Introduction and Overview
This article relates to the recent publication of Group accounts for Fulham FC covering the 2020/21 season, the most recent unsuccessful premier league campaign.
The purpose of this article is to specifically consider the question of whether Fulham were compliant with Financial Fair Play (FFP) at the end of that season?
The main conclusions of this article are:
- Before making adjustments, Fulham lost about £64m more than permitted under the relevant FFP rules to the end of the 20/21 season
- However, it is plausible that FFP allowable adjustments could be enough to close this FFP short-fall, in particular, I think Fulham are likely to be able to claim very substantial covid-19 cost adjustments
- The biggest FFP pinch-point is likely to be the current 21/22 season, which as discussed here, will be a financially very difficult one for Fulham (in my opinion). Although some clever use of impairments, in the 20/21 accounts, may alleviate some FFP pressure in 21/22.
As always with these things, please note I am just an interested amateur observer trying to work out the FFP position of a football club. I may be wrong about estimates and assumptions within this work (I’m always open to feedback on mistakes). In particular there is a whole area on promotion bonuses where I still am unsure of the rules after 2 years of researching this topic (see below).
A Pre-Adjustment Position
The FFP Rules (also known as the Profit and Sustainability Rules or ‘PSR’) place limits on the level of losses on an ‘Adjusted Earnings Before Tax’ (AEBT) basis that a club can report in a particular observation period.
AEBT is the level of reported pre-tax profit or loss with adjustments to remove certain things which are exempt from the FFP calculation. These adjustments are for:
- Youth Development expenditure
- Women’s football expenditure
- Community development expenditure
- Covid costs incurred during the 2019/20 & 2020/21 season
- Depreciation/amortisation of goodwill, intangibles (excluding player contracts) & tangible fixed assets
The pre-adjustment position of the club is pretty transparent, it can be observed directly from the accounts, but the level of adjustments is more difficult to determine and requires estimates. I will start this article with the known positions and speculate on the adjustments later.
The first thing to set out is a point around the observation period for FFP as at the end of the 20/21 season. Normally the observation period is for the previous 3 seasons but, because of Covid, the conclusion of the 19/20 season was delayed and rolled into the next financial year. Because of this, the league has been looking at 19/20 and 20/21 as a combined period for FFP purposes.
The 2020/21 Premier League handbook is the rulebook which sets out the FFP requirements applying to Fulham at the end of the 2020/21 season and it describes the Profitability and Sustainability Rules Calculation (PSR: aka FFP) as follows:
So for Fulham this means we are interested in their Adjusted Earnings Before Tax (AEBT) for:
- The average of the 20/21 & 19/20 seasons
- the whole of the 18/19 season
- and the whole of the 17/18 season.
We can easily look this information up from the accounts of the club (and so can you as the accounts are here).
This extract from the accounts below shows (highlighted) the pre-tax loss for 2020/21 (£93.5m) and 19/20 (£48.1m)
And this next extract shows (highlighted) the pre-tax loss for 2018/19 (£20.2m) and 2018/17 (£45.2m):
So the unadjusted pre-tax losses to go into the FFP (PSR) Calculation are:
- Average of 20/21 season and 19/20 season: (£93.5m + £48.1m) / 2 = £70.8m
- Whole of the 18/19 season: £20.2m
- Whole of the 17/18 season: £45.2m
So the total unadjusted loss for the assessment period is £70.8m + £20.2m + 45.2m = £136.2m
The loss limit against which Fulham is assessed is £35m for each season in the assessment period in the premier league and £13m for each season in the Championship.
This means the limit for Fulham is:
- Average of 20/21 season (£35m in the Premier League) and 19/20 season (£13m in the Championship): (£35m + £13m) / 2 = £24m
- Whole of the 18/19 (Premier League) season: £35m
- Whole of the 17/18 season (Championship: £13m
So the total loss limit for Fulham under the FFP rules is £24m + £35m + £13m = £72m.
