2014/15 accounts released - £10.7m profit

[stony]

£850 million in interest payments

They could have built a brand new 100,000 seater, state of the art stadium for that. With a 100 checkout megastore. Instead they're still in that crumbling, vermin infested shithole just outside Manchester.

 

[bugsyblue]

Expert analysis of the accounts by the brilliant Swiss Ramble. Interesting read, as always.

http://swissramble.blogspot.ch/2015/10/manchester-city-modern-world.html

Fascinating read. All very positive except one thing stood out for me. £113m for contingent liabilities... @Prestwich_Blue can you shine a light on these? The article suggests they are bonus payments and the likes to, I'm presuming, other clubs should our players hit certain achievements.

By the way isn't this article a prime example of when it should have its own thread? It really does get lost in these collated ones.

 

[Prestwich_Blue]

Fascinating read. All very positive except one thing stood out for me. £113m for contingent liabilities... @Prestwich_Blue can you shine a light on these? The article suggests they are bonus payments and the likes to, I'm presuming, other clubs should our players hit certain achievements.

By the way isn't this article a prime example of when it should have its own thread? It really does get lost in these collated ones.

A contingent liability is something that isn't otherwise in the books but there's a foreseeable chance it may become payable under certain circumstances. Note 20 in the accounts says they're deferred transfer & signing on fees, bonuses that may become payable and loyalty bonuses.

So when we bought Sterling, we'd put him on the books at £44m but declare a contingent liability of £5m (although that's probably not in these accounts as it was after the year-end). Our contracts are now heavily weighted towards bonuses so I guess we've worked out every bonus that might be payable under every current contract. To give a simple example, if a player has just signed a 5 year contract that stipulates we'll pay them a bonus of £1m for winning the CL and the same for the PL, plus a loyalty bonus of £2m for each year they complete with us, that would entail a contingent liability of £20m based on a possible £5m each over the 5 years for winning the PL & CL and £10m for seeing out the full 5 years of the contract. If we won the PL that season, we'd add £3m to our expenses, £1m for the PL bonus and £2m for the first year loyalty bonus, assuming that's not contingent on anything else. We could also knock off the £1m for the CL (as we didn't win it) meaning that contingent liability was now down to £16m.

So it may look a bit worrying but every possible bonus on every player's contract for the remaining period of those contracts will be included. That doesn't mean we'll have to pay it all out though. The corresponding figure in the previous year was £101m by the way.

 

[bugsyblue]

A contingent liability is something that isn't otherwise in the books but there's a foreseeable chance it may become payable under certain circumstances. Note 20 in the accounts says they're deferred transfer & signing on fees, bonuses that may become payable and loyalty bonuses.

So when we bought Sterling, we'd put him on the books at £44m but declare a contingent liability of £5m (although that's probably not in these accounts as it was after the year-end). Our contracts are now heavily weighted towards bonuses so I guess we've worked out every bonus that might be payable under every current contract. To give a simple example, if a player has just signed a 5 year contract that stipulates we'll pay them a bonus of £1m for winning the CL and the same for the PL, plus a loyalty bonus of £2m for each year they complete with us, that would entail a contingent liability of £20m based on a possible £5m each over the 5 years for winning the PL & CL and £10m for seeing out the full 5 years of the contract. If we won the PL that season, we'd add £3m to our expenses, £1m for the PL bonus and £2m for the first year loyalty bonus, assuming that's not contingent on anything else. We could also knock off the £1m for the CL (as we didn't win it) meaning that contingent liability was now down to £16m.

So it may look a bit worrying but every possible bonus on every player's contract for the remaining period of those contracts will be included. That doesn't mean we'll have to pay it all out though. The corresponding figure in the previous year was £101m by the way.

Thanks mate, that's incredibly useful and clear. Does that mean then that if we were to pay these payments out, this year, we'd still make £11m profit? And therefore if were to not hit certain targets and thus not have to fork out some of these bonus, additional payments, we'd in fact make even more profit? Or is this figure not counted in this years accounts and is simply highlighted as possible future transactions?

