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In the latest episode of our Everton Business Matters podcast, Rodger Armstrong, John Blain and The Esk discuss and debate Everton’s off-field talking points in two parts:

  • Will regulations restrict how much Everton can spend and does it impact the transfer window?
  • Non-broadcast revenues, their importance and how to increase them.

You can listen to the podcast below or by searching for The Blue Room via iTunes to subscribe and receive all of our audio content as soon as it’s released.

By The Esk

As promised we’ve produced some notes to go alongside the podcast. We’d ask you to listen to the podcast first, the notes are just to aid some of the technical stuff – the podcast has much more detail:

We cover UEFA regulations, Premier League regulations and the way buying and selling of players are treated in the accounts

UEFA regulations:

Financial Fair Play Rules.

Essentially FFP limits the permitted losses of clubs by requiring clubs to balance their spending with their revenues (excluding infra-structure, stadium and academy spending). Thus, it restricts the ability of a club to rely upon debt as a means of financing normal activities.

UEFA use an “independent” body known as the Club Financial Control Body (CFCB) which looks at the previous 3 year’s financial accounts.

The regulations permit each club to spend up to €5m more than they earn per year. However, this limit can be increased to €30m if the excess is covered entirely by a “direct contribution/payment from the club owner(s) or a related party”.

Because of the now enormous profitability of Premier League clubs, including Everton, it’s difficult to see a time when FFP becomes a significant issue for teams building their squads.

Premier League Rules:

There’s two main regulations, Profitability and Sustainability regulations providing a cap on the maximum losses permitted, and Short Term Cost Control (STCC) designed to hold back the increase in player wages:

Profit and Sustainability Rules

The rules regulate the amount of losses (like UEFA’s FFP) and permit a maximum loss of £105 million over 3 years. This is reduced to £15 m if the owner does not inject capital into the club to cover the losses. It is not an issue for Everton, nor should be going forward.

Short Term Cost Control

Simply:

  • Use 2015/16 wages as a base
  • Each year Everton can increase wage bill by
    • £7 million, plus
    • Any increase in non-broadcasting revenues (called CORU)
    • CORU =club’s own revenue uplift
    • Includes increase in commercial, match day, sponsorship incomes and importantly player trading profits

In order to understand the above regulations it’s important to understand how players are accounted for:

Effect of buying & selling players on Profit & Loss Account

Buying:

  • Cost of buying a player is spread across the length of the contract, it does not appear in accounts just in the year of purchase.

Imagine Everton have spent £250 million on several players, each with 4 year contracts.  This would create a charge against the P&L account of the club each year (for 4 years or until a player is sold) of £62.5 million.

Selling

  • When selling a player the profit (or loss) is applied to the accounts in the year the player is sold.

Example:

Player is bought for £30 million on a 4 year contract.

Cost to the P&L Account each year: £30m/4 plus the players’ wages

He’s sold at the end of his 3rd year for £27.5 million

The profit is £27.5m less his current value (called book value). His current value is £30m minus 3 years of depreciation (called amortisation) 3x(£30m/4) = £7.5 million

Therefore, a profit of £20 million would be created. This can be used as part of the club’s own revenue uplift (CORU)

The podcast provides estimates of the impact these regulations have on our ability to spend on transfer fees and wages.

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