Fulham FC and Financial Fair Play

This post will be a bit of an introduction to the main financial constraint facing Fulham, the Financial Fair Play (FFP) rules.

I think this is an area that is not widely understood and there are a number of complexities so I will try my best to give an explanation of how it works.

I should note that I am not an FFP expert, but have spent some time over the last week trying to research this topic and thought I would share what I had learned about the rules.

I will also have a go at discussing Fulham’s specific position against FFP. This is hard to do for various reasons and the information to get an accurate view is not all in the public domain. But I am going to do my best and make estimates and assumptions where I don’t have hard facts. These will, in most cases, be incorrect, but I hope to be able to give some further colour to how FFP works and how it relates to Fulham.

At the end, my best estimate shows Fulham in compliance with FFP rules, but for the avoidance of doubt, no reliance should be placed on these numbers which contain a lot of estimates and guesswork! I do think I have reached a sensible indicative view of Fulham’s probable position, but to repeat again, this is based on educated guesswork and conjecture and should be treated as such.

Despite these limitations, I think it is interesting to look at the numbers in this level of detail and I hope you will find it interesting too as we explore the topic together!

There may be many who have more knowledge on FFP than myself, in which case, if you spot something wrong, please put it in the comments and I will be happy to fix it. If I can.

A very simple introduction to Football Finances and Accounting

In this section I will try to equip you with a sense of the basics of football accounting, and to set out some of the key concepts we will need to understand FFP and Fulham’s position against it. I will typically use numbers from Fulham’s accounts to illustrate the concepts, which will also give a decent overview of how Fulham operates as a business as well.

A football club is, in some ways, a fairly simple business, it brings in revenue largely through, tv broadcasting deals / ‘central awards’, gate receipts and sponsorship.

It can also make profits on the disposal of players registration, i.e. by selling players to other clubs.

Let’s look at Fulham’s turnover (revenue) from their most recent accounts. These accounts were published in March 2020 and cover the 2018/19 premier league season, with additional information from the 2017/18 Championship promotion season.

The accounts for Fulham (published under Fulham Football Leisure Ltd as the most relevant level for FFP purposes) are available to anyone on the Company’s House website here .

A key driver of that revenue is the central award, which is the hand-out of premier league broadcast contract money (you also get extra money for ‘broadcasting’ which involves actually appearing in televised matches). You can see that the 2019 premier league central award was much higher than the 2018 award (when Fulham was in the championship, even though the 2018 number also included a degree of parachute payment).

You can also see that, in total, being in the premier league is worth about £100mn per year more in revenue than the Championship for Fulham (and even more for a Championship team without parachute payments).

So that is how they make revenue, what about expenses? Fulham’s operating expenses are summarised below:

We can see for Fulham the costs mainly revolve around two items (highlighted in red), firstly there is the staff costs, almost all of which will relates to the playing staff (and some of the exec team). You can see how high it is in the premier league compared to the Championship, and indeed the differences is much more in a typical year as Fulham were promoted in 2018 so the £54mn of staff wages likely includes some pretty hefty promotion bonuses (we will come back to this later).

The other key item is the one part of the football accounts which is potentially a little tricky and counter-intuitive. This is ‘amortisation of players registrations’ and I am going to give it its own sub-heading…

Amortisation of player registrations

This item in the accounts essentially relates to the transfer fees paid to other clubs to bring in new players. The complexity comes because, in accounting terms, teams don’t recognise the entire transfer fee at the point at which the player is bought, instead they spread the fee over the length of a player’s contract. This is done so that the payment of the cost of an asset (such as a footballer) is better matched to the time period from which the club will extract a benefit (performances on the pitch).

This may be best explained with an example:

Imagine Fulham sign a player, let’s call him Cristiano, for £100mn. Cristiano signs up to a 5 year contract.

The accounts would not recognise an expense of £100mn at the point of purchase, instead they would spread that transfer fee over the life of the contract, so they charge an expense of £20mn to the profit and loss account in each of the 5 years of the contract.

