(1/60) As promised, here is a thread on how the Top 6 in the Premier League will be impacted by the new Financial Sustainability Regulation (FSR), expected to have a dramatic impact on the summer transfer window of 2023. #MUFC #LFC #Spurs #ManCity #Arsenal #CFC #FSR 
(2/60) Unfortunately, my threads tend to get really long, but the subject is complicated, so you have to bear with me to get through this. First, we will look at the relevant rules of the FSR (i.e. the “new” FFP rules).
(3/60) After that, we will look at the forecast of each Club, starting from the bottom. Lastly, we will cover the quality of each forecast, since that differ due to available information, and I will also add some thoughts on the margins of error.
(4/60) So, what are the new FSR replacing the commonly known FFP rules? They consist of 4 main rules: 1. The Net Equity Rule, 2. The No Overdue Payments Rule, 3. The Football Earnings Rule and the 4. The Squad Cost Rule
(5/60) Only Clubs in grave financial danger should struggle with Rules 1-2. The 4th rule – the Squad Cost Rule – brings in a new concept, to the FFP world. Under this rule, the “Squad Cost” may only amount to 70% of the Relevant Football Earnings.
(6/60) But it is eased in over 3 years, starting with 90% next summer, 80% the following summer – and so forth. It will impact teams, but I neither foresee an immediate impact nor a drastic impact (alone). Hence, this thread will focus on the Football Earnings Rule (“FER”).
(7/60) Under the FER, “Football Earnings” may during a Monitor Period only be minus 5m, 60m or 70m EUR (depending on if certain conditions are met). Football Earnings are “Relevant Income” minus “Relevant Expenses” plus “Relevant Investments”.
(8/60) In summary, “Relevant Income” is principally all income of a Club. But – remember that a capital contribution from an owner is not income. If an owner gifts money to a club, it does not impact the club’s income (nor does it if the club issues more shares).
(9/60) All Relevant Income may only be counted at “Fair Value”. What does this mean? Its probably a topic for another thread, but overly simplified it for example means that an owner cannot buy a cup of coffee from his club for 200m and call it “income”.
(10/60) Relevant Expenses also include most expenses of a club. The items that cannot be included in relevant income and relevant expenses can be divided into three categories: The first is items that could be used to 'cook the books', …
(11/60) …the second is depreciation/impairment of tangible assets since UEFA want to encourage investments in a Club's infrastructure and the third is that the result is calculated pre-tax, …
(12/60) which among other things results in that a club is not punished from being located in a high tax area or, vice versa, does not benefit from being located in a low tax environment.
(13/60) A Club may adjust the result upwards if it has made “Relevant Investments”. This is an interesting feature that explains why many clubs in the PL act as they do. Relevant Investments refers to investments in stadium and training-facility, …
(14/60) …spending on youth academy (excluding transfer fees for youth players) and women's team. So what does this mean in reality? It explains why Chelsea and City spends a ton on their respective Youth Academy.
(15/60) In the same way, a club may make investments in its stadium and training facility without it impacting its standing in relation to the Football Earning Rule.
(16/60) The Football Earnings Rule is measured over 3 years in aggregate, and clubs are allowed to deviate from the rule with either MEUR 5, MEUR 60 or MEUR 70, depending on if certain conditions are met.
(17/60) But – and this is missed by most – the first time used, the FER is only calculated based on two seasons, see Rule 104.1 C. This will have a big impact. The impact of one of the two seasons will be huge.
(18/60) So over three years, you could potentially make a loss of up to MEUR 70, if certain conditions are met. The condition to be allowed to register a loss of up to MEUR 60, is that your equity exceeds the loss you have made.
(19/60) It is however harder to be able to utilize the last MEUR 10 which allows you losses of up to MEUR 70 over three years. I won't get into detail on these provisions, but one condition is that a Club must have "Sustainable Debt",
(20/60) How it is sanctioned? This is the most important aspect of these rules, but at the same time often disregarded. The Football Earnings Rule is heavily sanctioned and cannot be disregarded by a Club. What will happen if a club breaches the Football Earnings Rule?
(21/60) At first, the club will be forced to enter into a settlement agreement with UEFA which can include fines and restrictions on number of players that can be used in tournaments as well as obligations for the club to clear up its economy, not very harsh. An example (Juve):
(22/60) But if the conditions of the Settlement Agreement are not met, the sanctions must be progressive and will ultimately lead to the club being banned from participating in UEFA tournaments.
(23/60) So what is relevant to look at? The key is to note that these rules are applied retroactively in relation to previous seasons. To participate in the 2024/2025 CL – you must have been a good boy in 22/23 and 23/24.
(24/60) As 22/23 is already underway, the activities of a Club in the summer of 23 -- setting expenses and incomes for 23/24 – must be measured. Argo, when a club sets a budget for the summer 2023, the relevant factor to consider is if it will pass the test in 2024.
(25/60) As a consequence, the summer budget of 2023, -- must – be based on a forecast for 23/24. Hence, this is what we will be looking at, i.e. a forecast for 22/23 and 23/24 for each club. The following forecasts assumes that the PL table is unchanged regarding CL spots (!).
