Kok Chee Kheong examines the nuts and bolts of the break-even requirement.
 
The UEFA financial fair play regulations have received their fair share of media coverage. Any fan of European football will be aware that the financial fair play regulations will come into force from season 2013/14 and require football clubs to fulfil a break-even requirement.
 
This article examines in further detail the elements of the break-even requirement in the financial fair play regulations.
 
RATIONALE
 
The break-even requirement is contained in the UEFA Club Licensing and Financial Fair Play Regulations (“Regulations”), the most-recent being the 2012 Edition.
 
The rationale for the financial aspects of the Regulations include the following –

THE AFFECTED CLUBS
 
Commencing from season 2013/2014, every club that qualifies to compete in any UEFA club competition will be required to obtain a licence from its licensing authority which confirms that the club concerned has satisfied the relevant criteria set out in the Regulations, including the break-even requirement. Hence, not every football club in Europe will be required to comply with the break-even requirement but only those that qualify to compete in the UEFA Champions League or the Europa League.
 
Further, clubs that have less than €5 million of relevant income and relevant expenses for each of the two reporting periods preceding the year in which they are to compete in a UEFA club competition and those that qualify to compete in the Europa League based on ‘sporting merit’, namely the three clubs that are admitted on the basis of the UEFA Respect Fair Play Assessment, are exempted from complying with the break-even requirement.
 
THE BREAK-EVEN REQUIREMENT
 
The cornerstone of the break-even requirement is contained in Article 57 of the Regulations which inter alia states that “all licensees that have qualified for a UEFA club competition must comply with … the break-even requirement …” Details of the break-even requirement are set out in Articles 58 to 63 and Annex X of the Regulations.
 
THE MONITORING PERIOD
 
Article 59 of the Regulations requires a football club to be assessed over a monitoring period that covers three reporting periods, that is, the reporting period ending in the calendar year in which the club is to compete in a UEFA club competition (“T”) and the reporting periods ending in the two calendar years immediately preceding that year (“T-1” and “T-2” respectively).
 
For season 2013/2014, the first monitoring period will cover only two reporting periods, namely the reporting periods ending in 2012 and 2013.
 
THE BREAK-EVEN RESULT
 
The break-even result, as defined in Article 60(1), is the difference between relevant income and relevant expenses for a reporting period. If a football club’s relevant expenses are less than its relevant income for a reporting period, then the club has a break-even surplus. If a club’s relevant expenses exceed its relevant income, then that club has a break-even deficit for that reporting period.
 
The aggregate break-even result is the sum of the break-even results in each reporting period covered by the monitoring period. If the aggregate break-even result is positive (equal to zero or above) then that club has an aggregate break-even surplus for the monitoring period. Conversely, if the aggregate break-even result is negative (below zero), the football club has an aggregate break-even deficit for the monitoring period.
 
RELEVANT INCOME AND RELEVANT EXPENSES
 
As mentioned above, the break-even result is determined by netting off relevant expenses from the relevant income for a reporting period.
 
The relevant income of a football club comprise gate receipts (including season and matchday tickets for all competitions, friendly matches and tours as well as membership fees), broadcasting rights for all competitions and friendly matches including tours, sponsorship and advertising (including revenue from sponsors, pitch-perimeter and other board advertising), commercial activities (including merchandising, food and beverage sales, conferencing and lottery sales) and other operating income (such as rental income and dividends) plus profit or income from disposal of player registration (i.e. transfer of players), finance income and surplus from disposal of certain tangible fixed assets.
 
The relevant expenses include cost of sales from all activities (such as catering, merchandise, medical care, kits and sports materials), employee benefit expenses (including wages, bonuses, social security contributions and medical care) and other operating expenses (including match expenses, rental costs, administration and overhead expenses) plus amortisation or costs of acquiring player registrations, finance cost and dividends.
 
Depreciation and impairment of tangible fixed assets, amortisation/impairment of intangible fixed assets (other than player registrations), expenses on youth and community development activities, finance costs for construction of tangible fixed assets (e.g. stadium redevelopment) are excluded from relevant expenses.
 
Income and expenses from non-footballing operations which are clearly and exclusively unrelated to the activities, locations or brand of a football club are to be excluded from the calculation of relevant income and relevant expenses.
 
The Regulations require transactions with related parties to be carried out at a fair value (i.e. between knowledgeable willing parties in an arm’s length transaction) and a club may be required to make adjustments to the value attributed to these transactions to reflect the fair value thereof.
 
EXCEPTIONS AND ACCEPTABLE DEVIATIONS
 
A football club that has a break-even deficit for a monitoring period is not automatically deemed to be in breach of the break-even requirement as the Regulations recognise certain exceptions and acceptable deviations.
 
