Manchester City face a much tougher fight than they expected if they are to avoid a ban from European football from 2013 onwards because of a £250m burden that must remain on their books for the next five years.
Uefa has told The Independent that this nine-figure sum, accrued from recent transfers, cannot be written off as a loss on next year's accounts alone, but must be spread over the length of the relevant players' contracts. As a result, the club must rethink its strategy as it hopes to meet the terms of Uefa's Financial Fair Play (FFP) regulations, which demand that, from 2013, clubs must lose no more than £13m per year or risk being shut out of all European competitions.
Uefa's calculations are made as an average over a rolling three-year period and, though this would allow some flexibility, City's recent spree means they will be starting each year until 2015 some £50m in the red, before they spend another penny. The club acknowledges privately that "a huge challenge" lies ahead to meet Uefa's break-even targets.
Uefa's head of club licensing, Andrea Traverso, the man in charge of monitoring, has told The Independent that any "wipeout" of historic spending would "be seen as a way to circumvent the rules, and that is not allowed".
The news comes as City's Manchester rivals, United, publish accounts today that are expected to comply comfortably with FFP, not least because they make enormous operating profits. A British record figure of more than £100m for 2009-10 is expected when United post their latest results, even though the overall losses are expected to be tens of millions as a result of interest payments, plus exceptional currency exchange losses and refinancing fees.
The FFP rules dictate that clubs must effectively break even from 2011-12 onwards, when monitoring begins. Two seasons of finances will be considered for entry into the Champions League or Europa League in the 2013-14 season. Initial losses averaging £19.6m per year will be allowed, but from 2012-13, losses will be capped at £13m per year (averaged over three-years), and from 2013-14, be capped at £8.7m per year.
The size of City's task is illustrated by the fact they made a loss of £121.3m in 2009-10, and expect losses of £130m-plus in 2010-11. The trend is hugely problematic and the transfer "backlog" is a damaging part.
Because City will not be allowed to clear that in one go, the £250m will have to be amortised (spread out) over five years. In simple terms, City will start every season between now and 2014-15 with a red hole in the accounts averaging £50m per season – for players they already own – before a ball is kicked. If they sign anyone else from now on, the deficit will only get bigger.
Amortisation of transfer spending is a necessary requirement under FFP regulations relating to British clubs. It makes no difference if City have actually already physically handed over all the money to the selling clubs for the players they have brought in. For accounting purposes, the fees need to be amortised over the length of the players' contract.
The £250m is an estimate calculated by The Independent from data within City's 2009-10 financial accounts, released last week, and has been corroborated by sources with insight into City's financial situation. City's net spending on players including Wayne Bridge, Gareth Barry, Carlos Tevez and Yaya Touré since June 2008 has been £332.6m and the gross spending far higher.
City hope to meet the FFP requirements by achieving giant leaps in income, especially from Middle East firms; by playing Champions League football for the next two years (a sizeable earner); and by producing their own young stars for the first team and for sale in the near future. But there are no guarantees of success – and other challenges. The biggest of those is a wage bill that grew to £133.3m in 2009-10, which alone was greater than City's entire income of £125m. That wage bill is expected to rise to around £160m in 2010-11; again that bill is expected to be close to the club's total income.
In 2009-10, the club's operating losses – income minus operating expenses, of which wages are the biggest single part – were £55.1m, and will rise.
City argue, with some justification, that owner Sheikh Mansour's investment of hundreds of millions is rebuilding not just a club but a community, with spending on everything from facilities to improved pies, a better website and an academy aimed at nurturing home-grown players. (No other club can better City's figure of fielding seven full England internationals in league games alone this season, albeit not all raised in Manchester).
And if City exceed Uefa's FFP limits solely because of spending before the rules were published, punishment may be reduced if not avoided. But even City insiders acknowledge they have actively chosen to keep on spending in 2010 – on players and wages – on the "if you don't spend, you don't grow" principle.
But as one Uefa source said: "While many clubs have been moving actively towards compliance, it is clear others are still deciding to go the other way... The rules are clear, and when they apply, they will apply."
Other European giants at risk...
The reigning European champions are also the continental kings of spending, with losses of £132m to June 2009, £126m to June 2008 and £178m the year before, or £436m in three years, underwritten by the Moratti family. Gargantuan transfer fees and wages need slashing.
Red Bull Salzburg
Bought by the Red Bull drinks firm in 2006, which has subsidised multi-million pound seasonal losses ever since. Titles have been consistent since (three in five years), under coaches and with players previously out of financial reach. But Uefa will take a keen interest.
The Bundesliga deserves its reputation for being well-run financially but Schalke's debt climbed to £121m in their last financial year after losses of £14m. The parent company debt is bigger still at £212m, although that is partly due to stadium funding.
Zenit St Petersburg
Owned and bankrolled by Russia's largest company, the gas firm Gazprom, which has spent hundreds of millions of dollars on facilities, players and wages since 2005.The Uefa Cup win of 2008 was one result. The spending of £38m during the summer was typical, and unsustainable.