There are a few things to point out in the above table.
1. Losses over €5m
UEFA are keen to ensure that clubs don't go deeper and deeper into debt so insist that any clubs losses over €5m during a single Monitoring Period are fully funded by their owner. In practice this means that clubs can only lose up to the maximum €45m during the first Monitoring Period if their owner is able and willing to put their hand in their pocket for any loss over €5m and, in UEFA's terminology, 'convert the loss to equity'. But what does this term mean and what are the implications? Let's use an example of a club losing €30m during the first Monitoring Period. We can see that the club passes the Break-Even test (as the loss is below the €45 threshold). However the €30m loss is above the €5m figure and the owner will need to take some action. In this example the club will create additional shares which the owner will have to buy for €25m (the difference between €30m and €5m). The Club will gain €25m in cash (ensuring the club's overdraft/debt doesn't increase) and the owner will be out of pocket by €25. However, the owner will now hold a potentially worthless paper share certificate. The problem for the owner is that they may never get their €25m back again they might possibly get it back if they sold the club, or if the club makes a profit in future years and he gets paid a dividend). This scenario might not trouble Abramovich or Sheikh Mansour but is the irksome prospect facing the owners of clubs such as Newcastle, Sunderland and Aston Villa.
2. Permitted Exclusions
I should also point out that the level of loss that a club reports in their financial accounts will not be the same figure as is used in the Break Even calculations. This is because UEFA have allowed clubs to exclude certain expenditure from the calculations. UEFA are keen to develop the game and don't want the FFP rules to constrain clubs from investing and developing - without any exclusions a club building a new stadium or new stand would be hit by an FFP penalty (the cost of the development would mean the club reported a large financial loss). Clubs can therefore exclude infrastructure development costs and youth development/community development costs. Manchester City announced that they should be able to exclude around £10m a year as a result of the youth/community exclusion.
There is one other exclusion that causes most confusion amongst journalists and fans; clubs are able to exclude certain wages for their long-standing players. By way of background; when the rules were first proposed, some clubs complained that they were already committed to paying high wage bills for some players on existing contracts and that they could fail the Break Even test as a result. UEFA therefore introduced an appendix to the rules which allows clubs who have failed the Break Even test to run the test again, but this time deduct the wages paid to players on pre-June 2010 contracts. However clubs can only deduct the wages paid to their long-standing players during one season (2011/12) and can only use the exclusion if they can show their Break Even deficit is reducing each year. Chelsea, for example, will probably find that they are not able to deduct the wages paid to Terry, Lampard, Drogba etc during 2011/12. This is because club losses are likely to increase in 2012/13 (they won the Champions League in 2011/12 and are likely to see their UEFA receipts and commercial income reduced in 2012/13).
3. Transfer Fees
An important part of the rules relates to the way that player transfers have to be accounted for. Although a club will often pay a transfer fee to another club immediately, from a Break Even perspective the financial cost of acquiring a player has to be written-off over the duration of the contract. We need an example: let's assume Torres was signed for £50m on a 5 year contract and that Chelsea paid Liverpool £50m via an immediate bank transfer. As far as the Profit & Loss section of accounts is concerned (and the Break Even test), Torres' purchase price would be depreciated (or amortised) evenly over the 5 years of the contract. So, during the first 12 months, only £10m would be incurred as a cost in the accounts and Torres would end the year with a 'book value' of £40m. After 5 years, Torres' contract would have ended and he would be free to leave the club (he would also have a book value of zero). If the club sells Torres part way-through the contract, the club the difference between the amount they receive for the player and the book value at the date of the sale is accounted for immediately in the accounts (and the Break Even test) as a 'loss/profit on player trading'. This is important as it explains how a club can sell a player for below the original purchase price and still record a profit in the accounts during the year of sale. If Liverpool sell Andy Carroll for anything above £18m in the summer, they will record the difference as a profit on player sales during 2013/14. If we assume that Falcao comes to Chelsea for £50m on a 5 year deal in the summer, the club's P&L account for the year will only include £10m as an expense (under the heading 'amortisation'). The club will also, of course, have to include the player wages as an expense in the Profit & Loss account. If you want to know more about 'amortisation', see the video at the foot of this page.
4. Fair Value
UEFA are aware that owners of clubs could look to inflate a club’s profitability by injecting funds into clubs via artificially inflated commercial deals. Paris St-Germain recently announced a huge sponsorship deal via a body that is connected to the club owners. For this reason UEFA FFP rules require any transaction from a ‘related part’ (i.e. a company or body connected to the club owners) to be assessed to ensure it was a genuine transaction at a ‘fair value’. UEFA has the power to adjust any artificial ‘mates rates’ deals and apply a lower value to the Break Even calculation. This assessment will be carried out by the CFCB panel (see below).
The first Test and UEFA punishments
UEFA has set up an independent panel (Club Financial Control Board – CFCB) to assess if clubs have broken the FFP rules (including the Break Even rules). Between December 2013 and April 2014 the CFCB will advise clubs of the outcome of their assessment and any punishments. The most serious punishment would be a ban from UEFA competition (with the first ban under for failing the Break Even rules starting in August 2014.
However, there are actually 9 available punishments available:
