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Arbitrator red cards Derby's amortisation policy

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As manager Wayne Rooney prepares to spend to strengthen his squad, Derby County FC’s change to its accounting amortisation policy could result in a financial own goal.

14th May 2021
Sports business reporter
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After narrowly surviving relegation, Derby County’s celebrations were cut short when the English Football League announced on Tuesday it had won part of an appeal against the Championship club over a breach of Financial Fair Play rules.

Sanctions could include a points deduction or a hefty fine. Other English clubs are monitoring developments to see if any precedent is set.

The Rams, currently the subject of takeover talk, had been cleared of financial wrongdoing last August by an independent disciplinary commission. But the EFL was successful in its appeal against the decision at an independent tribunal, specifically in relation to creative accounting practices around the club’s player amortisation policy.

Independent arbitration panel

The EFL said an Independent League Arbitration Panel “determined that the club’s policy was not in accordance with accounting standard FRS 102 because it failed to accurately reflect the manner in which the club takes the benefit of player registrations over the lifetime of a player’s contract”.

The original disciplinary commission had already concluded that the club “did not adequately disclose in its financial statements the nature and or effect of its change in accounting policy”, the statement added.

Football finance expert Kieran Maguire, who covers English football economics on his Price of Football website and podcast, said the new disciplinary commission responsible for gathering evidence and determining appropriate penalties should punish Derby.

If there are no sanctions, it effectively says that such a policy is legitimate and therefore other clubs are at liberty to adopt it when preparing their annual results, which will just make a complete mockery of financial fair play because there is scope to manipulate the numbers,” he tells AccountingWEB.

“It would cause a potential problem in future.”

Maguire argued Derby’s accountants had “taken a punt” on the club’s accountancy policy to slash costs. “The club will argue that the accounts have been signed off by the auditors and therefore it is acceptable,” he added.

The league’s initial investigation into the club’s finances revealed that it had recorded losses in excess of the £39m permitted for the three-year period ending 30 June 2018.

Maguire noted, however, that the EFL had limited success in punishing clubs for breaking FFP rules. Derby successfully dodged penalties over the controversial sale and lease back of its Pride Park Stadium.

“This is very much a test case on which they are pinning everything and they will use whatever they can to be successful,” added Maguire, who raised concerns about the club’s amortisation policy in a letter to the EFL in June 2018.

Residual value rather than straight line basis

He pointed to the benefits Derby gained in switching its amortisation policy to reduce losses. For most clubs, transfer fees for players - intangible assets – are amortised on a straight line basis over the period of the players’ contracts. But in 2015 Derby decided to assign residual values (the expected value) for players at the end of their contracts. 

Dan Plumley, a sport finance expert at Sheffield Hallam University, said the integrity of the EFL’s profit and sustainability rules were at stake, but saw no end to creative accounting to beat the FFP system.

“One of the major downsides with financial fair play from day one is that clubs have always been looking to circumvent the regulations to work in their favour,” he said.

“This is a new thing. We saw that with stadium sales as well… one club did it and two or three followed suit. I have no doubt we will see something else crop up in the future.”

He added: “I’m sure some people will call it cheating. I’m sure some people will call it creative and inventive. But whichever way you cut it, it’s designed with financial fair play in mind and that’s what the clubs are looking at – how do they comply with those regulations in whatever way possible?”

League gunning for Derby

Plumley said the EFL will want to make an example of Derby to deter other clubs from revamping their amortisation policies to exploit FFP loopholes.

“It’s a question of moral and owner objectives and how they run their business. In theory it could open the door, but whether the other 23 clubs in that league would walk through it, I highly doubt that,” said Plumley.

“But one or two might look at it and say if we want to have a promotion push and need to spend, then that’s a way to do it.”

Time is running out on a ruling to dock any points from Derby for the 2020-21 season, which could relegate the club to League One instead of Wycombe Wanderers.

“It just can’t be done. The lawyers will prevaricate and delay to make sure that is the case – and so will the accountants,” said Maguire, who predicted that the club owned by Mel Morris could yet be hit with a points deduction at the start of next season.

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By Silver Birch Accts
14th May 2021 13:52

Up the Rams!

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blue sheep
By Nigel Henshaw
16th May 2021 09:53

very interesting article, a few things stand out to me.

Firstly were they wrong in the first place to assign residual values to their assets, could that even be done with any accuracy, it would presumably have to be reviewed on a very regular basis to reflect current values, and what if a players value increases?

Secondly, the disclosure in the accounts was clearly wrong, suspicious perhaps, perhaps not.

Finally where are the auditors all this, my experience of working with auditors is that they set the agenda.

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By Walker57
27th Jun 2021 15:28

The article is let down by inaccuracies and omissions so comes across as biased and petty rather than a balanced reflection of the situation

Derby were found not guilty of 2 charges the EFL appealed one of those

The accounts under scrutiny had previously signed off by the EFL over 3 years with no comment made or problem identified with the clubs approach. When Middlesbrough threatened to sue the EFL they suddenly realised they had made a “mistake”

The accounts do not show losses in excess of £39m as stated in the article

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