This is called amortising the players registration and the players carrying value (value of their contract on the club balance sheet) reduces from £100mn (the value at the point of purchase) down to zero over the life of the contract as its value amortises.

This is shown for Cristiano in the table below:

Let’s now imagine now that Fulham sell Cristiano at the end of the third season. Fresh from Champions League glory with the Whites, we are able to sell him for £150mn.  So what then is the profit Fulham might recognise on that sale?

It’s not, as one might think, £50mn (i.e. £150mn less the £100mn paid) it is in fact, £110mn, that’s the transfer fee of £150mn less the carrying value of the players contract (£40mn at the end of year 3).

This will become important later when we think about the spending Fulham did when they first arrived in the premier league. Fulham spent around £120mn (according to the accounts) on a number of players. Those players included Alfie Mawson, Zambo-Frank Anguissa, Jean Michaël Seri, Aleksandar Mitrović, Joe Bryan, Maxime Le Marchand and Fabri.

All of those players are still with Fulham, some are on loan, but none have been sold.

If we assume that all these players have 4 year contracts on average (they were actually all different but simplification is useful here), then that £120mn is amortising over the subsequent 4 seasons, and Fulham will be recognising an expense of £120 / 4 = £30mn per year with respect to those players

They would have taken an amortisation expense of this amount in the 18/19 premier league season (we can actually see in the expenses table above where total player amortisation in the premier league season of £42mn is reported which would also include amortisation of some of the existing players contracts as well as those that formed part of the premier league investment).

They would also have amortised the same amount (roughly, some contract renegotiations slightly change the picture but it is broadly unchanged) in the 19/20 Championship season and, if none are sold, they will take a similar hit in the 20/21 premier league season too.

Of course, some of those players are out on loan, and we would hope that the loan fee covers both transfer fee amortisation and player wages, but still, while they are with Fulham, we know that the player amortisation will have continued.

That is as much football finance accounting as is needed for now so we are ready to move on to the central focus of this piece and that is FFP itself….

FFP: The Rules (Overview)

This is not as simple as it could be because UEFA, the Premier League and indeed the EFL Championship have their own rules for FFP.  For Fulham, it is complicated because they have oscillated between the premier league and the championship, and therefore their FFP rule structures, for the last few seasons.

UEFA FFP rules apply to teams which qualify for European Competition. These rules limit clubs to EUR30mn of adjusted losses (we will come on to adjusted losses soon) over a rolling 3 year period. This EUR30mn limit is subject to at least EUR25mn of the loss being met through direct equity investment by a club’s owner.

The Premier League has a more lenient set of rules applicable to its teams, they must incur adjusted losses of no more than £35mn a year over a rolling 3 year period, again subject to an owner covering the majority of those losses.

The EFL Championship rules are very similar to the Premier League but say that a club cannot make adjusted losses of more than £13mnn a year over a rolling 3-year period.

What FFP Rules Apply to Fulham?

The FFP rules that currently relevant to Fulham are those for the Championship and the Premier League.  Through these rules, Fulham are set a maximum allowable level of loss on an ‘adjusted earnings before tax’ (AEBT – which I will explain soon) basis over a rolling 3-year period.

So what is that limit for Fulham? Well, Fulham are allowed £13mn Annual AEBT in the Championship and £35mn of Annual AEBT in the Premier League.

At the current point in time (end of the 19/20 season), the 3 years covered by the rolling 3 year time frame are:

• the 19/20 Championship season (£-13mn of AEBT permitted)
• the 18/19 Premier League Season (£-35mn of AEBT permitted)
• the 17/18 Championship season (£-13mn of AEBT permitted)

So based on these seasons, at the present time, Fulham’s are permitted losses on an AEBT basis are £61mn (13+35+13) over the last three seasons.

What does Adjusted Earnings Before Tax (AEBT) mean?

