Derby charged under financial fair play rules
The bad news for Derby County FC came in an 80-word statement from the English Football League (EFL) last week in which they were charged with breaching financial fair play (FFP) rules. Mark Bisson investigates a complex case that hinges on its player amortisation policy.
The East Midlands club, now home to England and Manchester United's all-time leading goalscorer Wayne Rooney, faces a legal battle with the EFL and the possibility of points deduction.
Following a probe into its finances, the league said the club had recorded losses in excess of the £39m permitted for the three-year period ending 30 June 2018.
An independent disciplinary commission is handling the case, whose outcome could deal a hammer blow to Derby’s promotion push after missing out to Aston Villa last season. As a test case for football accounting policies, it could also have serious repercussions for other Championship clubs. The credibility of the league’s profit and sustainability regulations is on the line.
The EFL charges relate to creative accounting practices that have angered rival clubs, but could have repercussions on their player contract accounting treatments.
Derby County’s controversial sale and leaseback of Pride Park Stadium is the main plank of the case.
The stadium was on the club’s books for £41m. Following an independent valuation Derby sold it for £80m to a subsidiary company owned by club chairman Mel Morris. It was then leased back for around £40m. The move allowed Derby to post pre-tax profits of £14.6m in its 2017/18 accounts and, crucially, senior executives thought, dodge the league’s profit and sustainability rules. The prior two years the club recorded losses of £7.9m and £14.7m.
EFL’s financial fair play
Derby joins Sheffield Wednesday, Aston Villa, Birmingham and Reading in selling and leasing back stadiums to their owners, exploiting a loophole in the EFL’s financial fair play rules.
In November, the EFL charged Wednesday with misconduct over the sale of Hillsborough Stadium for about £60m to owner Dejphon Chansiri following an investigation into its 2017-18 financial results. The league is querying the sale process and recognition of the profits in the annual accounts. Chansiri, finance director John Redgate and former CEO Katrien Meire were served with misconduct charges.
Offloading the stadium helped the Yorkshire club turn a profit of £2.5m. But Wednesday countered that the charges were “unlawful” and would be “vigorously defended”, particularly since it had consulted the EFL on the stadium transaction. Wednesday could yet be hit with sanctions that could hurt its promotion push.
Last week, Derby County vowed to strongly contest the EFL charges relating to the stadium sale and breach of financial fair play rules, saying the EFL had previously agreed to the sale. Their statement echoed the tone of outrage and indignation in Wednesday’s response.
There are question marks over how Pride Park stadium came to be valued so highly, compared to the other four clubs who have sold their stadiums for considerably less. One press report said it was overvalued by £30m.
Player amortisation policy
Derby’s case is more complex, differing in one vital aspect. In last week’s statement, the club revealed it had also been charged over its player amortisation policy.
Under normal accounting standards for intangible assets, transfer fees are amortised on a straight-line basis over the period of the players’ contracts.
This accounting policy was previously identical to other clubs, but in 2015 Derby decided to assign residual values (the expected value) for players at the end of their contracts. It’s a manoeuvre that allowed Derby to cut annual player amortisation costs, in so doing reducing its losses.
Derby denied any wrongdoing, saying the player amortisation policy “was again reported transparently to the EFL executive as part of the club’s submissions and these were again approved and signed off in writing”.
Football finance expert Kieran Maguire, who keeps close tabs on English football on his Price of Football website and podcast, says the charges in respect of the Pride Park sale and the amortisation policy represent a “test case” for the league.
On the stadium sale, hhe case revolved around the fair market valuation: “The complication here is Mel Morris is selling to Mel Morris, so that dynamic of a fair market doesn’t exist”.
Maguire suggests the EFL will question the £80m valuation when Villa’s ground was sold for £56.7m.
In my view it has given Derby County a short term benefit, allowing them to invest in more players and boosted their promotion prospects - Kieran Maguire
More concerning is Derby’s amortisation policy and allocation of residual values. At the end of a contract, a player is allowed to leave on a free transfer under the Bosman ruling. “How can you give a residual value to a player? That seems to me to be an inconsistency,” Maguire says.
“Under accounting rules, all intangible assets, including player transfers, are assumed to have zero residual value,” he explains. “One of the consequences of taking such a policy into accounts over a three or four year period is it reduces your costs and allows you to satisfy financial fair play rules.
“In my view it has given Derby County a short term benefit, allowing them to invest in more players and boosted their promotion prospects,” he adds.
“Have they done anything illegal? Certainly not. Have they applied the accounting rules? I am not convinced that they have but the auditors seem to think so.”
Maguire says he even wrote to the league in June 2018, giving what he says was “a full and thorough explanation” as to why Derby had contravened amortisation rules.
The EFL’s decision to wait until this month to charge Derby highlights the complexity of its investigation into possible financial fair play breaches. If the evidence of rule-breaking was clear, some may wonder why the EFL has not yet brought sanctions against Derby. But EFL lawyers may have needed the time to build a stronger case.
For the sake of other Championship clubs, who are currently making major decisions about spending and recruitment with an eye on FFP rules, Maguire urges the independent disciplinary commission toexpedite its work on Derby and Sheffield Wednesday.
“It’s not just these two clubs impacted, but all of the clubs because there will be potential relegation and promotion consequences impacted depending on whether the clubs are sanctioned,” he adds. Potential sanctions include a points deduction or financial penalties.
Profit and sustainability overhaul overdue
Maguire believes the EFL’s overhaul of its profit and sustainability rules is long overdue. With clubs employing smart accountants to spot the loopholes, he questions why the league has not tightened its rules since they were first introduced in 2016.
“You end up with the situation that it’s not just about the talent and quality on the pitch. It’s the talent you have in your accounts office as well – and that’s just totally wrong,” he says.
The cases of Derby and Sheffield Wednesday illustrate that unless the EFL moves swiftly to strengthen its financial fair play rules, another wave of clubs could take advantage of the flaws and further damage the EFL’s credibility.
With Rick Parry as its new chairman, Maguire suggests the “light touch towards regulation” under the EFL’s former CEO Shaun Harvey will be replaced with the league taking “a much harsher line”.
There is much at stake for Parry. He is bidding to restore some integrity to the EFL, whose image suffered under the previous leadership following the demise of Bury and financial turmoil surrounding Bolton and Macclesfield. Maguire says if the charges against Sheffield Wednesday and Derby are thrown out, “his reign will be in tatters effectively before it starts”.
If these two test cases go in favour of the clubs, he says, it would signal “the death of financial fair play and profit and sustainability rules”.
“If the EFL charges are both rejected it’s effectively open season for other clubs to apply similar treatments themselves.”
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Mark Bisson is a sports business reporter and editor with over 20 years experience. He currently writes about Premier League and Championship clubs for football finance website, Off The Pitch.
An Olympic correspondent for more than 13 years, he has written for many UK and international sports business publications.
Mark is a former...