So based on the calculations above Fulham have unadjusted losses of £136.2m and a loss limit of £72m. So they exceed the loss limit on an unadjusted basis by £64.2m
So then the key question is, are Fulham likely to be able to make £64.2m in FFP adjustments in the observation period?
The next part of this article will look at potential adjustments and consider whether its plausible that Fulham could have enough in the way of allowable FFP adjustments to close this £64.2m gap
FFP Adjustment 1 – Youth Development Spending
One of the biggest sources of potential adjustment is to do with youth development football or the Academy.
Fulham have a ‘category 1’ academy, producing a large number of talented players. There is very little data on the annual cost of this for Fulham in particular. From the Fulham website we can see a lot of individuals employed by this academy which is based at Motspur Park. I have previously estimated its running cost (here: using data published from Germany and other English sources) at £5m a year.
If that is correct then there would be a total adjustment across the observation period of £15m.
However, if we imagine that the academy costs £10m and I have underestimated previously, then the FFP adjustment would be £30m. I think given that Fulham are London based (land costs more) and clearly have a premium academy, it is reasonable to estimate a running cost at the high end of this range but this is all very speculative.
FFP Adjustment 2 – Women’s Football Spending
This is another area which is hard to comment on due to a lack of data. I am aware that Fulham are pushing the development of the womens team who train and play at Motspur Park with a significant compliment of coaching staff. The team has been brought into the ‘Performance Centre’ of the club.
I would guess that in addition to costs associated with the playing and coaching staff, some central Motspur Park costs can be allocated to the Women’s team. I am going to estimate the cost of the team charged to the club is £1m per year. This is largely guesswork and I would welcome other views on this.
This implies an FFP adjustment of £3m over the observation period.
FFP Adjustment 3 – Community Development Spending
I don’t think this is a material area of adjustment for Fulham, I am aware they make a regular donation to the Fulham Football Club Foundation of around £30k, but I am not aware of any other expenses in this category which will impact our overall assessment. This is small enough that I will call it nil for the purposes of this analysis.
FFP Adjustment 4 – Covid Cost Incurred During the 2019/20 and 2020/21 Seasons.
This is the (potentially) big one! For 2019/20 and 2020/21 seasons, ‘COVID-19 Costs’ are also exempt from the FFP calculation. The costs are defined in the Premier League handbook below:
So what can we say about the cost incurred due to COVID-19 in this time? We can think about the lost revenue due to not having fans in the ground, we can think about extra safety protocols extra safety protocols as well.
Another area to consider is the effect of the pandemic on the transfer market. What if COVID-19, through the reduction of income available to clubs, and uncertainty over future income, caused the transfer market to dry up and impacted player values. Smaller clubs reliant on player sales might find themselves unable to attract the level of transfer fee they might normally expect.
Could Fulham have sold key assets like Mitrovic, Anguissa, Seri and others during the 2020/21 season if there had been the usual buoyant transfer market? Perhaps they can argue that they could and would have?
Although it is speculation, I think Fulham will indeed argue this and one key piece of evidence is found in the accounts themselves.
Note 4 of the accounts (reproduced below) contains a fairly surprising entry that gives us a clue on this…
The note above sets out that Fulham have written off a portion of the value of their playing squad worth £21m.
Normally the value of the players amortises through the accounts over the life of the player contract, if you are new to the concepts of football accounting, I have a primer on how this works here🙂
This amortisation process spreads the cost of players over a number of seasons which matches their cost to the period of value they bring to the team, and also spreads out player investment in a way which is helpful for FFP purposes. It would be illogical on the face of it for a team to willingly write off player value, because this accelerates the recognition of transfer fees paid and brings them forward into the season in which the write off occurs, rather than having them spread over years.
I don’t know which players this write off relates too, but this £21m cost would have been recognised over 2 or 3 seasons normally, and now it is all being recognised in the 20/21 season. Which is very bad for the FFP position at the end of the 20/21 season.
I assume therefore that the reason this step is being taken is that Fulham are going to claim that this is a write off which reflects the change in the transfer market due to the pandemic and, as such, is a Covid-19 Cost which is an allowable adjustment for FFP purposes.
