Exposing the Skeletons of FFP
This essay comes from a request on Twitter to try and make some of FFP rules clearer, especially with regard to summer spending possibilities at Leeds United.
The acronym FFP stands for Financial Fair Play and came into effect worldwide some years ago. Recently there has been a change and the name Profit and Sustainability (or P&S) is now used. However, the P&S is really an extension of the FFP rules so I’ll use FFP and occasionally mention P&S rules.
What is FFP?
For all its faults, FFP is an attempt to prevent clubs spending beyond their financial abilities and to prevent them from going bust. In its simplest form FFP in the Championship tries to limit financial losses to less than £13m per season.
However, FFP goes a bit further and tries to encourage clubs to invest in training young players and invest in improving stadia and such like. To do this the EFL allows clubs to deduct certain costs from the losses that are published as the official club accounts and the losses for FFP purposes will be less than shown in the official accounts.
Some of the costs that can be removed from official losses are:
• depreciation of tangible fixed assets
• amortisation of intangible fixed assets except player registrations
• costs of women’s football
• youth development costs
• community development costs
What are the FFP limits?
When it first came out, FFP was calculated over a single year but the change to adopt Profit and Sustainability rules means that the pass or fail figure is now calculated over a three year period and the equity investment amount an owner must put into the club on failure is now calculated over a five year period.
For clubs that have spent all three years in the Championship, such as Leeds United, then the maximum FFP loss totalled up over three years is £39m. For clubs that get relegated from the EPL or promoted from League One there is a slightly different figure.
What are the Relevant Seasons?
The three years that are used to add together all the losses are this season, last season and the season before. If the total FFP losses over this three year period exceed £39m then the club is reported to the Governance Committee for possible sanctions.
To gain some insight into how much the club can spend next season (starting from 1st July 2018) the three years we need to look at are last season, this season and an estimate for next season. In other words, to avoid failing FFP next year we cannot overspend on transfers this summer or pay excessive wages during next season.
How does this affect Leeds this season?
We will know certain things from the accounts that are just to be published: These accounts cover the season ended June 2017 and are basically the last year of Massimo Cellino’s tenancy; these accounts are the second year of the three year triple that determines whether Leeds will fail FFP this season and risk a transfer embargo starting at the end of this season.
The first year of this triple is the season 2015/2016 when we had losses before tax of almost £9m, however we can remove about £3m of costs related to depreciation, amortisation and youth development costs so the FFP Loss was about £6m.
The second year of this triple is last season, 2016/2017, when we had a small profit before tax of around £1m; again we can remove costs of around £3m so we actually made a FFP Profit of £4m.
The total for these two seasons is therefore a loss of only £2m for FFP purposes.
The limit when this current season is included is £39m so we can lose another £37m of FFP related items before hitting a problem this summer.
We know that Andrea Radrizzani has increased costs (notably wages and spend on transfers) but he has not increased spending by £37m this season alone and so we are in absolutely no danger of failing FFP this summer.
How does this affect Leeds next season?
Something we fans talk a lot about at this time of year is the summer transfer window and our preferred comings and goings; I’ll declare again here and now, for the umpteenth time, that I’ve no opinion worthy of sharing on who should come and who should go but I can maybe throw some light on how much the club can spend this summer on transfers and during next season on wages.
The problem with making this prediction is that we don’t know what extra costs have been generated by Andrea Radrizzani this season, nor his plans for next season; nor do we know just how much gate money has increased due to increased ticket sales, similarly merchandise and catering sales will be up but by how much? Commercial income I feel will also have increased but we have no idea by how much.
Although we don’t know these new increased costs and incomes, we can make predictions and I’m afraid that a many of the increases in income are a lot smaller than many people think.
For instance, after VAT, EFL ticket tax, talent-agency booking fees and zebra finance costs are removed our gate turnover this season is likely to be closer to £11m than over £20m as some people have suggested to me. Similarly, with crowded catering outlets struggling to supply fans last year I doubt that catering income will increase pro-rata with crowd increases.
Rather than now spend pages and pages writing up my prediction in minute detail, I’m just going to make a wild assumption here. Let me say I’ll guess that unless things change then this season and next season (ie the first two of Andrea Radrizzani’s seasons) the club will lose a total of £25m which after player sales will be £10m loss before tax and as far as FFP goes this will be about £5m FFP loss.
Adding last season’s estimated FFP profit of £2m to my prediction for the next two seasons and the FFP Losses so far are only about £3m compared to a maximum allowed of £39m.
So we have loads of losses to use up next season before we could start to run into FFP problems.
How much can Radrizzani invest?
It came to light today that there is confusion over how much an owner can invest in shares under the current EFL rules.
An owner (or any other investor) can invest as much money as they like in shares (or equity) in the club. The confusing bit is only a smaller sum will count as offsetting any losses incurred under FFP.
This is to ensure owners can fund new stadia, training grounds and so forth but they must run the football side of the club without making massive losses.
In the olden days, when FFP was analysed over one year, every owner was compelled to buy shares to cover any annual losses he’d overseen above £5million, up to a maximum of £13million – ie the EFL could force an owner pay up to £8million into his club as new equity.
This is not a limit however, any owner can choose to invest much more as shares or loans if he feels it will benefit him.
The confusing bit with FFP is that a club can have loads of cash NOW but be a basket case that is using cash so quickly they’ll run out and go bust. So FFP, quite rightly, concentrates on profit and long term sustainability and tries to stop clubs acting like lemmings, where all 24 Championship Clubs spend a fortune in the mistaken belief they will all get promoted together.
Why does this essay stop?
The latest accounts covering Cellino’s last year will be published shortly so Part 2 will follow when these accounts are officially available to us.
Mike Thornton 3rd April 2018