Ten days ago, as the transfer window closed, Chelsea FC gave us all a snapshot of their finances from June 2010 to June 2011, showing a loss of around £68M. This, of course, sparked a lot of sniping from the media about Chelsea's supposed inability to meet UEFA's new Financial Fair Play rules and that in turn led to some hand-wringing from Blues fans. It's a bit of a shame that most football journalists are simply too lazy to dig into either the actual FFP document or the full statement issues from Chelsea, but hey. That's what we're here for, I suppose.

The excellent Manchester United/financial blog Andersred did a piece on this already, but there's some room to expand on it, so that's what I'm going to do. First, a recap of Financial Fair Play.

The overarching point of the UEFA Financial Fair Play regulations is to ensure that team expenses are more or less balanced out by team income over certain monitoring periods. We're currently in the first one (the 2011/12 and 2012/13 seasons*), and following periods will account for three years apiece, each named after the ending year. Despite their history as Roman Abramovich's toy, Chelsea supported this, presumably because it would prevent other teams doing exactly what they did and injecting crazy amounts of cash into a team to instantly become a European contender.

*Which means that the losses in 2010/11 don't have anything to do with FFP anyway, but it's good to take them into account to see how close we are to managing.

It's worth pointing out that UEFA have no say in what goes on in the domestic leagues - right now violation of FFP will simply result in (at worse) suspension from European tournaments, which isn't the worst thing in the world, and it's difficult to see the likes of Barcelona or Real Madrid made examples of anyway. But regardless of how toothless the regulations eventually prove, the Blues should be planning for the worst-case scenario: Make FFP or get booted out of the Champions League.

Let's look at the rules in a touch more detail.

The Club Financial Control Panel will at all times bear in mind the overall objectives of these regulations, in particular to defeat any attempt to circumvent these objectives.

In other words, any attempt to use a loophole to avoid the regulations will get you absolutely nowhere but 'in trouble'. We can't use creative bookkeeping to avoid paying, say, Fernando Torres's wages as a charitable donation to disabled children. We're going to have to play by the rules. Here are the really important parts:

1 - The acceptable deviation is the maximum aggregate break-even deficit possible for a club to be deemed in compliance with the break-even requirement as defined in Article 63. 2 - The acceptable deviation is EUR 5 million. However it can exceed this level up to the following amounts only if such excess is entirely covered by contributions from equity participants and/or related parties: a) EUR 45 million for the monitoring period assessed in the licence seasons 2013/14 and 2014/15; b) EUR 30 million for the monitoring period assessed in the licence seasons 2015/16, 2016/17 and 2017/18; c) a lower amount as decided in due course by the UEFA Executive Committee for the monitoring periods assessed in the following years.

To translate, clubs are allowed to be €5M in the red over a certain monitoring period - unless they have a benefactor to bail them out. For the next couple of seasons, the ones we're directly concerned about, a €45M (£38M) deficit is acceptable, as long as it comes from Roman Abramovich's pocket rather than in some other form. That figure will eventually shrink, but it'll be very slow in doing so - during the 2017/18 period the 'break even' point is actually -€30M (-£25M). That's obviously good news and everything, but Chelsea's losses for 2010/11 were reported at £67.7M, almost £30M below what the FFP regulations would regard as acceptable.

Fortunately, there's more to the story. FFP doesn't really care about actual losses. Rather, they're interested in losses excluding certain items, such as youth development. Let's dig in a little deeper and look at UEFA's definition of relevant income and relevant expenses:

1 - Relevant income is defined as revenue from gate receipts, broadcasting rights, sponsorship and advertising, commercial activities and other operating income, plus either profit on disposal of player registrations or income from disposal of player registrations, excess proceeds on disposal of tangible fixed assets and finance income. It does not include any non-monetary items or certain income from non-football operations. 2 - Relevant expenses is defined as cost of sales, employee benefits expenses and other operating expenses, plus either amortisation or costs of acquiring player registrations, finance costs and dividends. It does not include depreciation/impairment of tangible fixed assets, amortisation/impairment of intangible fixed assets (other than player registrations), expenditure on youth 34 development activities, expenditure on community development activities, any other non-monetary items, finance costs directly attributable to the construction of tangible fixed assets, tax expenses or certain expenses from non-football operations.

In other words, Chelsea's expenses, under FFP, exclude several items that are reported on the balance sheets year to year. We'll look at the specific figures in a little while, but you should already be realising that the FFP loss is closer to breakeven than what Chelsea are reporting. There's also a significant clause in there about the construction of tangible fixed assets - building a new stadium (or upgrading Stamford Bridge, if you think that that's possible) is a write-off, as far as FFP is concerned, and that means that it's a 'free' way of increasing matchday income.

But there's actually more good news for Chelsea buried even deeper in the FFP regulations - if a club cannot meet acceptable deviation during 2013/14 or 2014/15, there's another rather helpful clause:

For the purpose of the first two monitoring periods, i.e. monitoring periods assessed in the seasons 2013/14 and 2014/15, the following additional transitional factor is to be considered by the Club Financial Control Panel: Players under contract before 1 June 2010 If a licensee reports an aggregate break-even deficit that exceeds the acceptable deviation and it fulfils both conditions described below then this would be taken into account in a favourable way. i) It reports a positive trend in the annual break-even results (proving it has implemented a concrete strategy for future compliance); and ii) It proves that the aggregate break-even deficit is only due to the annual break-even deficit of the reporting period ending in 2012 which in turn is due to contracts with players undertaken prior to 1 June 2010 (for the avoidance of doubt, all renegotiations on contracts undertaken after such date would not be taken into account).

