Transfers are a huge part of football clubs finances and compliance with Financial Fair Play (FFP). The way football transfers are accounted for aren’t a simple as taking profit/loss from a sale and adding/subtracting from the clubs profits. This article will take the world record Neymar transfer as an example and explain how this monumental deal can be within Financial Fair Play rules.

In the wonderful world of football accounting, players when purchased are capitalised such that their cost are spread over their ‘useful life’. A players useful life is essentially their contract length, so for a player on a 4 year contract, their transfer fee will be split over 4 seasons. The annual cost is known as the amortisation. For example, Neymar cost PSG £200m on a five-year contract so annual amortisation charge will be £40m, this will be included as an expense in the clubs financial statements. This costs does not include wages.

When the player is sold, the profit is not the transfer fee received less the transfer fee paid, it is instead the transfer fee received less the players remaining ‘value’. This value is the original transfer fee minus any amortisation to the date of sale. So, using the Neymar example again, in two years Neymar ‘value’ will be the £200m transfer fee minus two years of amortisation costs (£40m x2), £80m. This leaves Neymar with a value of £120m in two years.

So if Neymar is sold at this point for £150m, many would wrongly assume a loss of £50m when in fact, the club has made a ‘profit’ of £30m in their accounts. This amount will be added as income in their financial statements. They will also be saving costs on amortisation of £40m for each of the remaining 3 years and his wages.

This explains why the Neymar deal may be financially viable. PSG can sell players and record a ‘profit’ while also saving on their amortisation costs in the future. Lets look at their player sales.

Aurier

Aurier was signed for £9m on a four-year contract from Toulouse in July 2015. This leads to a yearly amortisation costs of only £2.25m a year. He was then sold to Tottenham for £22.5m in August 2017, just over two years worth of amortisation (we will stick to two years for mathematical simplicity). Two years of amortisation is then £4.5m (£2.25m x2) leaving him with a value of £4.5m. PSG therefore record a profit of £18m on this sale in their accounts, nearly half of Neymar’s amortisation costs, plus amortisation savings of £2.25m for each of the next two years and also saved wage costs.

Matuidi

Matuidi was signed for £7.2m on a three-year contract from Saint-Ettiene in July 2011. Since he stayed for six years, he obviously signed a few new contracts. This changes the treatment as his ‘value’ remains at the time of the new contract is then amortised over the new contract length. However due to this amount being negligible, for simplicity we will assume his contract has been fully amortised leaving him with a value of nil. PSG sold Matuidi for £18m, realising a profit on the full amount while also saving on his wages.

Jean-Kevin Augustin

A relatively unknown player, Augustin, 20, was an up and coming PSG youth player, signed as a boy in 2009 at the age of 12. He was signed by the ambitious German outfit RB Leipzig this summer for £14.4m. As he came through their youth system at negligible cost, he has a nil value and the full transfer fee is recognisable as a ‘profit’ in their accounts, another incentive to invest in youth.

Overall

From these 3 sales, PSG have recognised profits of £50.4m, more than covering the amortisation costs of Neymar, leaving room to help afford his lucrative wages. This does not include the saved wage costs of the players and Aurier’s amortisation costs.

This is obviously unsustainable to expect to sell 3 good players a season and not spend elsewhere also, however the quality of Neymar should help the club improve performance in the Champions League to increase prize money, while his star power will lead to increased commercial success through sponsorships, merchandising and TV earnings. Which has already been seen with the added interest in PSG this season and even at one point running out of Neymar shirts in their club store.

Since its announcement in September 2009, Financial Fair Play has divided opinion. The ever polarising Platini remarked “Fifty per cent of clubs are losing money and this is an increasing trend. We needed to stop this downward spiral. They have spent more than they have earned in the past and haven’t paid their debts. We don’t want to kill or hurt the clubs; on the contrary, we want to help them in the market. The teams who play in our tournaments have unanimously agreed to our principles…living within your means is the basis of accounting but it hasn’t been the basis of football for years now”. Financial Fair Play was aiming to change this.

