There seems to be a lot of confusion from fans on what the FFPRs actually mean for clubs? So i'm going to attempt to explain it for you all. Most of the examples i'll use in this post are based around English Premier League teams just for the fact that the reference i'm using to write this uses them as examples but it applies to all the big teams across Europe.
Why is the FFP being brought into effect?
It has long been a major concern for UEFA that clubs are continually making losses year in, year out and are not playing by the rules of fair play, by the owners subsidising their clubs by injecting large amounts of cash that the clubs can't make on their own merits. As a clubs largest expenditure is transfer and wage fees the FFP is being implimented to effectively put a cap on these expenses in order to bring more stability to the finances of the clubs because when all is said and done a football club is a business and every business needs to balance it's books, i.e not spend more than they earn.
Why is the FFP being brought into effect?
It has long been a major concern for UEFA that clubs are continually making losses year in, year out and are not playing by the rules of fair play, by the owners subsidising their clubs by injecting large amounts of cash that the clubs can't make on their own merits. As a clubs largest expenditure is transfer and wage fees the FFP is being implimented to effectively put a cap on these expenses in order to bring more stability to the finances of the clubs because when all is said and done a football club is a business and every business needs to balance it's books, i.e not spend more than they earn.
So how did European clubs end up in this situation that they are spending more than they are making? Well one explanation brought forward by UEFA (and is generally agreed with by most parties) is that as clubs are taken over by new mega rich owners they pump large amounts of money into transfer funds to pay whatever it takes to bring in their most wanted stars, the trouble with that is that the other clubs are having to do the same to keep up in a 'keeping up with the Jones's way' even if they end up spending more than they can realistically afford, so believe it or not the FFPR was the result of the clubs owners turning to UEFA and asking them to save themselves from themselves by limiting the amounts they can spend as without help this ridiculous spending trend would spiral out of control eventually leading to some of Europes best known and loved clubs going out of business.
The Basics
UEFA have brought in the FFP as part of it's licensing system that clubs already have to apply for in order to compete in UEFA's European compititions, with that in mind, the FFP regulations only relate to clubs that participation in the Champions League & Europa League, and NOT to the domestic league. If a club believes it can qualify for that seasons European competitions it has to ,prior to the beginning of that season, apply for a UEFA club license. From the 2013/2014 season stipulations of this license will include adherence to the FFP rules, until that season there will be no punishments enforced for breaching these rules, this however doesn't mean that clubs can go on wild spending sprees this summer as the clubs accounts for the 2011/2012 & 2012/2013 seasons will be used to determine a clubs license application for the first year the FFPR is enforced(2013/2014).
The good news is that these new rules encourage the clubs to invest in youth development and the clubs infrastructure which includes stadium & training ground development as well as expenditure in the clubs academy. The new rules give the club more incentive to spend in these areas as opposed to big money transfers as the FFPRs don't count this sort of investment as expenditure when working out it's break even calculation, which will all aid the commercial revenue growth for the club and in the grand scheme of things this sort of long term investment will give the club a larger revenue to balance against expenditure.
UEFA are also stressing that they are not anti-debt,with clubs like Manchester United's huge reported debt it would be impossible for them to clear it all in just a few years, so Platini has ensured these clubs that so long as the profit is covering the interest on the debt then there isn't a problem, this issue, of course, becomes more delicate if the club's profits aren't covering the interest on the debt. For example before it's latest takeover Liverpool FC in it's latest accounts showed the club's profit of £27.4 million fell a long way short of it's interest payment of £40.1 million. That being said though it doesn't mean the clubs can indefinitely stay in debt and just cover the interest with their profits as one of the main aims of the FFPRs is to get to the point where clubs are breaking even i.e expenditure = revenue though this isn't expected until the 2018/19 season at the earliest.
So do the FFPRs mean the end of the mega money transfers? The answer is probably as clubs simply can't afford to spend £50 million + on a player and still break even, unless of course the club makes large commercial profits, which let's face it very few European clubs do. So from the 2011/12 season a club would have to make huge revenues from their commercial activities or sell on of their top players to afford a superstar player and balance their books, that being said though if they can afford to cover the interest payments they can still get a loan to purchase the player.
So why didn't clubs go on huge spending sprees before 2011/12?