(27/60) Chelsea FC is one of the clubs that has not published its 21/22 accounts yet. Income is based on the figures published by Deloitte Football Money League, and expenses on rough adjustments made to available information.
(28/60) Remember that these figures do – not – include any player sales by CFC in the summer of 2023. CFC is great at selling players and have many of them to sell. How does a sale of a player impact the earnings?
(29/60) It impacts the earnings in three ways. First of all, the right to register each player is an "intangible asset" in the Balance Sheet. This asset is written down -- amortized -- over the length of the players contract. …
(30/60) …The amount it is written down with, is an expense. If a player is signed for 100m and given a 5 year contract, the amortization is 20m per year. Second of all, a player is paid a salary which is a direct cost.
(31/60) If a player is sold the wages won’t have to be paid. Third of all, when sold, if the price paid for a player exceeds the players' remaining book value, the exceeding amount is a profit or a loss if it is lower than book value.
(32/60) So in the example above, if the 100m player is 2 years into his contract, he will have a remaining book value of 100 - 20 - 20 = 60m. If sold for 80m, it is a 20m profit, in addition say 5m is saved on salary and 20m is saved on amortization. So the net gain is 45m.
(33/60) Selling academy products like Madison and James gives Chelsea a big profit, selling underperforming players like Sterling and Lukaku not so much.
(34/60) Without getting CL money, I cannot see how Chelsea can come close to the minus 60m deviance. There spending spree is effectively done, and what we are seeing now certainly seems like an attempt to establish a squad that will let them over winter UEFA imposed austerity.
(36/60) What is abundantly clear is that MUFC must sell to be able to spend big next summer, even if the Club gets a new owner (at least as long as the new owner cannot pump in massive amount of “fair value” sponsorship money).
(37/60) The yearly cost for a Lissandro Martinez is about 20m (salary+amortization). So 21m of room is nothing. With its debt, MU will only be able to utilize a minus 60m deviance, while a debt free club like CFC can go minus 70m.
(38/60) What should be noted is that MU’s finances are heavily impacted by FX fluctuations, since most of its debt is in USD. If the sterling tanks vs the USD, MU debt raises. This will even out some. Something to keep an eye on.
(39/60) So what would a house cleaning by United in the summer result in? Selling the following players for the following fees basically gives us another 75m, which would allow us to bring in two players costing about as much as a Sancho each.
(41/60) Based on the following data besides financial statements.
(42/60) Arsenal didn't play in Europe last season for the first time in decades. Despite a heavily reduced wage bill, they finished the year (21/22) with a 45.5m loss with total football revenues just amounting to 370m …
(43/60) ... with a wage bill of 212m and amortization of 127m. This year, a big investment in the squad has paid of big time. An EL and CL impact is included in the numbers.
(44/60) Winning the PL and getting back into the CL, does not dramatically change the outlooks for Arsenal. But they can certain afford to "back the manager".
(45/60) Here comes Citeh:
(46/60) What is interesting when you look at Man City's books -- is how big of an impact the profit they make on player sales have on their bottom line. If City -- despite all cheating -- did not sell players they would have problem with these rules.
(47/60) But when you sell players for a profit of 60-120m every season, it is of course huge. Lastly, will City be impacted by the new “Fair Value” rules? That is for another thread.
(49/60) LFC’s last season was insane revenue wise, while the above data counts on missing the CL next season:
(50/60) Something that more or less apply to everyone, is that Liverpool also cannot continue to invest much if they miss the CL. As of next season, the top 5 will get into the (new) CL instead of top 4, but it is an issue for the PL teams.
(51/60) Liverpool can afford to invest, say a Bellingham and another expensive player.
(53/60) So Tottenham is a club that makes yearly losses -- and have for some time. They have not been a big spender on the transfer market. How can they be in great shape? Tottenham's finance situation is heavily impacted by their new stadium.
(54/60) Tottenham's yearly cost for its stadium is 40m (interest) and 70m (depreciation) = app. 110m. Since these costs are excluded from the FER, it of course has a big impact on turning Tottenham's financial loss into a profit in relation to the FER.
(55/60) The above is under the assumption that Tottenham miss the CL next season. But since this exercise is intended to provide information on how much a team can spend in the Summer of 2023, its of less importance.
(56/60) Tottenham's spending is limited by Levy, not UEFA. The QSI pushing in a bunch of money into Tottentham -- could however change the club's situation drastically. I definitely fear Tottenham spending without limitations next summer if that happens.
(57/60) So lastly, lets briefly touch upon the quality of the application on the Football Earnings Rule and the above forecasts. Any forecast is uncertain. Data from 2021/22 is not always available. And in the reports, all relevant items are not singled out.
(58/60) For example, costs for youth and womens teams. So any numbers presented above should be relied upon. But I do think that the overall picture painted by them is true.
(59/60) I.e. Tottenham has a lot of room, Liverpool aren’t screwed by missing the CL, even City must sell, Arsenal can back Arteta, United must sell to buy, and Chelsea’s spree is coming to an end after this window.
(60/60) This thread could easily have been expanded 3-4x over with information, “most” is left out. But do not hesitate to ask about any detail and I will expand on the background. Any input is of course much appreciated! #GlazersOut #GlazersOutNOW
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