Not To Fear – Financial Fair Play Is Here

Financial Fair Play (FFP) – the three words that used to send shivers down my spine, when I first found out about the UEFA proposals to put an end to loss-making football clubs.

Yet surprisingly, Roman Abramovich was reportedly one of the biggest backers of FFP and UEFA initiatives. The English media put 2 and 2 together and got 5, claiming the main man was no longer interested in backing Chelsea financially.

Yet, our new £50 million signing is set to make his debut against his former employers on Sunday. How can it be possible?

Chelsea released a statement that they have become cash-positive for the first time under Roman Abramovich, whilst announcing a loss of £70.9 million. So having spent another £70 million in January, and with sources claiming Roman Abramovich is ready to bankroll an overhaul of playing staff in the summer – how can Chelsea possibly comply with the FFP criteria?

The key figure in all of this is the £68.6m operating loss. To those unaware of financial jargon, operating profit/loss is wages and amortised (read below) transfer fees taken away from total revenue to generate a figure, in our case a loss. For past 3 or 4 seasons, wages formed about 70-80% of our costs, last season’s figure being £167 million (excluding pensions and social security benefits).

Obviously for past 3 seasons we haven’t really spent that much, and although the sackings of managers have contributed to these costs, they only formed no more than 5% of the total spend.

From the start of 2011/2012 season clubs can post total losses of no more than €45 million for the following three seasons, or an equivalent of €15 million a year. With Chelsea revealing a £70.9 million loss and Manchester City a £121 million loss for one year, it seems unfeasible how the two clubs could possibly meet the requirements.

Yet only a few months ago Monsieur Platini claimed that Roman Abramovich was one of the biggest supporters of FFP. So what does Roman Abramovich know, that British press have failed to recognise – claiming we are staring into a possibility of being kicked out of UEFA Champions League?

Well it seems that the lazy journalism has prevailed, jumping on sensationalism and failing to pick up on key aspects of the FFP. UEFA will monitor spending whereby clubs are not allowed to spend more money than they earn. However, there are special dispensations whereby certain losses are allowed if they are funded by the owners (Moratti, Abramovich, Sheikh Mansour).

More importantly perhaps, for the monitoring period of 2011-12, 12-13, 13-14 the clubs are able to deduct wages of players whose contracts were signed before 1st June 2010 (which is the large majority of Chelsea’s high earners).

As mentioned previously, we spent £167 million on wages last season which contributed to our losses, but if you deduct the cost of all contracts that were signed before 1st June 2010 (likes of Lampard, Terry, Drogba), that figure is likely to be closer to £67 million. So according to UEFA and FFP our £70.9 million loss looks more like an operating profit of £29.1 million.

This view is supported by the club’s chief executive Ron Gourlay: “The club is in a strong position to meet the challenges of UEFA ‘financial fair play’ initiatives which will be relevant to the financial statements to be released in early 2013.”

Chelsea of course have already begun the reduction of the wage bill, which wasn’t really reflected in the financial figures released. High earners like Michael Ballack, Joe Cole, Ricardo Carvalho and Deco have all left. Their replacements – Yossi Benayoun (£60,000 per week reportedly), David Luiz (£35,000 p/w reportedly), Ramires (£25,000 p/w reportedly) – may have cost a total of £44.5 million but earn significantly less.

This is where transfer amortisation comes in. Transfer amortisation is an accounting term in football whereby the cost is allocated among the period of player’s contract. So for example – David Luiz is costing us £3.8 million per annum for the next 5 and a half years on top of his wages.

So what does the future hold for Chelsea? Of course nobody can tell for sure, as far as some are concerned the world is coming to an end in 2012. But I believe the following might happen in the next 2 to 3 years:

• Senior players on high wages – either being sold, released, retiring or taking massive pay cuts.
• Chelsea (and other clubs) willing to pay higher prices for players, and paying lower wages (as already seen with Luiz and Ramires).
• Chelsea (and other clubs) handing out longer contracts so that transfer fees can be amortised over longer periods.
• Clubs tying ‘marquee’ players to long-term (8, even 10 years) contracts.
• Sponsors paying wages directly for ‘marquee’ players (a pattern that has already emerged in Brazil).
• Naming rights to Stamford Bridge being sold.

Well-informed sources claim that Roman Abramovich is keen to spend further in the summer months as he takes a more hands-on approach on Chelsea signings. It makes sense as a lot of highly-paid club officials in charge of recruitment policy are departing in the summer (Hans Gillhaus, Frank Arnesen and a host of others).

Of course the press have been trying to convince us (the football fans) that he has been meddling with transfers ever since he got here, a claim a certain Claudio Ranieri recently refuted.

If signing two long-term targets who happen to be world class players is an example of Abramovich “interference” and “panic buying” – then I’ll happily take more of that.

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