The Premier League and Championship define a club’s AEBT as its profit before tax with adjustments made to exclude the following cost items:

• depreciation / impairment of tangible fixed assets (such as on buildings / stadia)
• Amortisation of goodwill and other intangibles (but not amortisation of player contracts which we discussed above)
• Youth development expenditure
• Women’s football expenditure
• community development expenditure

This is all set out quite clearly in the FFP assessment table included in the Premier League handbook for teams to submit (shown below).

What do we know of Fulham’s current FFP position?

We have seen that Fulham are currently subject to an AEBT limit of £61mn (losses) for the last 3 seasons. In this section we start to consider how Fulham might be doing against this limit?

This is tricky to answer because Fulham do not publish their FFP position, but we can look at some of the financial information in the public domain and start to get an idea of how Fulham are doing.

Fulham are assessed for FFP at the reporting level of Fulham Football Leisure Ltd (FFLL) which the club noted to the Fulham Supporters Trust in their April 2020 meeting (source: minutes of FST meeting with club in April 2020).

FFLL release financial statements around March each year for the period up to the previous June. So that is why we have some relevant data for the 18/19 premier league season and the 17/18 Championship season, but at present we can only speculate about the financial result in the season just gone (The latest FFLL accounts are viewable here)

These accounts show loss before tax of:

• 41.1mn for the 18/19 Premier League season and
• 45.2mn for the 17/18 Championship season

With that information, we can start filling our own estimated version of Fulham’s FFP submission here:

Total losses (before tax) for the first two years are £86.3mn, already more than the FFP limit with another season to go, but before we look at the 19/20 season, we need to see if the accounts can shed any light on potential adjustments for the 17/18 & 18/19 seasons.

Adjustments

Depreciation/Amortisation of Tangible Fixed Assets

The latest financial statements include the following extract:

This sets out that Fulham has impaired one of their fixed assets, the Riverside Stand which has been decommissioned, this means they have recognised a £21mn loss due to the non-availability of this stand and this loss is part of the £41.3mn loss for the 18/19 season.

Further detail on Depreciation and Impairment of tangible fixed assets (shown below) indicates a further £1.215mnn depreciation charge on land & buildings (red box), a £488k charge on Plant, Equipment, Fixtures and Fittings (blue box) and indeed an additional £640k impairment for Land & Buildings on top of the Riverside impairment (green box).

In aggregate these impairments and depreciation charges on fixed tangible assets give us one allowable adjustment for AEBT purposes of £23.3mn in the 2018/19 season

The accounts show a similar depreciation charge (but not the impairments) of £1.7mn in the previous season, and it is reasonable to assume that this will continue into the more recent season as well. So to summarise I believe we can update our AEBT summary for Fulham as follows (new entries in bold):

The other main areas for which an adjustment could be made is spending on the Youth Academy, the Women’s team and community development.

The statements do not include information on these, and the premier league rules say that in order to qualify for an FFP adjustment, these elements should be shown separately in the notes to the accounts or in a separate audited statement (Premier League rule extract below):

There are no notes relating to these matters in the audited accounts so either no adjustment is claimed or there is a separate unpublished audited document used for FFP purposes which sets these costs out. I am going to assume Fulham do produce an audited statement on these areas, and given it is not in the public domain, I am going to attempt to estimate what these costs might be in order to continue our AEBT estimate.

Fulham’s Youth Development Expenditure

I have no particular knowledge of the cost of this particular item, so what follows is entirely speculation based on limited knowledge! I am aware Fulham has a successful ‘category one’ academy, and from the Fulham website there appear to be there appear to be at least 14 full time staff associated with the academy including the Academy Director Huw Jennings.

In addition, the accounts make reference to investment and development at Motspur Park to support the academy and make it clear that the academy players use the Motspur Park facilities. While any investment in the Motspur Park facility itself is likely to be a capital expenditure (i.e. would not go through the accounts as an expense) it is reasonable to assume that a fair chunk of Motspur Park running costs could be allocated to the Academy given the academy uses it (so for example a share of the maintenance costs could be allocated to the academy based on the amount of time they spend using the facility).

