Often Partisan

Financial Fair Play

Much has been made on the Birmingham City fan messageboards of Nick Harris’s article in the Daily Mail about Birmingham City being potentially kicked out of Europe. The piece in itself is quite short; and whilst it’s in broad terms accurate it doesn’t explain much about the situation. I decided to be brave and take the plunge into legalese and bureaucracy myself to try and work out what the situation is.

UEFA’s financial fair play rules are available for all to download and read here (pdf link). It’s 91 pages of pretty heavy going, turgid legal stuff, so it’s not really a gripping read. However, with careful reading you can see pretty much where Birmingham City need to be careful. The article that Nick Harris’s article refers to in particular is Article 52, which is on page 34 of the PDF.

1 The licence applicant must prepare and submit future financial information in order to demonstrate to the licensor its ability to continue as a going concern until the end of the licence season if it has breached any of the indicators defined in paragraph 2 below.

2 If a licence applicant exhibits any of the conditions described by indicator 1 or 2, it is considered in breach of the indicator:

a) Indicator 1: Going concern

The auditor’s report in respect of the annual or interim financial statements submitted in accordance with Articles 47 and 48 includes an emphasis of matter or a qualified opinion/conclusion in respect of going concern.

b) Indicator 2: Negative equity

The annual financial statements (including, where required, the supplementary information) submitted in accordance with Article 47 disclose a net liabilities position that has deteriorated relative to the comparative figure contained in the previous year’s annual financial statements, or the interim financial statements submitted in accordance with Article 48 (including, where required, the supplementary information) disclose a net liabilities position that has deteriorated relative to the comparative figure at the preceding statutory closing date.

3 Future financial information must cover the period commencing immediately after the later of the statutory closing date of the annual financial statements or, if applicable, the balance sheet date of the interim financial statements, and it must cover at least the entire licence season.

4 Future financial information consists of:

a) a budgeted profit and loss account, with comparative figures for the immediately preceding financial year and interim period (if applicable);

b) a budgeted cash flow, with comparative figures for the immediately preceding financial year and interim period (if applicable);

c) explanatory notes, including a brief description of each of the significant assumptions (with reference to the relevant aspects of historic financial and other information) that have been used to prepare the budgeted profit and loss account and cash flow statement, as well as of the key risks that may affect the future financial results.

5 Future financial information must be prepared, as a minimum, on a quarterlybasis.

6 Future financial information must be prepared on a consistent basis with the audited annual financial statements and follow the same accounting policies as those applied for the preparation of the annual financial statements, except for accounting policy changes made after the date of the most recent annual
financial statements that are to be reflected in the next annual financial statements – in which case details must be disclosed.

7 Future financial information must meet the minimum disclosure requirements as set out in Annex VI. Additional line items or notes must be included if they provide clarification or if their omission would make the future financial information misleading.

8 Future financial information with the assumptions upon which they are basedmust be approved by management and this must be evidenced by way of a brief statement and signature on behalf of the executive body of the reporting entity.

It’s a bit wordy, isn’t it? Let’s take it step by step. A football club has to submit their accounts, and UEFA have two indicators that flag up a warning sign – the first that the club may not be a “going concern” in the eyes of an auditor, and the second is that the club has negative equity – ie their liabilities are more than there assets. In the last set of accounts, Birmingham City fail both of these indicators. This is where people have got the idea that we could be kicked out of European competition.

However, the first paragraph states that if these indicators aren’t met, then the football club has to provide to UEFA (or more likely the FA, in it’s capacity as the licensor for UEFA) a budgeted profit and loss account and a budgeted cashflow with explanatory notes to show that club is indeed a viable business. In our recent results, there has been explanations as to how the club will continue – for instance in the interim results BIH make it plain that there is a share issue with a backstop of a bank loan mortgaged on Carson Yeung’s property in HK. In this case, I think we’re ok.

Articles 49 and 50 state that at the time of the licence being issued, a football club can have “no overdue payables towards football clubs” – ie overdue transfer fees/add-on clauses; and “no overdue payables towards employees and social/tax authorities” – ie no overdue wages or tax bills. This is where Portsmouth fell down last year; barring a spectacular collapse in our fortunes this month I believe we’re okay.

Chapter 2 deals with the idea of monitoring requirement; at the moment we’re not breaking even (which is bad), but article 61 states that a football club is allowed to deviate from break-even by 45million Euros in season 2013/14 (the first season that it comes in), provided directors put that money in; something we easily meet. Again, nothing to worry about.

Indeed, the only bit I could be concerned about is Article 38; which states we must have a permanent (and qualified) head of youth development – at the moment, with the departure of Terry Westley we don’t meet this but I am confident we will have someone in place by the time the licence is due to be applied for – there is also a sixty day grace period for clubs to use between appointments in this (and other documented positions).

I must admit, I’m in no way a financial whizz kid or a lawyer; all I can do is read what is printed and try and apply it to Birmingham City. From what I have read, and what I understand, barring a spectacular collapse in fortunes akin to Portsmouth, we will be playing in the Europa League next season. How long we’ll remain in that competition for is anyone’s guess though…

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