In other words, the wages of players signed to contracts before June 2010 do not count for Financial Fair Play (and will not count, ever, because said contracts will have expired by the 2015/16 season anyway). Many of Chelsea's star players were signed to contract extensions prior to this deadline, so there is an incredibly obvious out clause here.

Anyway, now that we're all caught up with the FFP regulations and how they might apply to Chelsea, let's look at the books. The following information comes directly from the Chelsea FC PLC Directors Report, available here and covering the period June 2010-June 2011.

Overall income for the period was £240.7M, which can be broken down as follows:

Football-related operations excluding player sales: £201.3M

Player sales: £18.4M

Merchandise sales: £11.9M

Other: £9.1M

Chelsea, apparently, do not release a split of their football operations, but Andersred has estimated that the media and matchday revenues are roughly £100.9M and £64.8M respectively (which, as an aside, means that the non-matchgoing fans are as a group contributing 56% more to Chelsea's coffers than the matchday ones). The player sales include Ricardo Carvalho to Real Madrid, Miroslav Stoch to Fenerbache, Franco di Santo to Blackburn* and Michael Mancienne to Hamburg. They do not include Yuri Zhirkov to Anzhi Makhachkala or the other Hamburg deals, which along with Nicolas Anelka to Shanghai and Alex to Paris Saint-Germain will be accounted for in the 2011-2012 season. The £240.7 figure appears to all fall under 'relevant income', but if you're feeling conservative go ahead and knock off the 'other' to make it £231.6M. Let's take a look at the reported losses now.

*I thought he was sold to Wigan, but hey, I'm just going with what Chelsea are telling me here.

Chelsea apparently spent around £308.5M in the 2010-2011 year, which is an absurd amount of money. Here's the breakdown:

Wages: £135.5M

Other: £82.9M

Amortised transfer fees: £39.7M

Replacing manager: £28.0M*

Tangible asset depreciation: £8.6M

'Impairment in player registration': £7.4M*

Image right settlement with HRMC: £6.4M*

*regarded as 'exceptional' - i.e. non-recurring by Chelsea FC

We don't much care about the non-recurring costs, since they shouldn't pop up again in the 2012/13 monitoring period, so we can instantly discard them from our analysis. 'Amortised transfer fees' is something that I hope you're familiar with if you've been hanging around the site - the way clubs deal with transfer fees is to smear them over the life of the subsequent contract (so Fernando Torres' amortisation cost per year would be £9.1M per year until his contract runs out in 2016). This is the way you ought to be thinking about transfer fees, so don't just buy into the up-front costs.

Since we're doing an FFP analysis and 2010/11 doesn't really fall into our remit, it's worth looking at trends as well as the actual results. Here's the general gist of things - transfer fees are going up (significantly) and wages are going down (significantly). The two should balance each other out in the 2011/12 season. Remember, if we spend £90M this summer on players with 5-year deals, that's 'only' an extra £18M a season that Chelsea would add to their accounts.

As for the rest... well, you've seen the exceptions allowed to us by FFP. We don't have breakdowns for youth and community development, but an assumption of £10M isn't going to be very wide of the mark, and we're specifically allowed to ignore deprecation. That's almost £19M off the losses already. That's good (it takes us down to an overall loss of about £49M), but it's not good enough. Fortunately, we haven't used the ace in the hole - wages.

Remember that Chelsea can ignore the wages of a player if that player was signed to their current contract before June 2010. That's true of most of the highest earners on the team. Look at this list: Petr Cech. Ashley Cole, Michael Essien, Frank Lampard, Didier Drogba, John Obi Mikel, Florent Malouda, Salomon Kalou, John Terry. That's not even exhaustive, but it totals more than £45M per season regardless. Revise that number up (by a fairly significant figure, too) if you're willing to be a little less conservative - I only used the wages that I could confirm.

Add that all together, and by FFP Chelsea actually suffered the relatively mild loss of £3.3M per FFP rules. Furthermore, the £41.8 'exceptional' expenses should not return for the first monitoring period, meaning that the Blues look in very good shape for the 2011/12 season at least. We are not there yet, however, and there are a few things to bear in mind for when next year's results come out.

They will include the sales of Gokhan Toure, Slobodan Rajkovic, Alex, Nicolas Anelka and Yuri Zhirkov, plus whoever else is sent off this summer. That will be a significant boost beyond the £18.4M profit made on player sales in the 2010/11 season.



Wages will have continued to decrease with several high-profile departures, but that will not have any real impact on FFP, because the big losses will have come from the pre-2010 crowd. Therefore, wages will have increased , as far as we're concerned.

, as far as we're concerned. The amortisation value will see a significant increase after the purchases made this summer, winter, and the upcoming summer transfer window.They'll also see a full year of Fernando Torres and David Luiz - in the current report they're only in the system for five months apiece.



All in all, I'd expect Chelsea's expenses to be much lower next season (thanks to the lack of exceptionals) and income to be higher. There's no reason to think that the club won't be able to break even, as far as FFP is concerned, in the 2011/12 season. Things are looking pretty bright, even if we break the bank in the summer.