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February 2018 - Villa play FFP roulette as the consequences of failing this season becomes clear!

Updated: Feb 3

Villa play FFP roulette as the consequences of failing this season becomes clear!




















The roulette table is spinning and we appear to have gone all in on promotion. Will the ball land in our favour or will we have blown the lot? We are only a matter of months away from finding out.


As this article will discuss in more detail, failure to go up this season will arguably lead to as big a turnover in playing staff as we witnessed when we were relegated nearly two years ago from the Premier League. However, this time we will have no funds to bankroll it!


There is a very real possibility that next season could be the season that AVFC get sucked into the pull of the black hole of fallen giants which will lead to years in the abyss as experienced by Leeds, Portsmouth, Nottingham Forest…. The list goes on. In my mind (and this article will go on to substantiate this opinion based on the information available), AVFC are on a cliff edge. I just prey we hold on and get promoted this season.


As you will know, the first set of the Xia regime accounts have been published over the last week. They make fascinating reading for a number of reasons.


1. We now know the stark realities of relegation;


- 559 job losses* (142 full time and 417 part time)

- Broadcasting rights fall 26% from £65m to £48m

- Turnover down 32% from £106m to £72m**

- Wage bill down 35% from £82m to £53m

-Sponsorship and commercial revenue falls 52% from £31m to £15m

*It is acknowledged that some of these jobs may have been TUPE to new contractors taking up catering and merchandising contracts.

**This figure is propped up by £40m parachute payments.


2. The accounts show us that in the first two transfer windows under Dr. Tony Xia we spent £88m on acquiring new players... EIGHTY EIGHT MILLION POUNDS.


3. Dr. Tony Xia injected nearly £50m cash into the club to fund our transfer assault.


I am grateful that Dr. Tony Xia bought AVFC and saved us from a fate which is currently being witnessed at Sunderland AFC. He has been as good as his word so far. He has injected significant funds into our club and has engaged and reinvigorated the fan base. However, it is important for a fan base to analyse and hold the regime responsible for the direction it takes our club.


Whilst many despise Lerner, he was right when he said owners aren’t owners but custodians. Our club must be handled carefully for the benefit of future generations. This article will question some of the strategic decisions taken by the current board of AVFC however I appreciate such a stance is easy to take sat in an ivory tower with the benefit of hindsight.


The reality is that the club was a mess when Xia, Wyness and co. took over the reins at AVFC and they have done well so far to slow the huge tanker that is AVFC down, and begin to turn the club around. However the strategy we have adopted is highly risky. Get promoted this year and all of the risks taken will have been worthwhile. Don’t get promoted and well... I suspect it will be a troubling time that will take years to address.

Lastly, and before I get into the nitty gritty of the accounting numbers, forecasts and FFP regulations, I want to stress that I do not blame the board for not spending more money. FFP prohibits them from doing so. Evidence has shown that Dr. Tony Xia wants to invest money in to AVFC. What is the point of Dr. Tony Xia investing heavily again, us getting promoted but then having the points deducted and promotion snatched away from us. It makes zero business sense. The updated EFL FFP regulations are a sufficient deterrent to prevent any regime from ignoring the latest regulations. I hate FFP and whilst football clubs should not be racking up unsustainable losses, where a club has a wealthy investor wanting to invest money, it is crazy that the EFL discourages outside investment. FFP is for the elite, to protect the elite. It stinks. But it levels the playing field... bullsh*te!


Football accounting techniques and transfers


I apologise in advance to any readers who already understand basic accounting concepts and the accounting processes for recording a transfer. However, if readers truly want to digest our accounts and understand our FFP position, these basic concepts must be understood.


All sets of company accounts have three key reports contained within:


- Profit & Loss (a.k.a Income Statement); This breaks down the operating health of the business and demonstrates whether it is profitable or not in the accounting year.

- Cash Flow; This shows how funds have flowed in and out of the business. Cash is king!

- Balance Sheet (a.k.a Statement of Financial Position); This shows the overall health of the business and demonstrates whether it has the assets to cover its liabilities and continue as a “going concern” (note this is only a snapshot at a point in time).


Player transfers are reflected within all three reports (or Statements) listed above however the focus of this article is on the effect they have on Profit & Loss (P&L) given it is the P&L position which is considered for FFP purposes. This nicely brings me onto player transfers and the mystical term “amortisation”…


If frustrates me when I see discussions rage around a clubs notional net spend. It is a completely irrelevant figure in the context of how it is used by journalists and fans alike. The arguments you constantly see is “we’ve sold £70m worth of players and only bought £20m worth. We have £50m left to spend”. That is not how football finances work and it ignores agent fees, signing on fees, other expenses, sell on clauses, writing off future amortisation, etc.


So what is Amortisation?


Amortisation is how a transfer is accounted for by spreading the cost of acquiring the said player (excluding wages) over the duration of that player’s contract.


Example:


We purchase a player and the total cost of acquiring the player is £25m excluding wages. The player signs a five year deal. This transfer would be recorded in the P&L as a £5m amortisation expense. That £5m would then continually appear in the next 4 years’ worth of accounts as an amortisation expense of £5m. Even though the club might pay the £25m in one upfront payment, it would still appear in the P&L as a £5m amortisation cost. The £25m outflow is then reflected in the cash flow.


