University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Analysis of Financial Condition of the Czech Professional Football Clubs David Procházka Department of Financial Accounting and Auditing Faculty of Finance and Accounting University of Economics, Prague W. Churchill Sq. 4 Prague, 130 67 Czech Republic Web: https://webhosting.vse.cz/prochazd Email: <prochazd@vse.cz>
Introduction Introduction On 27 May 2010, the UEFA approved a new regulation on the licensing of football clubs The regulation contains important requirements on financial criteria to ensure Financial Fair Play and the economic sustainability of European club football The implementation of regulation should be favourable not only to football structures, but for all other stakeholders (fans, sponsors, creditors, state authorities) as well The paper focuses on the Czech professional football clubs (relatively different economic environment than UEFA worked with when approving the Regulation) Two chief hypotheses: - is the financial reporting of Czech professional football clubs transparent? - what is the overall financial situation of Czech professional football clubs? Slide 2/14
Literature overview 1 Literature overview Sport contributes to the GDP of the European Union by 3.7 % (Dimitrov, 2006) Despite its obvious positive influences, esp. professional sport is often connected with adverse or even illegal behaviour (FATF, 2009) Pioneer work in sport economics by Rottenberg (1956); followed by Neale (1964), who described the professional sport as a joint production (a single club cannot satisfy the entirely market demand) Sloane (1971) challenges the view, as clubs always have to be economically independent; however, he broadens the scope of professional clubs objectives (not only profit) The scope of modern research is very wide and includes such topics as league structures, team objectives, salaries, financing, broadcasting rights, performance with emphasis on American professional leagues and European football Despite its importance, overall financial health is an issue relatively understated by the research; the evidence is available only for Top5 leagues and few others Slide 3/14
Research design 2 Research design 2.1 Sample selection Regulation relevant for all clubs, but only the Czech selected: - Regulation is hugely influenced by the situation in top leagues (inequality among leagues as far as financial strength, ways of financing, etc.) - change in the CL format in favour of small countries provides incentives for buying success (and also for deceiving and corruption) - some professional Czech clubs went bankrupted in recent years (the question is whether it is a unique or systematic failure) 2.2 Contribution Linkage between economics of sport and the transparency of financial reporting (governance) Assessment of the level of informativeness and fulfilment of information duty by an entire industry Complex analysis of financial health of football clubs (firstly for the clubs outside top leagues) Slide 4/14
Research design 2.3 Methodology and data description Sample consists of 36 football clubs in period 2005/2006 until 2009/2010 All clubs have to be share companies => have to fulfil requirements of Czech accounting legislation and other disclosures required by Company law Only publicly available information used (financial statements + other reports in Business Register) All data gathered manually, because: - databases do not contain all financial statements publicly available - differences in accounting politics - some sort of information needed for the analysis is not collected by databases at all Slide 5/14
Results 3 Results 3.1 Transparency of financial information Theoretically, 180 sets (36 clubs times 5 seasons) should be at disposal, but only 97 sets were submitted (8 clubs promoting later, 2 changes in accounting period and 73 missing) Only 9 clubs have statements in all 5 years, 18 partly and 9 clubs did not submit any statements Tab. 1: The rate and delay of submission of financial statements to the Business Register 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Maximum number of financial statements 29 34 35 36 36 Number of non-submissions 9 12 12 15 25 Number of submitted financial statements 20 22 23 21 11 Submitted financial statements in % 69% 65% 66% 58% 31% Average length of submission (in days) 447 453 296 245 181 Number of late submissions soft criterion 5 9 7 4 0 Number of late submissions hard criterion 15 17 14 10 5 Average rate of submission is about 60 %, in line with the findings of Tomis (2007) Soft criterion based on Act on Accounting (submission not later than in 12 months) Slide 6/14
