Manchester City FFP Series Part 1: Why they will meet the guidelines

On 29 January 2014, Manchester City released their Annual Report for the 2012/13 season.

The "detailed document" also contained the financial report for the term, with the Sky Blues "posting a net loss of £51.6m, down from £97.9m in the previous reporting period with annual turnover at £271m, breaking the £250m threshold for the first time in the Club’s history". City have also paid off all their remaining borrowings and are hence, operating with zero financial debt.

After the report was released, several questions were raised regarding City's ability meet UEFA's Financial Fair Play (FFP) regulations. There was no mention of the FFP in the report, but the club's executives assured the fans that City are expanding their commercial revenue and moving towards a sustainable financial set-up.

"Financially, the Club continues to improve. Growing revenues and controlled expenses are bringing the Club to breakeven in the immediate future and profitability thereafter," wrote Chief Executive Ferran Sorriano.

Chairman Khaldoon Al Mubarak further added, "The Club has made no secret of the fact that winning championships is at the heart of its strategy... and at the same time to continue to build a socially responsible and commercially successful off-field operation...That is the model for a successful and sustainable football club and it is one we continue to pursue in all aspects of our operations."

Without further ado, let's look at why City will meet the FFP guidelines.

This is part 1 of a lengthy series analyzing City's finances and off-field matters (FFP-related primarily). This article explains why FFP won't be an issue for the Sky Blues. Controversies regarding the Etihad deal and others are ignored.

What is FFP?

The Financial Fair Play is a "plan is designed to stop reckless spending by clubs and rich benefactors from injecting large amounts of cash, a practice which distorts the transfer market, pushes players' wages to astronomical levels and has a knock-on effect as other clubs try to keep up".

FFP regulations were commenced owing to the massive debt European clubs had cultivated over several years.

Of the 660 recognized European clubs, "around half" didn't break-even in 2009. To gain rapid on-field success, clubs were spending beyond their budget.

Via Wikipedia.org

"Club owners are generally over optimistic about their management abilities and vision for a club. With ample academic evidence that there is a clear correlation between squad wages and points won- something which is obvious to owners - there is a natural tendency to borrow in the pursuit of success, although not all teams can be successful. There are many examples of clubs where the directors (true fans) have "chased the dream" - gambling short-term investment (or borrowing) in the hope of long-term success. The pressure on the directors of a club to invest, to sign a star player…is often immense from ordinary supporters."

The clubs that spent heavily but failed to win silverware and consequently, couldn't increase their income to meet their reckless expenditure ended up badly, like Portsmouth. Before more clubs fell into a debt trap and eventually liquidation and financial hell, UEFA decided to act.

FFP was introduced, giving all the clubs three years to "break even". Moreover, the idea was that the clubs could only spend what they had earned, hoping the likes of Arsenal could finally compete with "sugar daddies" like Roman Abramovich.

Here is a basic view of the FFP regulations: (Reference: Goal.com and Reutures)

1. Clubs will be able to record maximum losses of £39.5m before 2014

2. From 2014 to 2017, the overall permitted loss will fall to £26.3m

3. Owners cannot bail clubs out of debt with personal wealth

4. Clubs could face exclusion from UEFA competitions in 2014-15

5. Clubs are also barred from owing money to other clubs, players, tax authorities and social service departments

6. Exceptions:

i. Money invested in stadiums and youth development does not count in the expenditure for FFP purposes. The main targets are high wages and high transfer fees.

ii. Wages paid to players who came to the club before 2010 (when FFP regulations were ruled down) won't be included.

Why City will meet FFP regulations?

Initially, all the European clubs will be assessed over the two seasons- 2011/12 and 2012/13. Since the start of the 2011 season, City have posted a loss of about £150 million.

But after deducting money on relevant "exceptions" stated above, "club insiders insisted that figure was less than £37 million"- the amount a team can lose over the two seasons.

This includes massive expenditure of the club on the Etihad campus and wages paid to the likes of Carlos Tevez, Mario Balotelli, Nigel De Jong, Wayne Brigdge, among others.

Moreover, if we look at the 2010/11 term, City reported losses of £97.9m. But they stated that, "£15m of the losses came from infrastructure and youth development costs, while approximately £80m came from contracts that pre-date 2010". So roughly their loss was somewhere in the range of £5m or less.

Although, City haven't released a similar result for the 2012/13 season, their losses should be lessened to an amount that meets the FFP criteria. Consider this, Carlos Tevez's wages alone, will "save" them £9m.

As it is, despite finishing over the £37m figure, City are confident their spending on youth development and infrastructure - which is exempt for FFP accounting purposes - will enable them to comply.

-Richard Conway, BBC

Some irregularities that might come under scrutiny

1. Sale of "Intellectual Property"

Nearly £23m of City's claimed turnover was from the sale of their "intellectual property" to "unidentified external parties".

Problem: City will have to show that the organization that purchased the intellectual property rights received a "fair value for their investment" and that the "figure has not been merely agreed with a related party as a device to help overcome the break even principle". Otherwise, it can be considered as an artificial revenue stream by UEFA.

2. Sale of Players' Image Rights

City also earned a whooping a sum of £24.5m by selling the image rights of their players to an external party.

Via The  Independent:

"Experts agree that the Premier League leaders' £24.5m sale of player image rights to an external company – one of those two significant arrangements – has never been attempted by a football club before.City will not reveal the name of the company that has bought their image rights – and neither did they do so in their accounts – but the club has dismissed the notion, put to it by The Independent, that the buyers might be a subsidiary of the club."

According to experts, City will need to show to UEFA that the image rights of their players were fairly valued at £24.5m, considering a percentage of the money obtained via image rights is also retained by the players.

That the rights were probably sold to a subsidiary company will surely raise questions.

Still no reason to worry about

Yet, these controversial sale of assets won't be a problem for City, for their accountants and lawyers are bound to be smarter that what the UEFA can come up with.

City, already have among their ranks, FFP specialists – Alex Byars and Martyn Hawkins. The two joined the club from the Deloitte sports business, which helped UEFA set up the FFP legislation. The two must have found some loopholes in the system to exploit and I believe increasing revenue through sale of "intellectual property" and image rights of the players are two of those.