However, say we then sell this player for £30m two years into his deal. Only £10m of the £25m paid has been accounted for in the P&L. Therefore £15m is still “owed” for this player as amortisation costs. The P&L will therefore reflect a player profit for this transaction of £30m (selling price) - £15m (amortisation costs) - £3m (other expenses estimate) ≈ £12m.


FFP rules and regulations, a reminder!


Now I suspect that if you are still reading this article, you probably read my first article on FFP. That article focused much more on what FFP is and how parachute payments reduce. As a refresher though…


For the period to May 2018 (assessed in March 18)


The maximum permitted loss is £61m (15/16 £35m + 16/17 £13m + 17/18 £13m). The assessment of whether we are under this maximum permitted loss is through an assessment of the audited Group Accounts for 15/16, 16/17 and notional accounts prepared up to March 2018 (projected forward to May 2018).


For the period to May 2019 (assessed in March 19)


The maximum permitted loss is £39m (16/17 £13m + 17/18 £13m + 18/19 £13m). The assessment of whether we are under this maximum permitted loss is through an assessment of the audited Group Accounts for 16/17, 17/18 and notional accounts prepared up to March 2019 (projected forward to May 2018).


FFP regulations aren’t straightforward and although permitted maximum losses are cleared defined, the audited Scheme accounts are then adjusted for certain items. The important adjustments we need to be aware of for the purposes of AVFC’s assessment is:


Regulation 4.2.2 Depreciation / impairment of tangible fixed assets (net of any capital grants);

Regulation 4.2.5 Net expenditure on Youth Development Activities;

Regulation 4.2.6 Financial support for the Championship Club’s Charitable Community Scheme.


Making these adjustments you end up with the following P&L from the audited accounts:


2015/2016 (Reform Acquisitions Limited)


P&L = -£81m

less Impairment of tangible fixed assets -£45m

less Youth development activities -£5m

less Community Scheme losses -£2m


Total P&L losses for FFP purposes = -£28.7m


2016/2017 (Recon Group UK Ltd)


P&L = -£14.5m

less Youth development activities -£6m

less Community Scheme losses -£2m


Total P&L losses for FFP purposes = -£6.5m


2017/2018 Accounting Forecast


Changes to the financial statement which we know as fact are:


Parachute payments have dropped in this accounting year from £40m to £33m ~ -£7m

Player sales in the accounting year (after expenses) are £19.4m ~ fall in the accounts of -£7.2m


Assumptions made are:


Increase in wage bill (***) is ~ -£1.8m

All other accounting items are the same


Predicted 2017/2018 P&L accounts show a loss of £30.5m or £22.5m for FFP purposes.


***

2018 FFP assessment shows the following total losses for FFP purposes:


-£28.7m 2015/2016

-£ 6.5m 2016/2017

-£22.5m 2017/2018


Total Losses = -£57.7M

Maximum permitted loss = -£61m


AVFC has NOT failed FFP as at the 2018 FFP assessment date!!!!


2018/2019 Accounting Forecast


Changes to the financial statement which we know as fact are:


Parachute payments have dropped in this accounting year from £40m (16/17) to £14m ~ -£26.0m

Player sales in the accounting year (after expenses) are £0m ~ fall in the accounts of -£26.6m


Assumptions made are:


Decrease in wage bill (****) is ~ £10.8m

All other accounting items are the same


Predicted 2017/2018 P&L accounts show a loss of £56.3m or £48.3m for FFP purposes. ****









2019 FFP assessment shows the following total losses for FFP purposes:


-£ 6.5m 2016/2017

-£22.5m 2017/2018

-£48.3m 2018/2019


Total Losses = -£77.3m

Maximum permitted loss = -£39m


AVFC WILL FAIL FFP as at the 2019 FFP assessment date unless £38m worth of profit can be generated between now and March 2019!!!!


Bearing in mind, the figures used to calculate the 2018/2019 position includes releasing Snodgrass, Terry, Onomah, Grabban, Agbonlahor & Hutton, we still need to lower the annualised wage bill and sell players (net of expenses and amortisation) to the tune of £38m i.e. register a loss of only £10m instead of the expected £48.3m in the 2018/2019 accounts


Furthermore, these figures show don’t account for losing Johnstone which whilst wages will be saved, will need to be replaced.


This is where the criticism of the current regime is fuelled. We have spent £88m on players yet that strategy has focused on signings experienced players (many of whom have fallen in value or have little resale value) and loan signings have tended to be youngsters. Our most saleable asset and actually the ‘big’ player I would most be prepared to lose is Kodjia yet who will buy Kodjia for big money when he has been out for over a year. As a result, other teams will come sniffing around the carcass of AVFC and will pick off our gems in Grealish and Chester. If this happens, the spine of our team has gone, and we have no available flexibility within FFP to revamp the squad.


It is my opinion that it is this season or else. I just cannot see how we can turn the losses around when parachute payments fall by an astonishing £26m from those reflected in the accounts recently released. Even then, the year after that, the parachute payments finish and revenue drops another £14m! The spiral begins. Let’s get out this year AVFC. UTV.

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