Friends,
The UEFA Club Licensing and Financial Fair Play Regulations (CLFFPR) places huge importance on the financial stability of clubs. In order to play in UEFA-sponsored competitions, clubs have to break-even on aggregate over the monitoring period. But what exactly does this mean?
Let's understand this by way of an example: Juventus FC have qualified for the UEFA Champions League (UCL) for the 2020/21 season having won the Serie A. For Juventus to apply for the UCL License under the CLFFPR, the club has to break even on aggregate over the duration of three seasons: the 2019/20 season, the 2018/19 season, and the 2017-18 season.
These individual time periods are known as reporting periods, which UEFA conveniently categorizes as T, T-1, and T-2.
The algebraic sum of relevant income and relevant expenses is the break-even result. If you want to calculate over the entire monitoring period, you merely add the break-even results of each reporting period, at which point a positive number will result in a surplus aggregate break-even result and a negative number will result in a deficit aggregate break-even result.
The acceptable deficit under the UEFA regime is €5 million. It can be extended up to €30 million if the excess spending is entirely covered by contributions from equity participants or Related Parties.
Related Parties - The PSG Story
The UEFA does not recognize all contributions as permissible. A gift deed from an equity participant or Related Party is a permissible transaction- provided that such a gift deed does not require the recipient club to repay the gift amount. Another such permissible transaction is a debt waiver where an equity participant can simply waive off the debt owed by the club.
Both these transactions have one thing in common:- there is an influx of excess money not earned as revenue. If such money is then spent towards the expenses of clubs, then an additional €30 million is waived off by UEFA towards the break-even calculation.
But who exactly is a Related Party?
When determining a Related Party transaction, emphasis is to be placed on two things: (a) the legal relationship between the parties, and (b) the substance of the relationship between the parties.
The substance of the relationship signifies the qualitative relationship between the parties. The International Accounting Standards Board (IASB) shares this sentiment too.
For example, a Related Party in the football industry will be someone who holds "control or joint control over the club", or holds "significant influence" in the club. Maybe he is part of the key managerial personnel in the club's parent company- in both these cases, the individual or body corporate will be considered a related party. (Note: This list is not exhaustive).
UEFA also regulates the assessment of Related Party Transactions (RPT)'s, requiring the transaction to be made at fair value. The UEFA Financial Fair Play (FFP) Regulations have followed the traditional definition of the International Accounting Standard to define fair value. The definition goes something like this: “Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arms-length transaction".
Since FFP has made breaking even for clubs compulsory, clubs have been forced to inflate their revenue streams. One such method is inflating revenue through related party sponsorship agreements.
In 2014, Paris Saint Germain (PSG) did just that. PSG is owned by Oryx Qatar Sports Investment (QSI),- a fund led by Nasser Al-Khelaifi and supported by the Qatari Government. In 2013, Nasser Al-Khelaifi was appointed as Minister in the Qatar government by the Emir of Qatar Sheikh Tamim. Now, Mr. Nasser happens to be childhood friends with the Crown Prince of Qatar- Tamim bin Hamad al-Thani.
QSI is a subsidiary of the Qatar Investment Authority and is the sports business wing of the Qatari Government. In 2012, the QSI-owned PSG entered into a sponsorship agreement with Qatar backed Qatar Tourism Authority. The sponsorship agreement would see PSG receive €200 million over the following four seasons.
If we break down the definition of “Related Party”, we can see a few themes emerge: - (a) control or joint control over the club; (b) significant influence by the same government; or (c) significant influence by a body corporate or individual.
In the PSG case, QSI and the Qatar Tourism Authority were both managed by the Qatari Government and had entered into a sponsorship agreement, making it a related party transaction. The UEFA Club Financial Control Body (CFCB) shared the same sentiment categorizing the transaction as "financial doping".
The CFCB found the value of €200 million annually for the sponsorship was not the “fair value”. While re-evaluating the value of the sponsorship, the CFCB found PSG’s revenue did not meet or exceed their expenses and therefore was in violation of the break-even analysis.
What Next?
Concealing sponsorship revenues as disguised equity contributions are becoming the norm. Manchester City (MCFC) too did something like this - but that's a story for another day. For now, let's just say it's hard for UEFA to separate the equity amount from the actual revenue amount.
So what is the obligation on the licensee club?
The CLFPRR is pretty clear on this: "The club (licensee) “must disclose the nature of the related party relationship, as well as information about those transactions and outstanding balances, including commitments, necessary for an understanding of the potential effect of the relationship on the financial statements,” and also details about transactions and commitments with each related party.
Annex X of the CLFFPR states that licensees must determine the fair value of any RPT,- If the estimated fair value is different from the recorded value then the relevant income must be adjusted accordingly. It is worth noting that Annex X, much like the IASB, places emphasis on the substance of the related party relationship.
One of the main issues regarding the CLFPRR and RPT regime is the punishment meted out to offenders. For example, in the PSG case discussed above, the punishment imposed on the club was completely monetary in nature. From a legal standpoint, this does little to deter clubs of such stature.
In such cases, wealthy clubs like PSG and MCFC will simply factor in the monetary fine into the cost of doing business, rendering FFP completely ineffective. That is not the objective of the FFP or the UEFA. At least that's what it says on paper.
The reality though is a whole other story…
Did You Know? 🤔
Neil Armstrong originally wanted to take a football to the moon - but NASA didn't let him because they thought it would be un-American.
Quiz 🧠
Q: Which footballer had a clause in his contract when he signed for Sunderland banning him from traveling into space?
Send in your answers by replying to us. Let’s see who of you gets this right.
NO GOOGLING!!
Now time for last week’s answers:
Q. Which footballer voiced Superman in the French Lego Batman movie?
A: Antoine Griezmann
Today’s Quote 😎
A reporter is speaking to the former Scotland manager Gordon Strachan. The conversation goes something like this:
"Gordon, do you think James Beattie deserves to be in the England squad?"
Strachan: "I don't care, I'm Scottish."
What Else Are We Reading 📚
An extremely comprehensive essay on the MCFC and FFP controversy by football attorney Thomas Horton.
UK Commons Select Committee demands more government funding for struggling sports organizations.
AS Roma sold to American Billionaire Dan Friedkin.
Squad salary caps introduced in the EFL
Strike Of The Day ⚽
Your Weekend Beer takes us approximately 30 hours to brew. Phew!
If you liked your Weekend Beer, please do share a pint with your football buddies.
After all, sharing is caring :)