A football club that has a break-even deficit for a monitoring period is entitled under Article 60(6) to demonstrate that the aggregate deficit is reduced by a break-even surplus (if any) in the two reporting periods prior to T-2, that is T-3 and T-4.
 
Article 61 sets out acceptable deviations whereby a football club which has a break-even deficit is nonetheless deemed to have complied with the break-even requirement. Firstly, a club which incurs a break-even deficit not exceeding €5 million for a monitoring period is deemed to have complied with the break-even requirement.
 
Secondly, a club which incurs an aggregate break-even deficit in excess of €5 million for a monitoring period is deemed to have complied with the break-even requirement if the excess is covered wholly by contributions from the equity participants of the club and/or related parties provided that such deficit does not exceed €45 million for the monitoring periods assessed in seasons 2013/2014 and 2014/2015 and €30 million for the monitoring periods assessed in seasons 2015/2016, 2016/2017 and 2017/2018.
 
Article 61 also provides that lower thresholds of acceptable deviations will be announced by UEFA for subsequent seasons.
 
In order for contributions by equity participants and/or related parties to be acceptable, Part D of Annex X of the Regulations stipulates that the contributions must be provided entirely by the aforementioned persons. Further, contributions by equity participants must be effected through share capital or share premium accounts.
 
Contributions by related parties may also be in the form of unconditional gifts, such as a debt waiver, that increase the club’s equity without any repayment obligation.
 
FULFILLING THE BREAK-EVEN REQUIREMENT
 
To fulfil the break-even requirement, Article 63(1) requires a football club to achieve a break-even surplus for the reporting periods T-1 and T-2 without any of the following indicators being present: (i) the auditor’s report for T-1 having expressed concerns on the viability of the club as a going concern; (ii) the annual financial statements for T-1 disclosing a net liabilities position that has deteriorated as compared to the corresponding statements for T-2; (iii) the football club having reported a break-even deficit for either or both the reporting periods T-1 and T-2; and (iv) the football club having overdue payments towards any other football club as a result of transfer activities or towards its employees or social/tax authorities as of 30 June of the year that the relevant UEFA competition commences.
 
Even if one of the aforementioned indicators exist, the break-even requirement is deemed to be fulfilled under Article 63(2) if the club has (a) an aggregate break-even surplus for reporting periods T, T-1 and T-2; or (b) an aggregate break-even deficit for reporting periods T, T-1 and T-2 which is within the acceptable deviation, after having taken into account the surplus (if any) for the reporting periods T-3 and T-4.
 
SANCTIONS
 
A football club that fails to fulfil the break-even requirement specified in Article 63 may be subject to sanctions by the UEFA Club Financial Control Body that range from a warning, reprimand, fine, deduction of points, withholding of revenues from a UEFA competition, prohibition from registering new players in a UEFA competition, restriction on the number of players that a club may register for a UEFA competition, disqualification from a competition in progress, exclusion from future competitions to the withdrawal of a title or award.
 
Annex 11 sets out various factors which the UEFA Club Financial Control Body may consider in deciding on the sanction to be imposed. An interesting proviso is Paragraph 2 of Annex XI which applies to the monitoring periods for seasons 2013/14 and 2014/15. This provision states that a football club that reports an aggregate break-even deficit that exceeds the acceptable deviation will not, in principle, be sanctioned if it satisfies both the following conditions –

CONCLUSION
 
The Regulations were first agreed in principle in 2009. Football clubs have been given ample time to prepare for the introduction of the break-even requirement in season 2013/14. Even then, UEFA has adopted a soft-touch approach by providing various exceptions and acceptable deviations in the Regulations so that clubs can gradually wean themselves off third party support to become self-sustaining entities.
 
Although the objectives of the financial aspects of the Regulations are laudable, the Regulations are of limited application as they only apply to football clubs that qualify to compete in the UEFA Champions League or Europa League.
 
To ensure the long term sustainability of European football clubs in general, national football associations should consider adopting some form of financial regulation for their domestic leagues. Presently only football clubs that compete in the French Ligue 1 and the German Bundesliga are subject to some form of financial regulation.
 
On 11 April 2013, the clubs in the English Premier League ratified new financial regulations to curb over-spending by Premier League clubs. Commencing from season 2013/14, a Premier League club must control their players wage bill and will not be allowed to incur losses above £105 million over the next three football seasons. A club that breaches the financial controls will face sanctions that could include deduction of points.
 
It remains to be seen whether clubs in the other European football leagues, such as the Spanish La Liga, Italian Serie A and Dutch Eredivisie, will follow suit.