This is reflected in the language in the note above which says the valuations are ‘based on the Directors’ assessments of achievable sale values taking into account current conditions in the transfer market’
I believe this is the club arguing that the impairment is a COVID-19 cost which should be exempt for FFP purposes.
It should be noted as well, that this write off does not help Fulham much in the season I am writing about (2020/21). If they had not made the write off, they would be in largely the same position anyway (some of that £21m would have amortised during the 20/21 season in a non-FFP exempt way, but not that much).
The real benefit here is that this write-off pulls forward costs which would otherwise have been recognised in the upcoming seasons, 21/22, 22/23 and maybe 23/24. So it is those seasons whose FFP positions (including therefore the current 21/22 season) will be improved by this action. My theory is therefore that this is a forward looking & defensive action, which will help Fulham, potentially, survive FFP requirements in future FFP assessment periods.
Aside from the £21m impairment, we can also estimate some other COVID-19 costs related to loss of revenue.
In 2020/21 in the Premier League and 2019/20 in the Championship, Fulham’s turnover was as follows:
But in 2018/19 (Premier League) and 2017/18 (Championship) turnover looked like this:
One might expect these numbers to be broadly similar, being as they reflect income in the same divisions. But the difference is that the former set of numbers are impacted by COVID-19 and the latter are not.
Looking at the 20/21 Premier League season:
- Gate receipts are down £10.5m in 20/21 compared to 18/19
- Sponsorship is down by £6.8m in 20/21 compared to 18/19
- TV money is also down by about £4m as well in 20/21 compared to 18/19
In total the club can probably point to around £21.3m in lost revenue in the 20/21 premier league season which could, plausibly, be attributed (in whole or in part) to the pandemic.
Similarly, looking at the 2019/20 Championship season:
- Gate receipts are down £1.4mm in 19/20 compared to 17/18
So in total, and with respect to allowable Covid 19 costs, I think I can see:
- £21m in lost revenue in 20/21
- £1.5m in lost revenue in 19/20
- £21m in player revaluations in 20/21
Giving a total loss in terms of lost revenue and exceptional costs of around £43.5 related to COVID-19, and that’s before thinking about costs around additional safety protocols. Im going to round this to being about £47m in COVID-19 adjustments, all in (I am assuming £5m of COVID-19 costs in 19/20 based on the EFL statement below).
The question is then whether this is a reasonable adjustment that the league will allow the club to make for FFP purposes?
That is really hard to answer but relevant observations are as follows:
In the Championship, clubs agreed and announced via a statement (here: Meeting of EFL Championship Clubs – News – EFL Official Website) that they would allow an FFP adjustment for up to £5m in each of the 20/21 and 19/20 seasons (and then £2.5m in 21/22). So a total adjustment of £5m (the average of the 19/20 & 20/21 seasons) for the period we are looking at in this article. A good deal less than the amount I estimated above.
Is this a problem for Fulham?
Well not in the period that we are discussing because Fulham were subject to Premier League rules at the time so the EFL statement has no baring, but it will be interesting to see how the EFL thinks about Fulham’s COVID-19 costs during its FFP assessment in the 21/22 season, hopefully, the fact that Fulham were a premier league club at the time of the costs (and its pretty clear the lost revenue was way more than £5m) will result in acceptance of COVID-19 costs as an allowable adjustment in 21/22 (but that is a slight tangent as this article is about 20/21 FFP). This may be an area of future controversy and debate.
Also it is worth noting that a number of premier league clubs have published even larger covid-19 cost estimates. Notably Everton identified £67m of COVID 19 costs in 20/21, (of which £42m is due to the loss in player value).
I would also speculate that these figures appearing in the accounts may involve some pre-positioning and discussion with the league. It would also have been cleared with auditors.