Promoting sustainable spending was the aim, with excessive spending a thing of the past, this was the message Platini was sending. Fast forward to 2017 and PSG have spent around 200m on Neymar and effectively spent (when the loan becomes permanent) £160m on a break-out teenager with 1 year of first team football.

This series will explore what exactly Financial Fair Play aims to achieve, its rules and how they have been enacted and bypassed to date. We will first look into the rules to gain a better understanding into UEFA’s thinking behind this regime.

Financial Fair Play rules are fairly broad, the main financial requirement is the break even requirement. This is a requirement to limit losses incurred by clubs, it is based on a clubs income and expenses, with the aim of encouraging sustainable spending such that clubs ‘break-even’ and don’t over extend themselves.

All clubs in UEFA competition must comply with the rules, which are based over a rolling three-year period (e.g for 2017 it will be based on the 14/15, 15/16 and 16/17 seasons).

The break-even requirement is that relevant expenses must not exceed relevant income by more than EUR 5m over the rolling three-year period. This loss can be increased to EUR 30m if the excess (EUR 25m) is contributed by a related party.

Club must also avoid having overdue payments to other clubs for transfers, employees and Government.

As an example if the Break even results 14/15 was +10m, 15/16 was +5m and 16/17 was -20m the club would still be within the requirements as the net result would be -5m. The result could be anywhere up to -45m if and only if the extra above the -5m was covered by contributions from related parties.

Below is a breakdown of what is included in ‘relevant income’ and ‘relevant expenses’, which from now on we will just call income and expenses respectively:

The main technical area around this is profit on disposal of players, this is a bit more complex than just taking taking the difference between transfer fee paid and transfer received.

Players are (rightfully so) treated as assets for football clubs, they are therefore assumed to depreciate over the time they are at the football club (Not always true, look at Zlatlan!). The profit is then the transfer fee received minus the depreciated value of the player.

For more details on the technical side of this, check out this post explaining player disposals here.

This is an area that can be very useful in complying with Financial Fair Play. Players can sometimes be sold who have a low book value can be sold for a large fee due to their ability, making a large ‘profit’ on that player and potentially saving the company from breaking (pardon the pun) the break-even requirements.

Another area that causes controversy for Financial Fair Play is related party transactions. An obvious deceitful way to pass Financial Fair Play is to use a company that the mega-rich club owner owns and plug money into the club through a ‘sponsorship’ which will increase income and meet break-even requirements.

In an effort to stop that, UEFA have stated that related party transactions must be at their fair value, such that if they were not related the payment would be the same. This is difficult to prove however as what exactly is fair? Often comparisons will be made with other similar deals, however this is not always available and fair value is open to debate so as of now is still a grey area for Financial Fair Play.

The same scenario may play out with expenses, where the related party charges the club a lower fee than otherwise would be ‘fair’ for instance stadium maintenance costs or other services.

Expenditure on youth development, community development and women’s football are all taken off the expense figure to encourage spending in these areas. Youth development will aid sustainable growth for clubs and help bring through more youth players with more of a focus on homegrown talent. Community development will help keep clubs in touch with their local community and fans which is harder than ever with the growing money in the game. A focus on women’s football is essential to building the game to higher level and encouraging girls to take up the sport.

Clubs may also be proactive and choose to voluntarily sign up to Financial Fair Play and break-even requirements. You may wonder why clubs would risk the extra burden of these rules, clubs with aspirations to qualify for UEFA competition may want to be proactive in meeting the requirements to avoid a shock once qualifies. Clubs may also want to self-impose financial discipline in order to achieve sustainability.

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We are back for the final instalment of our Financial Fair Play Series. In this edition we will discuss the sanctions that UEFA may impose on a club for failing Financial Fair Play and examples of when this has happened.

