Player Transfers: FFP and the break-even test
Player transfer fees in world football have been on an upward trajectory for well over a decade. The inequality across European clubs’ financial resources has resulted in an imbalance of power on the transfer market. Against this background, the UEFA Club Licensing and Financial Fair Play Regulations (FFP Regulations) seek to impose financial discipline and protect the long-term viability and sustainability of European club football. With these rules adding to the increasingly complex regulatory environment, today clubs must carefully navigate multiple legal pitfalls when structuring a player transfer.
Following up on SportingLinks’ first podcast on Financial Fair Play, this article considers and further elaborates on the accounting methods, in the context of player transfers, employed by football clubs in order to comply with FFP Regulations.
The main pillar of the FFP Regulations is the break-even requirement. This aims to ensure that clubs operate on the basis of their own revenue. A club is in compliance with the break-even requirement if the break-even result is:
- a surplus; or
- a deficit which is (A) not more than EUR 5 million, or (B) not more than EUR 30 million, if the excess is entirely covered by contributions from equity participants or related parties.
The break-even result is the difference between relevant income and relevant expenses (both terms as defined in the FFP Regulations). Those are the income and expenses from football related activities as adjusted for the purpose of the break-even requirement and subject to reconciliation with consolidated financial statements.
Put simply, a club should have a positive financial result from football activities or, if the result is negative, it should not exceed the limits provided by the FFP Regulations.
The transfer of player registrations and accounting methods used by an individual club can have a significant impact on the break-even result. This is of particular relevance in the Covid-19 age, during which the spotlight on player transfers has intensified further, as the financial health of football clubs has risen to the top of the agenda. With declining financial performance, compliance with FFP Regulations becomes even more challenging. A breach may have severe consequences for the club. More than ever, clubs should be conscious about the potential sanctions for non-compliance. These include fines, point deductions, withholding of prize money, and bans on transfers or on participation in UEFA competitions. Any of the aforementioned could have a significant negative impact on the club’s future financial performance, as well as its reputation. While the future direction of FFP is a matter of debate, reputational risk remains even if UEFA considered a further relaxation of FFP Regulations, given the ongoing disruption caused by Covid-19.
The two accounting methods provided in Annex X (Calculation of the break-even result) of the FFP Regulations are the (i) capitalisation and amortisation (C&A) and (ii) income and expense (I&E) method. Clubs must apply their selected method on a consistent basis from one reporting period to the next.
Capitalisation and amortisation method
Acquisition of player registration
C&A treats the registration of a new player as an acquisition of asset. The costs of registration (being the amount paid by the purchaser club to the seller club and other transaction costs) are recorded as an intangible asset on balance sheets. The value of the player registration is allocated over the period of that player’s contract with the purchaser club. The amount capitalised on the balance sheet is thus amortised in each reporting period, starting with the reporting period in which the player registration is acquired.
To illustrate the C&A method, let us assume that the purchaser club acquires a new player for EUR 100m (including transaction costs) on a five-year contract. The amount paid by the purchaser club is capitalised on the balance sheet and then amortised in each reporting period.
|Acquisition value of player registration||Amortisation in Reporting Period T||Amortisation in Reporting Period T+1||Amortisation in Reporting Period T+2||Amortisation in Reporting Period T+3||Amortisation in Reporting Period T+4|
|EUR 100m||– EUR 20m||– EUR 20m||– EUR 20m||– EUR 20m||– EUR 20m|
In the above example, for the purpose of the break-even result the purchaser club will record as a relevant expense in each reporting period the amount of EUR 20m from that player’s acquisition. At the end of the player’s five-year contract (end of year T+4), that player’s acquisition amount will be expensed in full.
Sale of player registration
Clubs that use the C&A method for acquisition of new player registrations must also apply the C&A method for the disposal of player registrations.
Let us consider the following example – after three years (in year T+3) the club transfers that player registration for a fee of EUR 90m. At that time, the book value of the player registration on the balance sheet of the club is EUR 40m (carrying amount after the respective amortisation in years T, T+1 and T+2 as shown in the table below).
|Acquisition value of player registration||Amortisation in Reporting Period T||Amortisation in Reporting Period T+1||Amortisation in Reporting Period T+2||Book Value in Reporting Period T+3|
|EUR 100m||– EUR 20m||– EUR 20m||– EUR 20m||EUR 40m|
That means the original purchaser club disposes of an asset which costs EUR 40m (book value) and receives for such asset EUR 90m. For the purposes of the break-even result that transaction will increase the relevant income of the club in the reporting period T+3 by EUR 50m (the realised profit on the disposal).
On the other hand, if the club transfers the player registration for a fee of EUR 30m then it will report a loss from such transaction. That is because the net disposal proceeds from the transfer of that player registration are less than the book value (EUR 40m). In such a scenario, the negative difference of EUR 10m will be recorded as a relevant expense and accordingly decrease the break-even result.
Unsurprisingly, the C&A method is preferred by most clubs, as under it the purchaser club does not take the whole acquisition amount for the calculation of the break-even result in a single reporting period. As illustrated above, such benefit is, however, balanced out with the treatment by the C&A method of outgoing transfers.
Income and expense method
Acquisition of player registration
The I&E method is relatively straightforward compared to the more complex C&A. With respect to the acquisition of player registration, the transfer fee and other transaction costs will be recorded as an expense for the reporting period in which the acquisition occurs. This means that if the purchaser club acquires a player for EUR 100m (including transaction costs), the whole amount will be taken as a relevant expense for the calculation of the break-even result.
Sale of player registration
With respect to the disposal of player registrations, clubs that employ the I&E method for acquisition of new players are afforded a certain degree of flexibility. According to the FFP Regulations, these clubs are permitted to apply either method to disposals. Clubs that use the I&E method for player disposals will record the net disposal proceeds as income in the respective reporting period. For example, if the amount received from the outgoing transfer of a player registration is EUR 90m (net of any transaction costs), such amount will be used as relevant income for the calculation of the break-even result.
Clubs should carefully consider the choice of accounting method and aim at a strict compliance with the break-even requirement. The C&A method enables clubs to allocate the costs of acquisition of a new player over the period of its contract, thereby alleviating the impact of the incoming transfer on the break-even result. The treatment of incoming player registrations is the pitfall of the I&E method, under which the entire amount of the acquisition costs is taken into account for the calculation of the break-even result.
It is pragmatic for clubs with high-value incoming transfers to use the C&A method. This allows them to capitalise the acquisition costs and expense them gradually across reporting periods, facilitating compliance with the break-even requirement.
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