CORPORATE FINANCE ORIGINAl PAPER © CC BY 4.0 DOI: 10.26794/2587-5671-2020-24-4-120-135 UDC 336.64(045) JEL G32, Z23 Applying UEFA Financial Fair Play Rules and Improving the Financial Stability of Football Clubs Illustrated by the Example of Manchester City FC I. V. Solntsev Plekhanov Russian University of Economics, Moscow, Russia https://orcid.org/0000-0001-9562-8535 ABSTRACT This article considers the financial monitoring of football clubs under UEFA Financial Fair Play (FFP) regulations. The aim of the paper is to study the current system for assessing the financial stability of football clubs and propose measures for its practical application. The work is relevant due to a wide range of financial challenges in modern football and supported by a detailed analysis of a recent case of Manchester City football club accused of breaching FFP. Studying the main allegations against the club, the author analyzed the basic concepts of FFP, breaches of other clubs and sanctions imposed on them, with emphasis on the experience of Russian clubs. The analysis illustrated the role of UEFA and football clubs with regards to FFP implementation, considering a specific case. The author estimated the potential losses of Manchester City due to the Champions League ban, and, in addition, the total losses due to the English Premier League suspension amid coronavirus threat. Using FFP criteria, the author analyzed the financial stability of Manchester City and Russian football club CSKA Moscow and identified similar problems for the clubs. The author outlined recommendations for UEFA rules compliance and presented a system of indicators that help to regularly monitor and manage the long-term financial stability of football clubs. The findings of the paper may find application in the field of other team sports. Keywords: sport economics; sport finance; football economics; football finance; assessment of potential losses; the impact of coronavirus on the economy (sport); financial strategy of a football club For citation: Solntsev I. V. Applying UEFA Financial Fair Play rules and improving the financial stability of football clubs illustrated by the example of Manchester City FC. Finance: Theory and Practice. 2020;24(4):120-135. (In Russ.). DOI: 10.26794/2587-5671-2020-24-4-120-135 INTRODUCTION ited from covering losses beyond certain limits. UEFA’s Club Financial Control Body (CFCB) im- The volume of external and internal debt is also posed a two-year ban from European competi- tightly controlled and a number of requirements tion (2020/2021 and 2021/2022) and a € 30 mil- established in terms of youth development, in- lion fine on Manchester City in February 2020 for frastructure, administrative and legal support. breaches of Financial Fair Play (FFP). This is the There are a lot of studies devoted to the FFP most severe punishment UEFA has ever handed regulations considering them from both posi- out since it created its FFP regulations. tive and negative sides in the scientific litera- One of the most important aims of FFP is to ture. The most significant works are by Vöpel improve financial and economic capability of the [1, 2]; Szymanski [3–6]; Müller, Lammert, and club. To achieve this aim, the clubs must dem- Hovemann [7]; Preuss, Haugen, and Schubert onstrate that their revenue exceeds or equals [8]; Morrow [9], Budzinski [10]; Schubert and expenditure, while shareholders are prohib- Könecke [11]; Bachmaier, Lammert, Plumley, © Solntsev I. V., 2020 120 FINANCE: THEORY AND PRACTICE Vol. 24, No. 4’2020 I. V. Solntsev Wilson, Hovemann [12]; Dietl and Franck [13]; The author of the present paper analyzes the Franck [14], Olsson [15]. club licensing system in several European coun- There are positive effects of FFP regulations tries and assessed Russian clubs’ FFP compliance. such as creating equal opportunities for all clubs In addition, the author suggests recommenda- and improving their financial stability. Among tions for Russian clubs aimed at ensuring their negative effects are: financial stability [19, 20]. • limited investment; Most scientific research on this problem is theo- • inequity in applying rules for teams from retical. Additionally, practices have been designed different championships; in recent years to keep in line with the regulations. • applying inappropriate sanctions of bans Finally, some FFP rules will be changed in light and fines for clubs in a difficult financial situa- of the current global crisis. Thus, the aim of this tion; work, which forms its novelty and practical sig- • subjective approaches to estimate the fair nificance, is to consider the practical application value of sponsorship agreements; of FFP rules based on the experience of European • high costs for monitoring and controlling football clubs considering current external chal- compliance with the FFP requirements, including lenges, illustrate its main aspects with a specific justifying the fair value of sponsorship contracts example and propose a system of indicators aimed and appealing UEFA decisions; at regular monitoring of the financial stability of • inconsistency