UEFA Financial Fair Play : How to calculate and analyze the FFP
What exactly is Financial Fair Play of UEFA?
Financial fair play is about improving the overall financial health of European club Football. It was introduced by UEFA to prevent clubs that qualify for its competitions from spending beyond their means and stamp out what their previous president Michael Platini called “financial doping” within football. Platini believes the big spending of some clubs is ruining the game and feels that the level of debt carried by many is unsustainable.
Financial fair play was approved in 2010 and the first assessments kicked off in 2011. Since then clubs that have qualified for UEFA competitions have to prove they do not have overdue payables towards other clubs, their players and social/tax authorities throughout the season. In other words, they have to prove they have paid their bills.
Since 2013, clubs have also been assessed against break-even requirements, which require clubs to balance their spending with their revenues and restricts clubs from accumulating debt. In assessing this, the independent Club Financial Control Body (CFCB) analyses each season three years’ worth of club financial figures, for all clubs in UEFA competitions, The first sanctions and conditions for clubs not fulfilling the break-even requirement were set following this first assessment in May 2014. The conditions relating to non-compliance with break-even requirements were effective for the 2014/15 campaign.
The main objectives of the Financial Fair Play Regulations:
- to introduce more discipline and rationality in club football finances,
- to decrease pressure on salaries and transfer fees and limit inflationary effect,
- to encourage clubs to compete with(in) their revenues,
- to encourage long-term investments in the youth sector and infrastructure,
- to protect the long-term viability of European club football,
- to ensure clubs settle their liabilities on a timely basis.
Are clubs no longer allowed to have losses?
To be exact, clubs can spend up to €5million more than they earn per assessment period (losses – three years). This is called break-even requirement. However, it can exceed this level to a certain limit, if it is entirely covered by a direct contribution / payment from the club owner or a related party. This prevents the build-up of unsustainable debt.
The limits are:
- €45m for assessment periods 2013/14 and 2014/15
- €30m for assessment periods 2015/16, 2016/17 and 2017/18
In order to promote investment in stadiums, training facilities, youth development and women’s football (from 2015), all such costs are excluded from the break-even calculation. However, besides the break-even requirement, there are several ratios considered by UEFA to anticipate club losses.
Are clubs automatically excluded if they are not in line with FFP?
If a club is not in line with the regulations, it will be UEFA’s Club Financial Control Body that decides on measures and sanctions. Non-compliance with the regulations does not mean that a club will be excluded automatically, but there will be no exceptions. Depending on various factors (e.g. the trend of the break-even result) different disciplinary measures may be imposed against a club. There is a catalogue of measures:
- warning
- reprimand
- fine
- deduction of points
- withholding of revenues from a UEFA competition
- prohibition on registering new players in UEFA competitions
- restriction on the number of players that a club may register for participation in UEFA competitions, including a financial limit on the overall aggregate cost of the employee benefits expenses of players registered on the A-list for the purposes of UEFA club competitions
- disqualification from competitions in progress and/or exclusion from future competitions
- withdrawal of a title or award
How to calculate & analyze the FFP
The UEFA wants to improve the financial health of European football clubs via an introduction of the break-even requirement. However, it is presented that additional ways to do so exist. The ratio analysis is now incorporated in anelaborated model, illustrated below.
1. Break-even requirement
Improving a football clubs’ financial situation is primarily based on the break-even requirement and therefore the income statement.
Break-even = Relevant income – Relevant expense
Relevant income is equivalent to the sum of the following elements :
- Revenue – Gate receipts
- Revenue – Sponsorship and advertising
- Revenue – Broadcasting rights
- Revenue – Commercial activities
- Revenue – UEFA solidarity and prize money
- Revenue – Other operating income
- Profit on disposal of player registrations (and/or income from disposal of player registrations)
- Excess proceeds on disposal of tangible fixed assets
- Finance income and foreign exchange result
Relevant expenses are equivalent to the sum of the following elements :
- Expenses – Cost of sales/materials
- Expenses – Employee benefits expenses
- Expenses – Other operating expenses
- Loss on disposal and amortisation/impairment of player registrations (and/or costs of acquiring player registrations)
- Finance costs and dividends
2. Ratio Analysis
In addition to the income statement, the balance sheet of Football Club can partially illustrate the financial situation of a company. The balance sheet can provide you with information regarding debt contracts and liquidation values in case of a default. In this analyze, there are several ratios that are used and divided into 3 aspects of assessing :
a. Assessing a company’s performance and efficiency
- Net Profit margin = Net profit / sales
- Return on Equity = Net profit / Shareholders’ equity
- Return on assets = (Net profit / sales) x (sales / total assets)
b. Assessing a company’s liquidity
- Current ratio = Current assets / Current liabilities
- Quick ratio = Cash and marketable securities + Trade receivables (net) / Current liabilities
- Cash ratio = Cash and marketable securities / Current liabilities
- Operating cash flow ratio = Cash flow from operations / Current liabilities
c. Assessing a company’s solvency
- Liabilities to equity ratio = Total liabilities / Shareholders’ equity
- Debt to equity ratio = Current debt + Non-current debt / Shareholders’ equity
- Debt to capital ratio = Current debt + Non-current debt / Current debt + Non-current debt + Shareholders’ equity
By including ratio analysis in the FFP regulations and to require certain ratio levels, the chances to become financially more stable increases. In this scenario the ratio analysis and the break-even requirement are of equal weight and contribute together to a healthier situation. However, this scenario and rules of FFP still need some improvements and adjustments, UEFA still continues to monitor and evaluate that regularly.
refferences :
- https://www.uefa.com : UEFA Club Licensing and Financial Fair Play Regulations
- https://www.bbc.com : Financial fair play : All you need to know how it works
- http://thesis.binus.ac.id : Analysis of the Implementation of UEFA Financial Fair Play
- https://essay.utwente.nl : A Contribution to Financial Fair Play in European Football
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