Commonly, but incorrectly, referred to as “FFP” profitability and sustainability rules are the regulations that restrict the magnitude of adjusted losses for Premier League clubs.
Before reflecting on Everton’s position, a brief description of the rules applying for this season (about as interesting as I could make it). In terms of relevance, these rules explain Everton’s last summer and this transfer window. We can also look ahead to have an idea what Everton can do in the coming summer (2022) and for the season 2022/23:
Throughout the height of the Covid-19 crisis the rules were periodically adjusted to reflect the impact and uncertainties for individual clubs and the Premier League itself. It has led to a situation where many fans have thought that the financial regulations have effectively been scrapped. Whilst it is true that there has been far more leniency and a greater understanding of club’s individual plights it is incorrect to assume there have been no consequences for those clubs flying in the face of the regulations. More on that later.
Let’s start with the rules for this current season (feel free to skip if the detail is too great!) :
The regulations are set out in the Premier League Handbook. For this season 2021/22 (which for the regulations is known as T) each club has an obligation to provide the Premier League with the following information before March 1st:
- Copies of the annual accounts, director reports and auditor reports for T-1 (2020/21) and T-2 (2019/20)
- An estimated profit and loss account and balance sheet for T (this financial year 2021/22) based on the latest information available to the club and an accurate estimate of future financial information
If the aggregate of the club’s earnings before tax for the last three years (2020/21, 2019/20 and 2018/19) result in a loss (as is the case with Everton) then they are obliged to provide information for each of the three years.
A club’s requirements change depending upon the scale of the losses.
There’s a calculation called the PSR Calculation. Without getting too technical it is (for this year) the aggregate of:
- Adjusted earnings before tax for T (2021/2022)
- The mean of the adjusted earnings before tax for T-1 (2020/21) & T-2 (2019/20)
- Adjusted earnings before tax for T-3 (2018/19)
If the PSR Calculation results in a loss of less than £15 million then the Premier League Board will check to see that the club can meet its liabilities until the end of the 2022/23 season.
If the calculation results in a loss greater than £15 million, then the club has to produce (by the 31st March 2022) projections for not only the current season, but for the next two years T+1 (2022/23) and T+2 (2023/24).
In addition, the club has to provide such evidence of “secure funding” as the Premier League sees fit.
If the PSR Calculation exceeds £105 million then the club will be subject to the board using its powers in rule E.15 and additionally will be treated as being in breach of the Premier League rules and the Premier League Board will report the club to a “Commission” of three people to deal with the alleged breach.
Rule E.15 applies a budget and places potential restrictions on transfers
If ultimately the club does not adhere to the restrictions place by rule E:15, and the Commission finds the club to have broken the rules then the range of options in terms of remedy available are virtually unlimited, ranging from a fine, points deduction to expulsion.
For the preceding season (2020/21), the rules were identical except (obviously) each relevant time period was 12 months earlier. It was those calculations, submitted to the Premier League before March 1st 2021, that determined whether Everton were compliant or not and what could be spent (or not) in the last summer window.
As I will demonstrate, albeit with projected figures for 2020/21 – projected because the accounts for 2020/21 are yet to be published, the probability of Everton being compliant were very slim.
In retrospect (and predicted previously on this site) the summer transfer spend of £1.8m, the sale of Digne to fund two young full backs in this January window, plus the desperate desire to get as much of James Rodriguez’s salary off the books in the Autumn show the constraints upon which Everton currently operate.
In the following table:
- Real figures, profit and loss for 2015/16, 2016/17, 2017/18, 2018/19, 2029/20
- Projected profit and loss 2020/21 & estimated Covid-19 attributed costs
- Estimated women’s football, youth football, and community costs
In the five complete years (up to June 2021) you will see that the club has only been in profit once (as a result of player sales including that of Lukaku). Even stripping out the impact of Covid-19 doesn’t change that fact. As a result of the club’s enormous increase in costs combined with a failure to compete in European competitions (with no corresponding increase in broadcast income particularly), significant losses were inevitable.
The key figure
So what does that mean in terms of compliance with profitability and sustainability?
The key figure is the box in red in the bottom right corner of the chart. If that figure is greater than the permitted £105 million aggregate loss position, then we are in breach of the profit and sustainability rules.
Of course, the qualification on the figure quoted in this article is the estimated losses for the year 2020/21 and the permitted deductions which are also estimates. However the margin, the difference between the permitted losses and the estimated losses is greater than £60 million, something which is greater than the likely margin for error.
By my calculations we have comfortably exceeded the permitted losses.
Consequences of breaking the profitability and sustainability rules
Something which must be understood is that this information will have been provided by the club to the Premier League before 1st March 2021, thus giving the Premier League the ability to respond to it before the end of last season, i.e. to be applied last summer and this current season.
The (in my opinion) breach of the profitability and sustainability rules are dealt with initially in rule E.15
- E.15.1. to require the Club to submit, agree and adhere to a budget
- E.15.2. to require the Club to provide such further information as the Board shall
determine and for such period as it shall determine; and
- E.15.3. to refuse any application by that Club to register any Player or any new contract of an existing Player of that Club if the Board reasonably deems that this is necessary in order to ensure that the Club complies with its obligations listed in Rule E.14.7.
So what does that mean in practice?
It effectively means two restrictions placed upon the club – an agreed budget (meaning an upper limit on costs based on expected income) and an agreement in terms of player trading – i.e. the club having to seek approval or agree to parameters to enable them to buy a player. Those conditions might be a limit on what can be spent without player sales, or a limit after player sales depending upon the profitability and cost implications of the sale, or as is likely an effective salary cap.
Only if the club did not agree or adhere to a financial agreement would other penalty considerations be brought in. In this instance the commission of three people would hear evidence and adjudicate accordingly with almost unlimited sanctions at their disposal.
So, it seems Everton are in a situation where we have to work within a budget agreed with the Premier League. We are not in a situation that results in immediate punishment. That is only likely if we decided to ignore, breach the agreements we will have reached or our finances were materially different from previously reported to the Premier League.
Looking forward it is clear we will be in a loss making position again this year, and likely to be above the £105 million profitability and sustainability limit. This will result in continued restrictions on player purchases into this summer.
Whilst the financial position improves beyond June 30 2022 with the final legacy of the summer of 2017 player purchases and contracts, plus other poor value signings disappearing off the books, our ability to recruit for (hopefully) a new manager will be dependent on what is agreed with the Premier League and/or player sales.
The mismanagement of the early years of Moshiri’s reign cast a long shadow over our ability to spend our way out of our current predicament. The need for proper governance, an effective director of football, and a disciplined recruitment strategy is never so apparent as now, if, as is hoped, our fortunes are to be improved.
Categories: Everton finances