FFP Adjustment 5 – Depreciation/amortisation of goodwill, intangibles (excluding player contracts) & tangible fixed assets
I wont go into this one too much, but depreciation and amortisation on certain assets is FFP exempt, and Fulham usually have around £1.5m in such exemptions. Looking through the accounts I think the relevant adjustments are:
- 20/21: £1.94m
- 19/20: £1.737m
- 18/19: £1.70m
- 17/18: £1.703m
On our adjustment methodology that is a total adjustment of
- (1.94+1.737)/2 + 1.7 + 1.703 = £5.24m
The table below gives my best estimate of the FFP adjustment available to Fulham (I have used the upper end of the range of estimated Academy costs):
Recall above that I said the unadjusted FFP shortfall was (to my calculation): £64.4m.
My analysis and estimates give a total available adjustment FFP adjustment of £61.7m.
This is just short of being FFP compliant, but close enough, given the limitations of my analysis and estimates, to suggest could be compliant in 2020/21.
I have been writing about Fulham and FFP for two years now, and this comes up every time, it is very frustrating. The issue is this:
Most people who are knowledgable about FFP say that Promotion Bonuses are also an allowable adjustment for FFP. Fulham once even told the supporters trust that it was an adjustment they could make (here).
Fulham have been promoted twice in the assessment period (and relegated twice) so have paid out promotion bonuses twice. I have previously estimated (here) that Fulham paid out around £15m in such bonuses on promotion in 17/18 and I think it is reasonable to assume they paid similar in 19/20.
So that is a total of £30m paid and an implied FFP adjustment of £22.5m (remember that we are interested in the average position in 19/20 & 20/21 so only half the promotion bonus goes into the adjustment) if indeed it is an allowable adjustment.
Add this on to the £61.7m adjustment above and we are laughing, FFP is met easily.
The problem is that nowhere in the Premier League Handbook (or the EFL Profit and Sustainability Rules) does it say that promotion bonuses are exempt from FFP. At least I cant find it after much searching.
So my guess is that rather than being an allowable adjustment, clubs dont factor it into their FFP calculations until the following season. This is a purely practical approach, because once a team is promoted, they leave the jurisdiction of the league they are in anyway, so its not until the following years assessment that it becomes relevant.
For this reason, I have left Fulham’s past promotion bonuses in the numbers and my FFP calculation. But there are plenty of people who will think I should have taken them out and they may be correct. If they are, Fulham are about £22.5m better off than I have said.
Thoughts about Next Season
I may do some further analysis other FFP issues, ie speculating about whether Fulham complied with FFP in 21/22 and what the transfer budget might look like in the premier league (Im assuming Fulham are promoted) in 22/23.
My only observations to leave here for now are:
- The player value impairment in 20/21 will serve to reduce contract amortisation in future seasons, and improve Fulhams FFP position in 21/22.
- The 17/18 season will fall out of the FFP assessment in 21/22, which is good because it was horrendous from an FFP point of view. This means that Fulham can lose around £45m (pre-adjustments) and still meet FFP. That’s the good news, the bad news is I think Fulham are looking at some pretty eye-watering loses in 21/22, but that is a future article (although I have speculated about it elsewhere in this site).
- FFP compliance in 21/22 is likely to be heavily dependent on whether the EFL have permitted Fulham to apply the very large covid-19 costs hinted at above. This is partly a question of whether Fulham can recognise losses in excess of the £5m limit agreed by EFL teams on the grounds they were not in the EFL at the time. I think this should be a straight-forward argument to make, personally, as its pretty clear that in simple lost revenue terms, the pandemic has cost Fulham much more than £5m in 20/21.
So the key points to take away from this are:
- Before adjustments, I think Fulham lost about £64m more than they are allowed under FFP rules to the end of the 20/21 season.
- However, a number of large potential adjustments identified here including covid-19 costs, mean that it is plausible that Fulham have met FFP (or PSR) requirements to the end of the 20/21 season.
- I think the big pinch-point will be the 21/22 FFP assessment which will be based on projections Fulham have already sent to the EFL. The key question there will be whether covid-19 costs (presumably) approved for use in the premier league, can also be used in the EFL, despite exceeding the limits agreed by EFL teams.