 

[blueparrot]

A contingent liability is something that isn't otherwise in the books but there's a foreseeable chance it may become payable under certain circumstances. Note 20 in the accounts says they're deferred transfer & signing on fees, bonuses that may become payable and loyalty bonuses.

So when we bought Sterling, we'd put him on the books at £44m but declare a contingent liability of £5m (although that's probably not in these accounts as it was after the year-end). Our contracts are now heavily weighted towards bonuses so I guess we've worked out every bonus that might be payable under every current contract. To give a simple example, if a player has just signed a 5 year contract that stipulates we'll pay them a bonus of £1m for winning the CL and the same for the PL, plus a loyalty bonus of £2m for each year they complete with us, that would entail a contingent liability of £20m based on a possible £5m each over the 5 years for winning the PL & CL and £10m for seeing out the full 5 years of the contract. If we won the PL that season, we'd add £3m to our expenses, £1m for the PL bonus and £2m for the first year loyalty bonus, assuming that's not contingent on anything else. We could also knock off the £1m for the CL (as we didn't win it) meaning that contingent liability was now down to £16m.

So it may look a bit worrying but every possible bonus on every player's contract for the remaining period of those contracts will be included. That doesn't mean we'll have to pay it all out though. The corresponding figure in the previous year was £101m by the way.

So would it be right to say that if we won everything and the liabilities became due it doesn't take into account the increase in prize money and TV revenue which would cover most of, if not all the liabilities. So in effect they aren't really a liability at all. ?

 

[PrestwichPeteMcfc]

So would it be right to say that if we won everything and the liabilities became due it doesn't take into account the increase in prize money and TV revenue which would cover most of, if not all the liabilities. So in effect they aren't really a liability at all. ?

In reality there will be a corresponding 'contingent asset' which may cover the bonuses, but potential prize money doesn't meet requirements for disclosure so won't be included in the accounts.

 

[Prestwich_Blue]

Thanks mate, that's incredibly useful and clear. Does that mean then that if we were to pay these payments out, this year, we'd still make £11m profit? And therefore if were to not hit certain targets and thus not have to fork out some of these bonus, additional payments, we'd in fact make even more profit? Or is this figure not counted in this years accounts and is simply highlighted as possible future transactions?

Good question. I did wonder for a while whether, to use the example of Sterling, we'd put him in at £49m and put in a balancing liability of £5m. But someone in the know on these things told me that it would be £44m in the books together with a £5m contingent liability that isn't reflected anywhere else. Plus the contingent liabilities are listed in Note 20 and the accounts themselves usually refer to any notes relevant to that particular figure. However there is no figure in the accounts that refers to Note 20 so I think it's safe to assume that what I was told is correct.

To give another example, let's suppose at the start of the financial year we have 20 senior players, each with the bonus clauses for winning the PL & CL we detailed earlier, and 5 of those have 4 years left on their contracts, 10 have 3 years and 5 have 2 years left. At that point we'd have a maximum contingent liability for winning the PL of 5x4x£1m, 10x3x£1m and 5x2x£1m, totalling £60m. The same would apply to the CL, giving us a total contingent liability of £120m.

In that season, we win the PL, so pay out £20m, £1m to each of the 20 players. That comes off our profit but the £20m we were contracted to pay out for winning the CL just disappears. If nothing else changes and we've still got the 20 players at the end of the financial year with the same contracts and clauses, then our contingent liability would be £40m less at £80m, based on the £20m we paid and the other £20m that we didn't have to. You can check that by working out that 5 players have 3 years left, 10 have 2 years left and 5 have 1 year, meaning based on a maximum £2m bonus for each for each year left our liability is £80m.

The only circumstance that I can see where that wouldn't quite be right was for loyalty bonuses. In the example where we contract to pay £2m a year but only at the end of the contract, then if someone like Milner sees their full contract out, they'll get £10m at that time. But that £2m might well become irrevocably payable at the end of each financial year meaning that whatever happens, even if Milner leaves before the end of the window, he gets that £2m for each year. In that case, we'd still reduce the contingent liability, but might add the £2m to expenses & creditors payable. That means we've recognised the expense is definitely payable but haven't actually paid it out yet.

In summary then, contingent liabilities are just related to possible future transactions, with no impact on current or previous years' profits or losses.