Some people argued that clubs could get around the new rules by going on massive spending sprees before the 2011/12 season began so that they'd be compliant in time for the first monitoring period in 2013/14. The thinking behind this, being that it would be booked on the 2010/11 accounts which aren't being used to determine the first lot FFPRs, though this isn't the case as when a club buys a player his value is split over the length of his contract meaning a player bought in the 2009/10 season could still have an effect on the break even calculation in 2013/14. Below is an example of how this works and shows how it effects the monitoring periods for the FFPRs.
A players signs in January 2010 for a fee of £10 million on a 5 year contract of £5 million a year in wages, so the clubs accounts would show the transfer fee as £2 million per year for each of the 5 years with the 3rd, 4th & 5th years being included in the FFPRs monitoring period. The other interesting issue with this procedure is if a player gets transferred, to highlight this point i'll use the example of Robinho (I didn't really want to but it was the example in my reference)
He was bought for £32.5 million by Man City in September 2010 on a 4 year contract so on that basis the accounts would show his fee at £8.1 million per year. He was then sold after 2 years to Milan so the cumulative amount was £16.2 million leaving £16.3 million on the books, the sale price was reported as being £18 million so City will report a profit on the sale of £1.7 million in 2010/11 accounts, therefore they will show an annual profit improvement of £18.1 million after the deal which equates to £8.3 million lower wages + £8.1 million they don't have to show from his original transfer + £1.7 million profit on the sale.
This shows how a club writes off the transfer fee of a player over the time of the contract and also interestingly shows that because he was worth £16.3 million 2 years in to his 4 year deal Man City made a £1.7 million accounting profit on his sale. Of course the fans would see this as a bad deal as in their eyes they paid £32.5 million for him and sold him for £18 million, though the club's account will pass it as a £18.1 million profit improvement.
The good news is that these new rules encourage the clubs to invest in youth development and the clubs infrastructure which includes stadium & training ground development as well as expenditure in the clubs academy. The new rules give the club more incentive to spend in these areas as opposed to big money transfers as the FFPRs don't count this sort of investment as expenditure when working out it's break even calculation, which will all aid the commercial revenue growth for the club and in the grand scheme of things this sort of long term investment will give the club a larger revenue to balance against expenditure.
UEFA are also stressing that they are not anti-debt,with clubs like Manchester United's huge reported debt it would be impossible for them to clear it all in just a few years, so Platini has ensured these clubs that so long as the profit is covering the interest on the debt then there isn't a problem, this issue, of course, becomes more delicate if the club's profits aren't covering the interest on the debt. For example before it's latest takeover Liverpool FC in it's latest accounts showed the club's profit of £27.4 million fell a long way short of it's interest payment of £40.1 million. That being said though it doesn't mean the clubs can indefinitely stay in debt and just cover the interest with their profits as one of the main aims of the FFPRs is to get to the point where clubs are breaking even i.e expenditure = revenue though this isn't expected until the 2018/19 season at the earliest.
So do the FFPRs mean the end of the mega money transfers? The answer is probably as clubs simply can't afford to spend £50 million + on a player and still break even, unless of course the club makes large commercial profits, which let's face it very few European clubs do. So from the 2011/12 season a club would have to make huge revenues from their commercial activities or sell on of their top players to afford a superstar player and balance their books, that being said though if they can afford to cover the interest payments they can still get a loan to purchase the player.
So why didn't clubs go on huge spending sprees before 2011/12?
Some people argued that clubs could get around the new rules by going on massive spending sprees before the 2011/12 season began so that they'd be compliant in time for the first monitoring period in 2013/14. The thinking behind this, being that it would be booked on the 2010/11 accounts which aren't being used to determine the first lot FFPRs, though this isn't the case as when a club buys a player his value is split over the length of his contract meaning a player bought in the 2009/10 season could still have an effect on the break even calculation in 2013/14. Below is an example of how this works and shows how it effects the monitoring periods for the FFPRs.