Results Hard criterion based on Commercial Code (submission not later than in 6 months) 3.2 Financial health: descriptive statistics 103 sets of annual financial statements in total (using information on comparative periods) Datasets divided into two subgroups according to the sort of accounting period to get comparable figures (54 cases of calendar year and 49 cases of fiscal year) For each case, the information on total assets; current assets; total equity; subscribed capital; total liabilities; current liabilities; revenue; earnings before interest and taxation; and interest expenses extracted (see descriptive statistics in paper) Annual average EBIT of is CZK 4,952 thousands and median CZK 1,930 thousands Basic analysis or fundamental data reveals that a long-term stability of Czech clubs is violated 3.3 Financial health: analytical tests of performance and capital adequacy 61 % of cases with negative EBIT similar to findings of UEFA (2011) Reference to Commercial Code and Act on insolvency to get objective measures of the problem Slide 7/14
Results Tab. 2: Analytical tests on profitability and capital adequacy Season Test Calendar Fiscal Total cases % Negative EBIT 8 7 15 65% 2006 Equity Test No. 1 8 6 14 61% Equity Test No. 2 6 3 9 39% Negative EBIT 8 7 15 63% 2007 Equity Test No. 1 9 6 15 63% Equity Test No. 2 6 4 10 42% Negative EBIT 6 6 12 50% 2008 Equity Test No. 1 8 3 11 46% Equity Test No. 2 4 3 7 29% Negative EBIT 7 8 15 71% 2009 Equity Test No. 1 6 4 10 48% Equity Test No. 2 4 4 8 38% Negative EBIT 1 5 6 55% 2010 Equity Test No. 1 2 2 4 36% Equity Test No. 2 0 2 2 18% Negative EBIT total count 30 33 63 61% Equity test No. 1 total count 33 21 54 52% Equity test No. 2 total count 20 16 36 35% Slide 8/14
Results More than 50 % of clubs have to solve drops in capital adequacy each year The problem is ignored and or not solved at all (notes to financial statements, auditor s opinion) 35% of Czech professional football clubs are operating permanently in a default position, which may turn into bankruptcy The situation may be even worse (a lot of missing financial statements, including two bankrupted clubs) 3.4 Financial health: complex model Index IN05 (Neumaier & Neumaierová, 2005), a version of Z-Score (Altman 1968) calibrated for the Czech business environment, is applied Index IN05 is a combined predictive model integrating information on both the default probability and the creation of value IN05 0.13 TA 0.04 EBIT 3.97 EBIT 0.21 REV 0.09 CA TL I TA TA CL TA: total assets, TL: total liab., I: interest exp., REV: revenue, CA: current assets, CL: current liab. Slide 9/14
Results Tab. 3: Index IN05 predictive model of financial health Period Index IN05 Calendar Fiscal Total cases % IN05>1.6 6 1 7 30% 2006 0.9< IN05<1.6 0 2 2 9% IN05<0.9 8 6 14 61% IN05>1.6 3 3 6 25% 2007 0.9< IN05<1.6 1 1 2 8% IN05<0.9 9 7 16 67% IN05>1.6 5 2 7 29% 2008 0.9< IN05<1.6 2 5 7 29% IN05<0.9 6 4 10 42% IN05>1.6 1 1 2 10% 2009 0.9< IN05<1.6 4 2 6 29% IN05<0.9 5 8 13 62% IN05>1.6 3 1 4 36% 2010 0.9< IN05<1.6 0 0 0 0% IN05<0.9 1 6 7 64% IN05>1.6 total count 18 8 26 25% 0.9< IN05<1.6 total count 7 10 17 17% IN05<0.9 total count 29 31 60 58% Slide 10/14
Results Almost 60% of observations fall into the bankruptcy zone (moreover IN05 was negative in 37 cases, with an extreme value of 15.72) 17% cases belongs to grey zone Only one quarter of the clubs flourish, and the risks of insolvency or bankruptcy are negligible Slide 11/14
Conclusions Conclusions The main results of empirical descriptive analysis: - the rate of submission of financial statements to the Business Register is rather low (about 60%), despite the fact that delivery of financial statements to the Register is mandatory - majority of those clubs, which do submit their financials, do it with a considerable delay - majority of clubs report regularly losses; annual loss before interests and taxation mounting up to almost CZK 5 million (which is about 5% of total assets) - equity is often negative and football clubs are unable to meet their liabilities on time - one third of clubs appears virtually in a permanent default Slide 12/14
Conclusions Future research: - is there any correlation between transparency of financial reporting of individual clubs and their economic performance? - who are the users of financial statements of football clubs (are any at all)? - how is it possible that a relatively high number of Czech football clubs survives even though they conduct their business with long-term losses? - are any specifics in terms of corporate governments? - issue of the quality of the auditor s reports in the sphere of football huge disproportion between economic performance of clubs and opinions of auditors regarding the going concern assumption (auditors expressed some concerns only in two cases) - comparison with other minor leagues Slide 13/14
Conclusions Tab. 4: The Best Football Goal Scorers All-Time in Official Matches Rank Scorer Country Goals 1. Bican, Josef Czechoslovakia 805+ 2. Romário Brazil 772 3. Pelé Brazil 767 4. Puskás, Ferenc Hungary 746+ 5. Müller, Gerd Germany 735 6. Deák, Ferenc Hungary 576+ 7. Seeler, Uwe Germany 575 8. Willimowski, Ernst Poland, Germany 554+ 9. Eusébio Portugal 552 10. McGrory, James Scotland 550 Source: The Rec.Sport.Soccer Statistics Foundation (2009); + indicates number as a lower bound - player may have scored more goals Slide 14/14