Wednesday, 21 April 2010

Accounting for football failure

We can see now the full extent of Portsmouth Football Club's indebtedness and, at £119M, it is quite staggering. Although Portsmouth fans are able to look forward to their team's appearance in the FA Cup final on 15 May there is no cause for optimism about the future of the club.

It seems as though the company's administrator, Andrew Andronikou, has successfully taken control of the catastrophic situation that he found on his appointment. He must also be somewhat relieved to think that the administration process, with the benefit of the cup final appearance, will not have squandered cash in the spectacular fashion exposed by the club's trading figures leading up to his appointment. He shouldn't get carried away, though. Portsmouth FC, in administration, has had the luxury of being able to play football without having to buy new players. The amortised cost of players' contracts, aside from wages, in the last five years before administration has been over £70M.

Almost everyone seems determined to secure the best possible outcome for the club and its creditors in the form of a Company Voluntary Arrangement (CVA). There is good reason for this. If the club cannot reach an agreement with its creditors, including the taxman who is owed at least £17M, then the only option for the administrator is to put the company into liquidation. If that were to happen then all the players' registrations would revert either to the Premier League or the Football League. This would be a disaster for the creditors as the players' contracts are valued by Mr Andronikou at £30M on a going-concern basis. Apart from selling players the club has almost no other way of returning funds to its creditors.

So what would happen in a CVA? Firstly Andrew Andronikou would be appointed as 'Joint Supervisor' with control over all the company's business. That sounds simple but it isn't. His report to creditors includes the trading figures for the last five years. These reveal spectacular and increasing losses totalling £58M. That is quite some trend that Mr Andronikou would have to buck. Yet, as an able accountant, Portsmouth's would-be supervisor might wonder whether the accounts do not tell the full story of the losses at Fratton Park. Football finances are extraordinarily obscure, with some owners running their clubs as an expensive hobby whilst others milk them as cash cows, but the basic bookkeeping equation still holds true, 'Liabilities = Losses + Assets' (Accounting and Bookkeeping College free taster course). The statement of affairs for Portsmouth FC can only find assets with a book value of less than £40M leaving a further loss, not accounted for, of £20M.

History doesn't provide any encouragement. Portsmouth FC is following in the footsteps of Leeds United, amongst others. The accounts at Elland Road didn't look as bad as they do at Fratton Park as Leeds tumbled out of the Premiership after a couple of seasons of over-spending. So Leeds with its enormous football reputation and hordes of fans was a more attractive prospect for a buyer but still only managed to secure a very shaky deal with Ken Bates before dropping further into League One. Perhaps, after considering the fate of Leeds United, Mr Andronikou ought to consider the story of Wimbledon which went from the top flight to oblivion?

It isn't part of the administrator's brief to secure footballing success for Portsmouth only to try and keep the club alive in some form and return the maximum amount of cash to the creditors. At first sight those two objectives seem to be neatly aligned but the accounts revealed in the administrator's report look very bad indeed. The CVA, approved by the Premier League and the Football League, is the sensible way out of administration but, once the players are sold, the way out of the CVA, in the absence of an indulgent new owner, may be abrupt and terminal.

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