Let us first start with the possible sanctions for non-compliance with Financial Fair Play, where clubs fail in meeting the requirements we discussed in the first instalment of this series.

The lightest punishments available are warnings and reprimands, usually given in marginal cases or where there is a specific extenuating reason for non-compliance  such as a one-off unexpected expense. Light punishments may also be given in the cases where there is an ‘improving trend’, where it looks likely that the club will soon meet the break even requirements.

Fines are the common penalty for non-compliance and have been issued in numerous cases, normally with part of the fine suspended and only issued if certain criteria is not met.

The rest of the sanctions are all very serious. Points deductions can have a big impact on revenue and are not handed out lightly, while withholding revenue can also cause significant damage for the club at hand in meeting their needs. Usually the amount of revenue withheld is not substantial enough to create huge cash flow issues, and in many circumstances, will be given back once certain criteria is met.

Transfers bans have been given out in a few situations and can range from just one transfer window to as many as deemed appropriate, usually capped at two. It is easy to get this mixed up with recent transfer bans for Barcelona and Atletico Madrid, however these bans were not linked to Financial Fair Play and instead to breaking transfers rules regarding players which will not be covered here.

For clubs in European competition, UEFA allows the club to register up to 25 players for use during the competition, this includes 8 home-grown players, of which 4 must be home-grown at the club. UEFA sometimes sanction a reduction of this number as a punishment for failing Financial Fair Play which can put these clubs at a serious disadvantage in the competition and significantly harm their chances of success.

The second most serious punishment is disqualification from UEFA competition. This is given out in extreme cases where the club was way below breaking even and expected to be for foreseeable future. The reason is that excess spending would give the club an unfair advantage against teams that are complying with Financial Fair Play so they should not be able to enjoy this advantage. These bans can include that the club is banned next time they qualify for the competition if they fail to do so in the season after their ban.

The worst possible punishment is retrospective stripping of UEFA competition titles, this is where other clubs can plea that the winning club gained an unfair advantage from their overspending which why the won the competition. This is a case (unlikely!) we could see this season after PSG stunning start to the season and the question marks over whether they will be able to comply with Financial Fair Play this season.

Now that we have an understanding of all the possible sanctions we will look at how these have been applied since 2013.

2013 – 2014

Probably the two most famous Financial Fair Play cases and most relevant today are related to super-rich clubs Manchester City and PSG. Both clubs had been brought by Mansour bin Zayed Al Nahyan of the UAE and Nasser Ghanim Al-Khelaïfi of Qatar respectively. Both clubs continued to flex their financial muscle going into the 2013 – 2014 season. Manchester City had a net spend of around £90m, with the significant arrivals of Fernandinho (£36m), Jovetic (£23.4m), Negredo (£22.5) and Navas (£18m) with Tevez departing for £8m. Meanwhile PSG had a net spend of around £100m with the arrivals of Cavani (£58m), Marquinhos (£28m), Cabaye (£22.5m, with Digne (£13.5m), Sakho (£17m) and Gameiro (£7m) the significant departures.

Despite this spending, Manchester City announced following the release of their annual accounts that they would fall within Financial Fair Play regulations. The main reasoning for this was a large spend on youth infrastructure which led to the building for their state of the art new training facilities, and an increase in turnover of over £40m with nearly £50m of their turnover due to peculiar image rights and property rights sales, from related parties of their Owner and New York City FC, Manchester City’s sister club. Chelsea manager at the time, Jose Mourinho openly questioned the legitimacy of Manchester City Financial Fair Play compliance calling it “dodgy financial fair play”. UEFA agreed with this assessment and rejected the legitimacy of these sales and decided that sanctions were necessary against Manchester City.

PSG had claimed compliance due in part to similar sponsorship deals to Manchester City from related parties. These claims were dismissed and PSG were also hit with the same sanctions as Manchester City.