There is little published on the subject of academy running costs, but after some googling, I identified the following:

• Statista.com have the following data on German Bundesliga (36 teams over top 2 tiers) spending on Youth Academies

This peaks at EUR186.72mn in the 18/19 season which is about EUR5.2mn per club per year.

It is notable, by the way, that there has been rapid growth in academy expenditure since 2012, when FFP rules first began exempting Youth Development Spending, I would speculate that quite a bit of aggressive accounting work goes into justifying putting as much of a club’s costs through the youth academy as possible.

I also found a 2012 Football Supporters Association Paper which estimates that a category one football academy (like Fulham’s) would cost over £2mn a year to run.  Given that was 2012, and the increase that has taken place in German academy spending since then, I think it is not unreasonable to think that Fulham could allocate around £5mn a year in expenditure to their academy. This would be broadly in line with German club spending, and consistent with the FSA document (adjusted for time)

Fulham Women’s Football Expenditure

With respect to the Fulham women’s team, my understanding is that after turning professional in the early Al Fayed era, there was a subsequent disbanding of the team which has recently reformed. However my understanding it is not formed on a professional basis (please correct me in the comments if this is incorrect). I believe that since 2018 the women’s team has played and trained at Motspur Park however, which presumably means a further portion of the facilities running costs could be allocated to the women’s team.

I am going to estimate the cost of running these teams (including a women’s development programme) to be relatively low driven in large part by an allocation of Motspur Park expenses. I will estimate it at £50,000. Again grateful for differing views in the comments.

Fulham Community Development

The accounts do note that FFLL do donate, annually, around £75,000 to the running of the Fulham FC foundation which seems to offer a wide range of community-based services. I am going to assume that this is the extent of the investment under this heading, however, if anyone has information to the contrary, please do post it in the comments.

So with these (very much back of the envelope) estimates in place, we can populate a bit more of our, entirely made up, FFP submission for Fulham (newly populated numbers in bold):

So based on the above, I would estimate that the combined AEBT loss for the 2017/18 & 2018/19 seasons is £51.25mn, with 1 year left to get under the 3 year rolling limit of £61mn.

It is also worth stopping to note here how horrendous the 2017/18 promotion season looks for FFP purposes. It looks like, driven in large part by the promotion bonuses paid out, the club went around £25mn over its limit for the year, although 18/19 did seem to bring things more under control when, awash with premier league funds, Fulham went £22mnn under their limits.

Based on the above, I would see Fulham as having capacity for a roughly £10mn AEBT loss in the 2019/20 season in order to ensure FFP compliance.

Estimating AEBT for 2019/20

Estimating the AEBT position even in years for which there is published information is tricky, so doing it for the most recent season with no published accounts and which was a strange one anyway due to the pandemic, is going to be very difficult indeed. Nonetheless, I think one can have an attempt by using the 17/18 season as a starting point (I will refer to it as a ‘template year’), after all that also featured a promotion via playoffs, and can give us an idea of the expenditure associated with that (i.e. bonuses).

I have made reference to this already but it is important to understand the scale of footballer promotion bonuses in the championship:

The above is an extract from Fulham’s accounts the last time they got promoted (and we already looked at this when introducing football club expenses). As already discussed, you can see player wages (staff costs) are significantly higher in the 17/18 promotion season than in the 16/17 season. Given the similar make up of the squads in those seasons, one has to assume that the difference in staff costs must be a combination of the loan fees paid for Matt Targett and Mitro, and the promotion bonuses (and almost certainly mostly the latter item).

To show this is not just Fulham, the extract below is from the accounts of (champions) Wolves for the same season, again showing a significant impact of likely promotion bonuses.

So when you see players rolling on the ground in anguish (or John Terry in tears) having just lost the Championship Playoff Final, we can now understand that this pain is probably in part because they have just missed out on a bonus that for most players would have been 7 figures!

Anyway, because of the unusual nature of salary payments in promotion years, I think it is sensible to use the 17/18 promotion season as a template for estimating profit in 19/20 which also contains a playoff promotion, making adjustments where we can for obvious differences.

And I note, of course, as we set out earlier, that in our ‘template season’ Fulham recorded a £45.2mnn loss.