A players signs in January 2010 for a fee of £10 million on a 5 year contract of £5 million a year in wages, so the clubs accounts would show the transfer fee as £2 million per year for each of the 5 years with the 3rd, 4th & 5th years being included in the FFPRs monitoring period. The other interesting issue with this procedure is if a player gets transferred, to highlight this point i'll use the example of Robinho (I didn't really want to but it was the example in my reference)
He was bought for £32.5 million by Man City in September 2010 on a 4 year contract so on that basis the accounts would show his fee at £8.1 million per year. He was then sold after 2 years to Milan so the cumulative amount was £16.2 million leaving £16.3 million on the books, the sale price was reported as being £18 million so City will report a profit on the sale of £1.7 million in 2010/11 accounts, therefore they will show an annual profit improvement of £18.1 million after the deal which equates to £8.3 million lower wages + £8.1 million they don't have to show from his original transfer + £1.7 million profit on the sale.
This shows how a club writes off the transfer fee of a player over the time of the contract and also interestingly shows that because he was worth £16.3 million 2 years in to his 4 year deal Man City made a £1.7 million accounting profit on his sale. Of course the fans would see this as a bad deal as in their eyes they paid £32.5 million for him and sold him for £18 million, though the club's account will pass it as a £18.1 million profit improvement.
Consequences & Conclusions
It can be argued that the bigger teams in a league will have a distinct advantage over mid-level teams with the top clubs receiving not only Champions league money but also have better and more effective ways of commercialising their rights leading to more revenue to offset their expenditure. On the flip side if a club doesn't want to participate in a UEFA competition they can spend whatever they want, in fact some clubs may see spending heavily on transfers and finishing the top of the league more lucrative for them than participating in the Champions League though the majority of teams wouldn't give up the chance of European competition plus without playing in Europe clubs would find it harder to attract the top players.
It may also provide another advantage for the mid-level teams that aren't participating in UEFA competition won't have the financial restraints that come with adhering to the FFPRs meaning they can spend more to be competitive domesticly. It appears that whilst the FFPRs will not stop a benefactor wishing to spend and inject capital into the club, it does stop an owner overspending if they want to play in UEFA competitions.
In short the FFPRs mean that-
Equity injections must be restricted to set limits
Spending is encouraged to spend on youth development and stadium infrastructure (to improve long term stability and revenue increases)
but clubs will be dis-incentivised for spending large amounts on short term transfers and wages
It ultimately means that the opportunities for instant success will be almost none existent meaning that in the long term clubs will be developing more youth talent from their academys giving national teams a greater pool of players but it will also promote a more self sufficient club structure and more organic club growth. In my opinion these new rules will cause a few problems to start with and fans won't like the financial restrictions placed on their favourite clubs but in the long term it could be just the thing to ensure professional football is around for a long time to come, without these rules we'd be seeing far more clubs going bankrupt and no one wants to lose the team they love.
It can be argued that the bigger teams in a league will have a distinct advantage over mid-level teams with the top clubs receiving not only Champions league money but also have better and more effective ways of commercialising their rights leading to more revenue to offset their expenditure. On the flip side if a club doesn't want to participate in a UEFA competition they can spend whatever they want, in fact some clubs may see spending heavily on transfers and finishing the top of the league more lucrative for them than participating in the Champions League though the majority of teams wouldn't give up the chance of European competition plus without playing in Europe clubs would find it harder to attract the top players.
It may also provide another advantage for the mid-level teams that aren't participating in UEFA competition won't have the financial restraints that come with adhering to the FFPRs meaning they can spend more to be competitive domesticly. It appears that whilst the FFPRs will not stop a benefactor wishing to spend and inject capital into the club, it does stop an owner overspending if they want to play in UEFA competitions.
In short the FFPRs mean that-
Equity injections must be restricted to set limits
Spending is encouraged to spend on youth development and stadium infrastructure (to improve long term stability and revenue increases)
but clubs will be dis-incentivised for spending large amounts on short term transfers and wages
It ultimately means that the opportunities for instant success will be almost none existent meaning that in the long term clubs will be developing more youth talent from their academys giving national teams a greater pool of players but it will also promote a more self sufficient club structure and more organic club growth. In my opinion these new rules will cause a few problems to start with and fans won't like the financial restrictions placed on their favourite clubs but in the long term it could be just the thing to ensure professional football is around for a long time to come, without these rules we'd be seeing far more clubs going bankrupt and no one wants to lose the team they love.
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