Both clubs were handed:

• EUR 60m fines, of which EUR 40m was suspended
• UEFA squad size reduced form 25 to 21 players, this was later reduced on appeal
• Transfer spending restrictions were imposed, with PSG missing out on Angel Di Maria to Manchester United as a consequence. PSG ‘only spent’ £45m on David Luiz that season. While Manchester City had a net spend of around £50m after purchasing Bony (£29m), Mangala (£27m), Fernando (£13.5m) and Caballero (£7m) while selling Javi Garcia (£15m) and Rodwell (£11m).
• Two-year squad salary reduction plan was also imposed on the clubs.

The fine proceeds were split between all clubs in UEFA competition that met Financial Fair Play rules.

Both Manchester City and PSG have met all criteria imposed on them since the ban and since even had them softened.

Both Manchester City and PSG complained about their punishments, seeing their investment punished while other large clubs loaded up on debt to fund spending such as the Glazer-owned Manchester rivals United. Manchester City in fact were debt free which does seem rather sustainable.

PSG argued that Financial Fair Play stops new investment into football and protects already established large clubs who can spend more due to large revenue figures – “For me, Financial Fair Play is unfair. It stops new investors from coming into football. It protects the big clubs and obliges the smaller ones to remain small clubs. If investors are prevented from coming into football, they will invest in Formula One or elsewhere. It is not good for football. We are ready to work within the rules but I hope UEFA are going to change it next year because a lot of clubs have complained. I hope a solution can be found.”

2014 – 2015

Sanctions and settlement agreements were handed out to 14 clubs in 2014/2015 season, with Hull City the most notable, being the only English club sanctioned, however they received a minimal fine of EUR 600,000, with EUR 400,000 suspended and were told they must be break even by 2015/16 season to avoid further sanctions.

Roma were also subject to Financial Fair Play punishment and were handed a EUR 6m fine, with EUR 4m suspended if certain criteria is met. Their squad size was also reduced to 22 players for the following season.

Previously free spending Monaco were hit with a EUR 13m fine, with EUR 10m suspended and a squad reduction to 22 players.

Inter Milan were handed the largest fine of EUR 20m, with £14m suspended if certain criteria was met. Their squad size for UEFA competition was also reduced to 21 players for the following season. They were also hit with significant transfer spending restrictions, Inter had a negative net spend for 14/15 (-£7m) and 15/16 (-£6m), bringing in more transfer income than spending. They were also tasked with breaking even by 18/19 season.

Sporting Lisbon were also handed a fine of EUR 2m, of which all was suspended.

2015 – 2016

Hull and Sporting Lisbon both quickly exited their settlement agreement after meeting all criteria the following season.

Turkish clubs Fenerbahce, Besiktas and Galatasaray failed Financial Fair Play, Fenerbahce were issued with a EUR 7.5m fine, with EUR 5.5m suspended, while Besiktas were issues with a EUR 5.5m fine, with EUR 4m suspended, both clubs were sanctioned with a squad reduction to 22 players. Galatasaray ban was much more significant, having previously been in hot water UEFA banned them from a year of UEFA competition and imposed strict spending and wage restrictions that led to the selling of a vast number of players with income of £19m plus the wage bill savings.

Financial Fair has been a significant issue for Portuguese and Turkish clubs, who have struggled to control their spending due to large wage bills, this has led them to be less competitive in Europe with Turkish teams in particular struggling with 6 clubs so far failing Financial Fair Play. Both Galatasaray and Fenerbahce who are usually Champions League group stage participants, were unable to progress through qualifiers and their fans will not witness any European football this season.

Porto are the most recent team to be sanctioned by Financial Fair Play in June 2017 and have received a small fine of EUR 2.2m, with EUR 0.7m suspended and a squad reduction this season to 22 players. This did not stop them from qualifying in second place in their Champions League group this year though.

This is the end of this Financial Fair Play series, here at Financial Football News we will be following Financial Fair Play rulings and update you on any changes that occur this year with particular interest on the PSG story.