The first half of this article explains what the alleged breach is about, why it may have happened. The second half looks at the potential consequences and what is now required.
Late Friday afternoon, the Premier league issued a statement as follows:
The referral to an independent commission relates to an alleged breach of Premier League Profitability and Sustainability rules.
The most relevant profitability and sustainability rules are rule E.51 and rule E.51.2 as follows:
E.51. If the PSR Calculation results in losses of in excess of £105m:
E.51.2. the Club shall be treated as being in breach of these Rules and accordingly the Board shall refer the breach to a Commission constituted pursuant to Section W of these Rules.
So what is the PSR calculation?
The PSR calculation is as follows
“PSR Calculation” means, save as indicated below, the aggregation of a Club’s Adjusted Earnings Before Tax for T, T-1 and T-2.
In respect of Season 2021/22, the PSR Calculation shall be the aggregation of:
(a) the Adjusted Earnings Before Tax for T;
(b) the mean of the Adjusted Earnings Before Tax of T-1 and T-2; and
(c) the Adjusted Earnings Before Tax of T-3;
T is the financial year 2021/22, T-1 2020/21, T-2 2019/20 and T-3 2018/19
What are the Adjusted Earnings Before Tax?
“Adjusted Earnings Before Tax” means Earnings Before Tax adjusted to exclude costs (or estimated costs as the case may be) in respect of the following:
(a) depreciation and/or impairment of tangible fixed assets,
amortisation or impairment of goodwill and other intangible assets (but excluding amortisation of the costs of Players’ registrations);
(b) Women’s Football Expenditure;
(c) Youth Development Expenditure;
(d) Community Development Expenditure; and
(e) in respect of Seasons 2019/20 and 2020/21 only, COVID-19 Costs, Each of Youth Development Expenditure, Women’s Football Expenditure and Community Development Expenditure and COVID-19 Costs shall only be excluded from the calculation of Adjusted Earnings Before Tax if separately disclosed:
(f) by way of notes to the Annual Accounts; or
(g) by way of supplementary information which reconciles to the Annual Accounts and which has been subject to independent audit;
Using information in the public domain, estimates of certain expenditure (youth, women’s football and community costs) plus estimated the annual losses for 2021/22 it is possible to calculate an estimate of Everton’s position and the likely compliance with the profitability and sustainability rules.
Estimated PSR position
Below is a table providing an estimate for Everton’s PSR position:
| £’000s | 2018/19 | 2019/20 | 2020/21 | 2021/22 |
| Profit & loss | -111,868 | -139,800 | -120,900 | -50,000 |
| Deductions | ||||
| Depreciation Fixed assets | 6,500 | 6,900 | 7,100 | 7,300 |
| New stadium costs | 7,200 | 19,900 | ||
| Women’s football | 2,500 | 2,500 | 2,500 | 2,500 |
| youth football | 2,500 | 2,500 | 2,500 | 2,500 |
| Community costs | 2,500 | 2,500 | 2,500 | 2,500 |
| Depreciation/impairment | 26,300 | 15,300 | 5,000 | |
| Covid impact | 67,300 | 14,800 | ||
| Estimated PSR calculation | -90,668 | -11,900 | -76,200 | -30,200 |
| Aggregate PSR position | -164,918 | |||
| Permitted losses | -105,000 | |||
| Excess losses | 59,918 |
Note, * shows estimates, so in the above I am estimating expenditure on Women’s and Youth Football, Community costs and the 2021/22 losses. The calculations also include expenditure on the new stadium, expenditure that can be deducted.
From the above, it is evident that Everton appear to be well in excess of the permitted losses. However that is likely to have been the case for the previous year also. The club claim (and I know that this is true) to have been in regular dialogue with the Premier League. Indeed I believe they were pro-active, highlighting the issues in advance of formal reporting deadlines.
The board, as explained at considerable length in the 2020/21 accounts, claimed that the Covid crisis had a significant impact on the business, claiming £82.1 million in losses directly related to Covid, and a much larger figure relating to “un-crystalised losses” .
So what has changed?
The aggregate position for the period 2021/22 worsened from the previous year by virtue of 2021/22 losses being greater than 2017/18 which dropped out of the equation.
The bigger question is why the Premier League are alleging a breach of profitability and sustainability rules for 2021/22 having approved previous losses likely to be greater than the permitted amount?
