Adopting FRS 102? Make sure you protect your results under the Financial Fair Play rules

As football clubs finally adopt the new UK accounting rules, assessing the impact on their Financial Fair Play (FFP) reporting will be a priority as the new UK GAAP could significantly affect not only your club’s formal financial statements, but also its ability to comply with the FFP regulations.

The big question is how this change will affect your club’s FFP reporting as they could lead to a substantial increase in reported losses and therefore potentially trigger FFP breaches, resulting in fines, transfer embargoes or other sanctions. Managing FRS 102 adoption and ongoing use carefully is therefore vital for your club’s future operating freedom.

The use of 31 May year-ends, chosen to align with the football season, mean that football clubs are now adopting the new form of UK GAAP. But the switch to new UK GAAP will be more challenging than for most other businesses once the potential impact on FRS 102 is taken into account. 

New UK GAAP is closely based on International Financial Reporting Standards, so brings a new reporting structure for primary financial statements and different language and terminology. The key new standard, FRS 102, changes the format and titles of the primary statements:
Profit & loss account Income statement
Statement of total recognised gains and losses Other comprehensive income
Balance sheet Statement of financial position
Reconciliation of movement in shareholders’ funds Statement of changes in equity

Club’s will still have to comply with Companies Act 2006 and some will continue to use profit and loss account and balance sheet as titles. So what real changes could your football club face?

Your club may be financed by a variety of complex loan arrangements from multiple sources, including loans from an underlying shareholder or a bank loan guaranteed by the club owner. Such loans at an interest rate below the market rate will need to be adjusted to fair value using a market rate of interest. Any difference will most likely be recognised as a capital contribution in equity.

Foreign currency transactions
Clubs’ foreign currency transactions when raising funds or buying players may be affected by FRS 102 adoption. For example, the fair value of a foreign currency forward contract will need to be recognised on the balance sheet and the monetary asset or liability that it is attached to will need to be converted at the spot rate.

Player contracts and impairment
The required review process will be more onerous under new UK GAAP and could lead to an increased amortisation charge in the first year following FRS 102 adoption, depending on your impairment policies currently adopted.

Stadium structures
Is your stadium retained by your trading company as a fixed asset or held in a separate entity and accounted for as an investment property? Adopting FRS 102 may trigger a review of your preferred approach; similarly, if your stadium is retained as a tangible fixed asset, any income streams additional to the main trade could impact the treatment of stadium valuations under FRS 102.

Revaluation potential
FRS 102 adoption creates the opportunity to revalue assets and achieve a one-off asset uplift. For example, your club could reassess your stadium’s deemed cost or is residual value in use.

Profit or loss volatility
It’s clear that, under FRS 102, more items are likely to be measured at fair value through the income statement. This will inevitably increase volatility in reported results.

For more information, please contact Mark Lamb.

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