Key Financial Differences between 17/18 and 19/20

The following are major differences between the 2019/20 and the 2017/18 playoff promotion seasons which might impact financial performance:

Reasons why 19/20 would have been financially better than 17/18:

• At the start of the 19/20 season, Fulham sold Ryan Sessegnon to Spurs, reportedly receiving cash, plus Josh Onomah as part of the trade. Transfermarkt.co.uk records the value of the transfer as £24.5mn which is similar to press reports at the time. I am uncertain of the accounting treatment of the Josh Onomah part of the transfer (recorded on Transfermarkt.co.uk as a free transfer) so I am going to assume that £24.5mn represents the entire value of the transfer. As an academy product, I do not believe Sess would have any balance sheet carrying value, meaning the entire transfer fee would be allocated as ‘profit’ in the accounts.

• In the 19/20 season, Fulham were on their first year of post relegation parachute payments, whereas in the 17/18 season they were on their final year of parachute payments following the previous relegation. The 2018 accounts indicate the parachute payments for the 17/18 season were £20.5mn, however press reports indicate that the parachute payments for teams relegated in the 19/20 season were £41.5mnn for the first year . So these payments would have been around £21mnn higher for 19/20 than the template season,

• Player value depreciation: In the 17/18 season, the accounts show that the Board decided to write down the balance sheet value of its players, believing them to be too high for one or more individuals. The impairment charged was £5.8mn. While the Board could have done similar in 19/20 (and indeed maybe should given the reduced market value of the players bought for £120mn following relegation) we have no information that they did (and this might have been FFP suicide if they had, so I will assume this did not happen). The relevant extract from the 2018 accounts is shown below:

Reasons why 19/20 would have been financially worse than 17/18

• Transfer fee amortisation: Earlier we talked about the players Fulham bought in the premier league for £120mnn and I estimated that their contracts, all of which are still held by Fulham, would be amortising by around £30mn a year. That cost would have been borne by Fulham in the 18/19 season and again in the 19/20 season. As mentioned above, it may have been partially offset by the outward-bound loan fees of Seri, Anguissa and Fabri, but the rest of the players are still on the books. Transfermarkt.co.uk indicates the transfer fees associated with the players who did not go out on loan were £65mn, so we could estimate that even if the loan fees received covered the wages and transfer fee amortisation of the players involved, the net amortisation cost of the remaining player’s contract would still amount to around £16mn a year. If we estimate the contract amortisation on the rest of the squads transfer fees at £10mnn (which is based on the latest available accounts) then we would expect total net contract amortisation for the season of £26mn, which compares to £19mn in our template year. So I would estimate paying out £7mn more in player amortisation in the 19/20 season, net of loan fees.

• New players: On a similar note to the above, Fulham also paid out significant transfer fees for the 19/20 season itself, notable acquisitions include Michael Hector, Bobby Decordova-Reid, Anthony Knockaert and Ivan Cavaliero. Some of these payers will also have had sizable loan fees prior to their acquisition also. The transfer fees would, as set out above, be amortised over the players contract, with only Hector’s transfer gaining a full season of amortisation, however based on the timing and size of these transfers, the amortisation impact on the 2019/20 season is likely only around £2mn.

• Player wages: one reason premier league clubs that are relegated enjoy parachute payments is that they typically have players locked into premier league wage contracts. This will no doubt be the case with Fulham and although it has been reported in the press that Fulham were shrewd in putting relegation clauses into players contracts in the premier league, it is likely that Fulham’s underlying wage bill will be significantly higher than in the 17/18 season. It has also been reported in the press that both Mitrovic and Cairney renegotiated their salary in order to mitigate the relegation clause as a condition of staying at the club. Looking at other recently relegated clubs from the premier league, they have staff costs (for their first year in the Championship) as follows:

From the above, we can see that these relegated teams had staff costs which were significantly above those paid by Fulham in the 16/17 season (the year before promotion so with no bonuses), suggesting the underlying staff cost is likely to have been around £15mnn higher for Fulham in the 19/20 season than compared to our template season. For the purposes of this calculation, I will assume Fulham’s 19/20 base wages (pre-bonus) were equal to the average above, which would be around £13.6mn more than my estimate for the base wages in the 17/18 season (which is based on the wages paid in 16/17 with no promotion).

