co. materialises, then they have two ‘equity participants’, as UEFA calls them, able to provide legal commitments to cover deficits in a voluntary agreement.