It is known that the board were in regular contact with the Premier League. It is known that the measures agreed with Everton included those measures in rule E:15 which effectively required sign off of any new player recruitment or the issuing of a major new player contract.
Perhaps this alleged breach is a further signal from the Premier League of its abilities to self regulate, another attempt to push back against the independent regulator coming down the tracks.
Regardless of the changes bringing about this alleged breach the implications are serious.
The independent commission will be comprised of three people, one of whom must have a judicial or legal background. Whilst there is provision for appeal (by either party) as to the decision of the commission, the appeal is the final stage of the process. There is no possibility of referring to the The Court of Arbitration for Sport for example, so assuming the processes of the commission are correct ultimately their decision is final.
Unlike the EFL there are no prescribed penalties, the commission has unlimited powers including a financial penalty, a transfer ban, a points deduction or indeed expulsion. There is no suggestion that expulsion is an appropriate penalty in this case.
Implications for Everton
This is another huge hammer blow to the credibility of the owner and of the board. It demonstrates yet again, the validity of the claims that this is an incompetent board and at best, an extremely careless owner. Many Evertonians would like to see rid of Farhad Moshiri, and aside the amount of funding he has provided the club there is little to support his ownership. However, he is unlikely to sell the club at this time.
What he can do, is change the board. This is obviously a long term theme of mine and many others. But the need for a competent Chair, CEO and financial team is even greater today than it was yesterday.
No future investment until this is cleared
This referral has huge implications for Everton. The ability of the club to attract fresh investment to complete the building of the stadium was stalling prior to this announcement. Until this matter is resolved, then it is dead in the water. We will not attract investment until this matter is concluded.
What implications that has for Everton depends on Moshiri’s willingness or ability to continue funding. We are now wholly dependent upon him, and him alone. That places the business at great risk in the absence of his continued support – indeed this is also an issue for the Premier League. They will want to know Everton have continued “secured funding”. Any suggestion we do not have that further complicates and makes an alleged breach even more serious.
What has to happen?
The board and owner have to come out of hiding and explain in simple terms the position the club is in, the potential risks to the business and our Premier League status, and finally what the remedial actions are.
Their silence has never been acceptable. Today it is even less so. They, the directors, have a duty to act also. They have a duty to promote the interests of the company, to protect the interests of stakeholders including shareholders, employees and suppliers. This duty is enshrined in law, section 172 of the Companies Act 2006.
Moshiri, as heavily invested as he is, has to act – he has to get the club to a position where it can be sold to suitable committed owners. He can start that process by appointing a number of emergency, interim directors, experienced in corporate recovery and turnaround. He can demonstrate to the Premier League, the players, the manager, employees and equally importantly the fans his commitment to turning around a desperate situation. The consequences of not doing so not only threaten our Premier League survival but our existence. Moshiri has spoken of existential threats, he knows what is at stake.
In my opinion, he has to act now, to ensure the worst in sporting terms (relegation) and in business terms (potential administration) do not happen.
Categories: Everton finances
You’ve answered a question I’ve just raised on Twitter Paul. Quite why the focus is on 21/22, when we seem to have at least started the road to recognise we couldn’t spend anymore, is beyond my understanding.
I am sure your extremely relevant point here is correct and the PL doesn’t want government interference, wants to show it can regulate itself and wants to demonstrate those powers.
I would suggest, albeit for different rule breaches, that the Man City situation has had an impact too. City will no doubt point to other cases (such as ours), where negotiation and a conservative approach to these problems existed and cry very loudly that they have been the single scapegoat for any PL shortcomings. It seems they are no longer alone and that might help the PL to explain its actions.
The BUTTERFLY EFFECT OR JUST EVERTON THAT!
Usmanov’s ability to provide funding before and planned for EFC goes all the way back to the poor due diligence process undertaken by the PL. His wealth, power and position alongside Putin hasn’t changed in 20 years. It should not have taken a war in Ukraine to change that. He has been around the PL for over 16yrs with their full support.
On a financial basis alone, losing that previous and planned investment could not have been predicted by EFC. To not fully take account of this impact would be an injustice.
We may have questioned some of those commercial deals but the PL did not question them at the time. To turn the clock back now is another injustice.
Losing assets of £45m. The whole Gylfi Sigurosson situation is a blemish too. We spent £45m plus heavy wages on a player that ultimately had no resale value which was beyond our control. The club has paid the price for taking such a positive stance toward his situation.
These factors, beyond our control must feature in our defence.