I should mention at this point, the latest Premier League handbook also says that any covid related expenses or lost revenue can be excluded from the AEBT calculation, so we don’t need to make any AEBT adjustment against our template year to address the pandemic.

Phew…so where does the above leave us?

Well, here is a summary of these (wildly speculative) estimates for the AEBT results in the 19/20 season:

Taking the AEBT estimated from our template season (17/18) I have put through all the key financial differences estimated above. This gives us an AEBT estimate for the 2019/20 season of -9.68mn.

If we plug these numbers into the FFP assessment table:

So, amazingly, this analysis would conclude that Fulham would have come in just under their FFP limit for the last 3 seasons with around £100k spare!

Now I don’t think for one moment that my estimates above were particularly accurate, there are bound to be loads of errors, but it is pleasing to see the numbers come out just the right side of the limit!

Regardless of the numerous errors in the estimates though, it is quite likely that this is close to the correct final position, after all, we know from interviews that Tony Khan was unable to proceed with the Hector transfer until the Sessegnon money from Spurs cleared – that points to a team with a plan to stay just the right side of FFP which is where the above analysis puts them!

So what about next season?

The good thing for Fulham, looking at the assessment above, is that the financially painful 17/18 season is about to roll out of Fulham’s 3 year rolling limits. Fulham came in comfortably under FFP limits in 18/19 and 19/20 according to my own assessment, so should have room to play with in 20/21.

Fulham’s new 3 year FFP limit for AEBT in 20/21 will be £-83mn (-35-13-35) and my assessment is that across 18/19 and 19/20, the AEBT loss was only about £22.6mn. So on that basis, Fulham could afford an AEBT loss of around £60mn in the 20/21 season. Given the size of the Premier League central award and the accounting treatment for amortising player contracts, this would require quite a spree to consume. Not that such a spree would be sensible as for Fulham maintaining FFP headroom is crucial, particularly if we end up back in the Championship again (hopefully not).

Can Fulham Afford Messi?

As I close this piece, I have just read the brilliant article by Sammy James on Fulhamish, on ‘Why Lionel Messi Should Sign for Fulham’. Driven by the undeniable logic there, I started to wonder, could we afford Messi?

Well his annual salary is reportedly around £88mn, roughly the same as Fulham’s entire 18/19 premier league squad’s pay. But if I am correct and Fulham can take a £60mn AEBT loss in 20/21 (which again would be inadvisable due to the problems that would cause in future years), then I think, providing Fulham bought no other players and just retained the 19/20 championship squad, then, with the added Premier League central awards and the, no doubt highly lucrative commercial sponsorship gains that would follow, I think we could, just about, meet Messi’s wages for one season! So how about it Tony Khan, one season loan at the cottage? Lets do it!

Conclusion

This has been a long and densely packed article so well done if you made it to the end! To summarise what we have learned above I would say the following are key points:

• Fulham took heavy losses (AEBT basis) last time they got promoted in the 17/18 season, causing quite a drag for FFP purposes.
• We don’t know, but based on my estimates and assumptions, I think Fulham are currently FFP compliant
• That difficult year is now rolling out of Fulham’s 3 year FFP assessment period, which should free up some spending headroom. Getting promoted using first year parachute payments (and selling Sess) in particular has contributed to a favourable FFP outlook.
• The outlook is so favourable that, if we cut other costs, we might just about be able to afford one season of Lionel Messi’s current wages and remain FFP compliant!

As I said at the start, I am not an FFP expert, and the above really reflects my learnings in researching this over the last week. If you see something clearly wrong, or can add any insight to any of the estimates, please let me know in the comments!

With thanks to Kieran Maguire (priceoffootball.com) who took the time on Twitter to help explain the FFP rules to me