 

[Prestwich_Blue]

In reality there will be a corresponding 'contingent asset' which may cover the bonuses, but potential prize money doesn't meet requirements for disclosure so won't be included in the accounts.

The guiding principle in preparing accounts is prudence, whereby you include everything you might foreseeably have to pay out but not anything you might potentially receive in future revenue. There have been a number of accounting scandals where companies have been too quick to include potential revenues.

Tesco did this, when they negotiated deals with their suppliers that involved the supplier rebating them based on certain targets being met. For instance, they might have a contract whereby if the supplier billed them £20m over a year, they'd give Tesco £2m back, £25m they'd give them £3m back and over £25m they'd give them 1.5%. If the target was £30m, they'd therefore get £4.5m from that supplier if that target was met. What they did was book that £4.5m up front as revenue, even after they knew that wasn't likely to be achieved. They should have booked nothing until it was clear how much was actually payable.

That shouldn't be a problem for football clubs as most have year-ends in May or June, when all prize money should be known and is either received or definitely payable. The only issue might be if you were playing in the Super Cup or something, knew you were guaranteed a minimum of £5m and booked that in the previous financial year, which ended before you played the game. That would be wrong of course.

Even in the scenario where you paid £5,000 upfront for your seat for the next 5 years, the club could only include the part of that payment in revenue that related to the relevant financial year, which would be £1,000. The rest would be deferred income.

 

[bugsyblue]

Good question. I did wonder for a while whether, to use the example of Sterling, we'd put him in at £49m and put in a balancing liability of £5m. But someone in the know on these things told me that it would be £44m in the books together with a £5m contingent liability that isn't reflected anywhere else. Plus the contingent liabilities are listed in Note 20 and the accounts themselves usually refer to any notes relevant to that particular figure. However there is no figure in the accounts that refers to Note 20 so I think it's safe to assume that what I was told is correct.

To give another example, let's suppose at the start of the financial year we have 20 senior players, each with the bonus clauses for winning the PL & CL we detailed earlier, and 5 of those have 4 years left on their contracts, 10 have 3 years and 5 have 2 years left. At that point we'd have a maximum contingent liability for winning the PL of 5x4x£1m, 10x3x£1m and 5x2x£1m, totalling £60m. The same would apply to the CL, giving us a total contingent liability of £120m.

In that season, we win the PL, so pay out £20m, £1m to each of the 20 players. That comes off our profit but the £20m we were contracted to pay out for winning the CL just disappears. If nothing else changes and we've still got the 20 players at the end of the financial year with the same contracts and clauses, then our contingent liability would be £40m less at £80m, based on the £20m we paid and the other £20m that we didn't have to. You can check that by working out that 5 players have 3 years left, 10 have 2 years left and 5 have 1 year, meaning based on a maximum £2m bonus for each for each year left our liability is £80m.

The only circumstance that I can see where that wouldn't quite be right was for loyalty bonuses. In the example where we contract to pay £2m a year but only at the end of the contract, then if someone like Milner sees their full contract out, they'll get £10m at that time. But that £2m might well become irrevocably payable at the end of each financial year meaning that whatever happens, even if Milner leaves before the end of the window, he gets that £2m for each year. In that case, we'd still reduce the contingent liability, but might add the £2m to expenses & creditors payable. That means we've recognised the expense is definitely payable but haven't actually paid it out yet.

In summary then, contingent liabilities are just related to possible future transactions, with no impact on current or previous years' profits or losses.

Awesome mate, thanks. Technically then, the more we structure contracts and purchases to include bonus payments to either player or club the easier it is for us in accounting towards FFP breakeven? Or does the total contingency liability still fall under our accounting process for FFP? Ie, using your Sterling example, if we put him in the books as £44m and a increase our liability by £5m does that mean for accounting purposes we've actually spent less this year on transfers than we have in reality (should of course we have to pay the bonus in future years)?

 

[Paul_Powers_Tash]

Forgive me if this point has already been made but I don't remember reading anywhere in the press that the Rags had made a loss of £4 mill last FY and that their gross debt had climbed from £342 to £411 million.