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Profit and Sustainability — The Rules & Everton' Position

Following on from Carlo Ancelotti's comments regarding spending, Paul takes a more detailed look at Everton's financial position, what it means for compliance and importantly transfers this summer

In answering a question regarding summer transfer activity, Carlo Ancelotti spoke at a media briefing on Wednesday 12 May regarding Everton's finances in the context of the Premier League profitability and sustainability rules.

This has been interpreted as Everton (i) not having issues with profitability and sustainability; and (ii) Everton are still pursuing punishment for the six.

Let's deal with the latter point first. Ancelotti and Everton are absolutely right to push for the harshest punishment for this flagrant act of bad faith by the six. If Uefa's treatment of the six seems lenient (punishment reduced by co-operation in not confirming membership of the Super League), that should not be viewed as a benchmark by which the Premier League should set its punishment. Clear breach of rule B.15 in acting in bad faith must carry the strongest of penalties, impacting the clubs sporting status (my personal belief is relegation; others suggest points' deduction) not just a financial penalty met by the owners.

The profitability and sustainability point though is worthy of examination. English is not Ancelotti's first language and although he speaks eloquently, with passion and humour, there are occasions his words are open to interpretation. His words could be interpreted as an admission or forecast that we may have compliance issues with profit and sustainability, they were not a denial. One interpretation is that he is comparing the possible severity of our potential to break rules with that of the clear rule-breaking of the six. Quite rightly he is making the case that the six have much larger, more significant cases to answer for than Everton potentially have.

Our ability to deal in the summer transfer window is unlikely to be contingent on profit and sustainability compliance for a number of reasons. Firstly the Premier League would have to bring a case, adjudicate and propose a punishment. This would be subject to arbitration and appeal if necessary (regarding any potential penalty). Secondly the window runs from 9 June to 31 August 2021. Our financial year end is 30 June 2021. Transfer activity beyond 30 June would fall into the financial period 2021-22, not the period contained within the current profitability and sustainability period. Whilst Everton will have had to provide projections for the following year, clearly they do not fall within this period, nor is there an absolute obligation to comply with the projections.

So what are the profitability and sustainability rules?

Commonly but incorrectly referred to as FFP (Financial Fair Play) they are the rules contained in Section E of the Premier League Handbook, rules E.45 to E.53.

Essentially they limit the permitted losses of a football club to £105 million over a three year period. This is not the aggregate of the net losses shown in the accounts. Several costs are permitted to be deducted from the statutory accounts:

• Depreciation and/or impairment of tangible fixed assets & amortisation of goodwill (not players' registrations)
• Women's football
• Youth development
• Community development
• Covid costs for 2019-20 and 2020-21 — lost revenues and exceptional costs directly attributable to the pandemic

The rules are usually viewed over three years but because of the impact of Covid-19, the current regulations look at the aggregate of the average calculated figure for this season 2020-21 (projected) and last season 2019-20 plus the preceding two years 2018-19 and 2017-18.

Everton's position

Thus for Everton (included projected figures for 2020/21) before allowances the figures are:

	£'000
2017-18	-13,070
2018-19	-111,800
2019-20	-139,900
2020/21 (projected)	-175,800
Average for 2019-21	-157850
Projected Total	-282,720

I have projected losses of £175.8 million for this (2020-21) financial year (not including the potential for £61 million of costs relating to Bramley-Moore to be capitalised — more below). I have calculated increases in wages and amortisation reflecting last summer's purchases and a full year of Ancelotti's wages, almost zero match day revenue and flat commercial revenues. I have not assumed a further write down of player book values as per previous year.

Estimated Allowances (including average for 2019-20 and projected 2020-21):

*estimated	£'000
Depreciation	17,500
Women's Football	18,000
Youth development	18,000
Community development	6,000
Covid Costs	50,000
Total Estimated Allowances	109,500

I have calculated estimated costs for women's football, youth development and community development. I calculated an additional £33 million of costs directly attributable to Covid-19 to give an average of £50 million for the two years 2019-20 and 2020-21

So based on the projections and estimates above, Everton would have aggregate losses after allowances of £173.2 million. However there is the prospect of capitalising the costs of Bramley-Moore which in these calculations amount to £61 million reducing the loss figure to £112 million.

Given these figures are heavily dependent on estimates, there is sufficient margin for error to suggest that the profitability and sustainability position of the club could potentially squeeze inside the £105 million figure.

If it does not then the apparent leniency towards the six and the fears the Premier League come down hard on Everton are perhaps over-played. It would be “funny” as Ancelotti stated in the light of the treatment of the six.

If the Premier League were to signal their intent to pursue the club on a profitability and sustainability breach then there are further remedies open to the club before the end of the financial year. With the window opening on June 9th, Everton have three weeks to sell players at a profit (notwithstanding Ancelotti's remarks). In that instance, the sale of Moise Kean would be the obvious and most palatable disposal, despite his enormous potential.

Summer transfer activity

It is clear to all Evertonians that the first team squad is still in need of considerable recruitment and strengthening whilst Brands will be charged with removing as many of those no longer desired as possible.

The situation is helped by a number of players carrying considerable costs reaching the end of their contracts, Bolasie, Walcott, and Besic being the most expensive in terms of wages and amortisation. Despite being on loan we have carried Bolasie's and Walcott's amortisation costs and no doubt a considerable part of their wages too.

The players whose contracts expire in 2022 also require careful consideration with potential extensions for James, Sigurdsson and Coleman. Bernard, Delph, Kenny and Tosun (injured) must remain high on the list to be sold, but as we know, contracts signed some years previously are unlikely to be matched in current market conditions making the moving of the players extremely difficult.

Of the most sellable (and potentially profitable) players Moise Kean remains the obvious choice financially and perhaps by the wishes of the player. If he is sold, the timing of the sale (ie, before or after 30 June) will give a clear indication of our financial position vis-a-vis profitability and sustainability with the profits being booked this financial year in a sale prior to 30 June.

Moshiri has proved remarkably resilient, resourceful and committed in providing his managers with the funds to buy players regardless of the enormous imbalance between costs and income. Given the continued losses of the club and the continued negative cash flow it seems inevitable that if he is to provide Ancelotti with what he requires he will have to provide further funding. One of the unresolved issues is how that sits with future lenders for the new stadium at Bramley-Moore Dock. Without doubt they will be urging (just as Arsenal's lenders did 15 years ago) restraint. Restraint does not seem to be a Moshiri characteristic, so yet again it will be an interesting summer for Everton on and off the pitch.

In the meantime, the six should not escape punishment, and football fans around the world should contribute to the fan-led reviews wherever possible or contact their clubs and local politicians where appropriate. It is our opportunity to influence the future regulation and governance of football.

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