between FFP break-even re- football clubs. quirements and “real” financial situation of clubs, including the costs on youth development, infra- FFP REQUIREMENTS structure, and training facilities. It should be noted that FFP rules are not limited Gallagher and Quinn B. [16] analyzed the im- to financial performance requirements, which pact of FFP rules on the sporting and financial is the result of the complex work of the clubs in performance of English football clubs and con- several directions. cluded that UFEA regulations reduce the average The sporting criteria require clubs to imple- efficiency of clubs by raising the relative impor- ment a youth development programme ap- tance of financial goals whilst lowering the im- proved by UEFA; to protect, safeguard and ensure portance of sporting goals. According to the au- the welfare of youth players; to ensure a yearly thors, the FFP rules strengthen the financial and medical examination for all first squad players sporting power of the elite clubs and undermine and establish and apply a policy to tackle racism the league’s competitive intensity by shifting the and discrimination in football. All players must priorities of clubs from the sporting component be registered with the UEFA member association to the financial component. and have a written contract. Similar research has been done by Ghio, Ru- The infrastructure criteria require clubs to have berti, and Verona [17] but the results are differ- a stadium available for UEFA club competitions ent. The authors find that FFP does not improve and training facilities approved by the UEFA the average efficiency of the Italian first division member association fulfilling the minimum re- teams, however, FFP has contributed to reducing quirements defined by UEFA. the gap in terms of efficiency between top teams Personnel and administrative criteria require and lower-tier teams. clubs to appoint an adequate number of skilled Birkhäuser, Kaserer and Urban [18] find that secretarial staff, have an office space, and appoint FFP rules have further amplified the competitive qualified key personnel. imbalance. This might be caused by the fact that Legal criteria require clubs to submit a valid FFP raises some barriers against the entrance of declaration confirming their participation in new investors and supports the former season’s UEFA club competitions, a copy of their current, winner. valid statuses, an extract from a public register or FINANCETP.FA.RU 121 CORPORATE FINANCE an extract from the UEFA member association’s (reporting period T-1) and 2016 (reporting pe- club register, information about legal group riod T-2). structure and ultimate controlling party at the UEFA considers previous reporting pe- statutory reporting date. riods — in case of an aggregate break-even The financial criteria are set out in the most deficit for the monitoring period, a club may detailed and in practice, clubs find them chal- demonstrate a reduced aggregate deficit due lenging. to the break-even results of the two reporting Clubs must provide the reporting perimeter periods prior to the monitoring period (i. e. re- in the first place, i. e. the entity or combination porting periods T-3 and T-4). At the same time, of entities in respect of which financial informa- there is an acceptable deviation — the maxi- tion (e. g. single entity, consolidated or combined mum aggregate break-even deficit, at which financial statements) has to be provided. Annual a club is considered to have met the break- financial statements must be audited. even requirement. The acceptable deviation is Clubs must publish the total amount paid to € 5 million. It can exceed the level up to € 30 or for the benefit of agents/intermediaries, and million if such excess is entirely covered by the audited financial information on the club’s contributions from equity participants. Only website or the website of the national association. relevant incomes and expenses, income re- Clubs must prove that as of 31 March preced- lated to the football activities, are included ing the license season it has no overdue payables. in the break-even calculation. Income related As of the end of March 2020, this deadline was to non-football operations is not included, for postponed to the end of April due to the spread example, operations based at, or in close prox- of coronavirus. imity to, a club’s stadium such as a hotel, res- Also, clubs must confirm any significant taurant, conference centre, business premises, change that has occurred in relation to any of health-care centre. the licensing criteria, events of major economic Additionally, UEFA considers the following in- importance that may have an adverse impact on dicators: the club’s financial position after the reporting 1. Sustainable debt. At the end of the period. reporting period Т-1, the relevant debt must Submitted future financial information is not be greater than € 30 million and greater one of the most important criteria, demonstrat- than 7 times the average of the relevant ing the ability of a club to continue as a going earnings of T-1 and T-2.