THE REST
That seems to be down to poor governance by our board, poor investment and zero success to justify those two things. Why the board don’t reign this in is totally at their feet.
MOSHIRI THE BILLIONAIRE
When you take account of his original wealth, the financial impact on his investments and business due to sanctions and his staggering investment in EFC, he really must be down to his last 1/4 billion or less?
He probably does have the money to finish BMD but that must take him very close to being “ALL IN” when he doesn’t know what other players hands look like!
BMD
If it is left to Moshiri to fund, he will be forced to sell more player assets like Pickford, Onana and even the likes of Iwobi. That money will go straight into paying for BMD. Where that leaves the team is anybody’s guess. If Dyche navigates us through this season, we will surely be forced into much cheaper replacements and the loan market for next season.
I still haven’t bought my two season tickets for next year. I will be waiting to make that decision right at the end of April deadline!!
Regards
Keith
Money from the sale of players cannot go towards BMD, it will be credited to the accounts to reduce the losses.
The Board have know that this was about to drop and I believe this is the reason why they have gone into hiding. Their incompetence and inability to perform their duties to an acceptable standard is highlighted. They, along with the major shareholder, have exposed the Club to a greater threat than relegation. Our history and existence is undermined by 4 people who have never kicked a ball in their lives. I forgive (partially) Graeme Sharp given, with all due respect, that he is just an ex footballer being abused as a patsy by Kenwright. He will have as much business acumen as the balls he kicks.He must step down immediately or risk what is left of his reputation as an Everton Great.
Why is this an issue now when the losses in 21-22 less than they were in 18-19? Makes no sense for it to be an issue when the situation is improving
The numbers didn’t add up last year already, see detailed breakdown by Swiss ramble
https://mobile.twitter.com/SwissRamble/status/1510859815496691713/photo/1
How Everton got away last season without being referred to the commission is beyond me. Leeds and Burnley were right to be outraged and file the complaint.
It has seemed obvious for a while that the fans understandable ‘sack the board’ stance is a waste of time, and that it has to be in the hands of the PL and/or FL to call our board to account. Sadly the inevitable affect is to damage the club further. New investors or the Chairmans abilities seems like clutching at straws and unless we can convince the PL that they have a share in the debacle having accepted previous 21/22/22 statements as acceptable, then further penalties can only exacerbate the problem. Conversation related to the forced dismissal of ineffective Board members with the forced appointment of creditable Executive Directors can be constructive opportunity to sort this out. Destroying a club of Everton historic stature can advantage the OL and FA itself.
Both of my entries above have the same error which I just couldn’t erase. So the last sentence should say ‘Destroying a club of Everton’s historic stature, founders, with others, of the FA, in a group that establishes the Premier league, along with Arsenal holding the record for unbroken years in the top flight CANNOT advantage the PL or the FA, a little common sense called for here.
Thanks Vic
It has seemed obvious for a while that the fans understandable ‘sack the board’ stance is a waste of time, and that it has to be in the hands of the PL and/or FL to call our board to account. Sadly the inevitable affect is to damage the club further. New investors or the Chairmans abilities seems like clutching at straws and unless we can convince the PL that they have a share in the debacle having accepted previous 21/22/22 statements as acceptable, then further penalties can only exacerbate the problem. Conversation related to the forced dismissal of ineffective Board members with the forced appointment of creditable Executive Directors can be constructive opportunity to sort this out. Destroying a club of Everton historic stature can advantage the OL and FA itself.
Thanks. Very insightful. Why are there no stadium costs in the last two years? Are they accounted for elsewhere?
Luke, the stadium costs are now capitalised and therefore don’t appear in the profit & loss account
Excellent piece as always.
The reason for the referral as the Esk tbh covered is that while they maybe were not wildly within but within to 2021 (debatable), 2022 being worse tips the numbers into default and outside of FFP. Is my reading of it.
Had Derby and their method been upheld maybe they’d have been fine to 2021 (doubtful) but they’d have been miles and miles over to 2022. As they made an FFP profit of £7-8m in 2017-18 season but that drops off to be replaced by a £25-29m LOSS in 2018-19…let alone a forecast amortisation spike of £18-19m in 2019-20. Same principle here.
Excellent analysis as ever. Would you happen to know if the PSR rules you’re referring to and this alleged breach applies to Premier League Rule Handbook season 21/22 or 22/23?
Thanks Richard, if you look on the PL website aand download the 21/22 handbook