Everything about Derby seems to be crazy at the moment
theathletic.com/2582397/2021/05/13/explained-amortisation-delays-and-disapproval-the-efls-appeal-win-over-derbyIt was the last round of games before an international break and nobody needed one of those more than Derby County and Wayne Rooney.
“We’re not on a great run of form but now we have the chance to go away and get a break mentally,” the Derby manager told reporters after his side’s 1-0 defeat at Stoke City on Saturday, March 20.
“It’s a chance to look back on the last few weeks and reassess how we move forward. The players before the game didn’t believe we were in a relegation battle but now we clearly are.”
It was Derby’s seventh game without a win and it left them in 19th place, five points above the relegation zone. They did not manage a shot on target.
It was not, however, the most important contest Derby were involved in that weekend, nor their worst defeat, because it coincided with the start of the English Football League’s appeal against a decision to clear the club of two charges related to financial fair play rules.
In keeping with most of the football this season, the appeal took place on laptop screens, with the three members of the panel and the lawyers representing the two sides conducting the two-day hearing remotely.
The result was revealed on Tuesday, three days after Derby secured a dramatic 3-3 draw with Sheffield Wednesday to beat the drop by a single point — and even then they needed a late Cardiff equaliser to thwart Rotherham to stay up. But if that was the break Rooney had been waiting for, it did not last long.
The Athletic has already explained how the club’s latest takeover bid is unravelling and the implications of Derby’s defeat in another case against the EFL that was to do with the sacking of former club captain Richard Keogh. But the stunning news that the EFL had won its appeal over the second of those FFP charges trumps all of that in the unpleasant surprise stakes.
The result is less straightforward than coming home from Stoke empty-handed and Derby were quick to suggest the verdict was a narrow defeat of limited consequence.
In language even denser than the 59-page ruling, a club statement said the panel had granted a “limited aspect” of the appeal, adding that the panel had accepted one of the EFL’s grounds for appeal but rejected the other two. In fact, the panel rejected three of the EFL’s grounds for appeal but this misses the point: they only needed one.
As the EFL more accurately put it: “An independent league arbitration panel has allowed the EFL’s appeal against the outcome of an independent disciplinary commission in respect of misconduct charges brought against Derby County.”
Here, is an explanation of how that happened, what happens next and what this might mean for Derby. But first, some background…
What was the case about? In January 2020, the EFL issued two charges against the Championship club. The first related to the valuation Derby used for Pride Park after owner Mel Morris bought the stadium for £81 million and transferred it to a new company in 2018. This charge was emphatically rejected by the three-man disciplinary commission when it heard the case last summer and the EFL did not appeal this ruling.
The second charge related to the method the club used to account for transfer fees in the 2015-16, 2016-17 and 2017-18 seasons. In an accounting practice known as amortisation, clubs stretch the cost of signing players over the length of their contracts.
Every other club in the land, including Derby before 2016, does this on a “straight-line basis”, which means if you pay £3 million for a player and give them a three-year contract, the annual amortisation charge is £1 million. Consequently, the player’s value to the club is £2 million after year one, £1 million after year two and zero at the end of the deal, which stands to reason as players can leave for free when contracts expire.
However, Derby’s chief executive Stephen Pearce, an accountant himself, and the club’s former auditor Andrew Delve came up with a different approach which they felt better reflected the fact players are intangible assets to be used and then sold, ideally for profit.
Instead of amortising in even steps towards zero, they applied residual values to their players, what they called an “expected recoverable value”, which meant the player in the example above might go from £3 million to £2.5 million in the first two years, cutting the annual amortisation charge from £1 million to £250,000, and then from £2.5 million to zero in the final year.
A bigger charge in year three, then, but a degree of control over outgoings that no other club has: a problem for a regulator trying to apply FFP rules in a fair and consistent manner.
The disciplinary commission, however, decided this was the league’s tough luck. If it wanted clubs to amortise in a straight-line basis, it should say so in the rulebook. Furthermore, there is nothing illegal about Derby’s approach and the full cost of the transfer fee does get accounted for in the end.
But it did agree with one of the particulars of the EFL’s charge. It ruled that Derby should have been more forthcoming about the method it was using, which the league did not fully understand until nine days before last summer’s hearing. For this offence, though, there was only a mild reprimand.
The EFL was furious. It felt the disciplinary commission had ignored the evidence of its independent expert and misunderstood the impact of Derby’s approach. Hence the decision last September to appeal the defeat on the amortisation charge.
Last September! Why did the appeal take so long?Three reasons.
First, Middlesbrough, who have had a bee in their bonnet about Derby ever since the East Midlands side pipped them to the play-offs in 2019, tried to join the EFL’s appeal. That was rejected.
Second, the EFL applied for the case to be heard “de novo”, with the appeal panel hearing all the evidence again itself. This, too, was rejected in December.
And finally, the EFL asked if it could submit new evidence but this request was also denied in January, which meant five months had passed since the league had submitted its appeal without any real progress.
But that delay would have doubled if the three members of the panel — former Supreme Court judge Lord Dyson and two leading barristers, Charles Hollander QC and David Phillips QC — had not agreed to hold the hearing over a weekend. The three of them were not free again until July.
There was also a further delay after the panel delivered its verdict when Derby lodged a series of arguments about its ability to reverse the original decision and impose sanctions. But we are getting ahead of ourselves.
How did the EFL win the appeal?
As mentioned, there were four grounds to the EFL’s appeal.
In layman’s terms, the league believed the disciplinary commission was wrong because it misinterpreted the effect of Derby’s clever accounting, it failed to spot that Derby were marking their own homework with the “expected recoverable values” they were assigning to players, or that the club had provided no evidence of how it worked these values out, and had been wrong to discount the evidence provided by the EFL’s independent expert witness, Professor Peter Pope.
Of these four, the first is by far the most important and it is the one addressed in greatest depth in the ruling. It is also, for what it is worth, the only one of the four grounds that the panel upheld. But that does not mean quite what Derby have implied with their statement, as we shall get to.
On the face of it, the argument about the “future economic benefits” ground is an incredibly dry and technical debate on whether Derby’s method complies with something called FRS 102, the standard used for company accounts in the UK and Ireland. But it can be boiled down into more simple terms and Professor Pope’s evidence, as the only independent witness called by either side on the amortisation charge, is crucial here.
He explained that, from an accountancy point of view, the only economic benefit a club can rely on when it obtains a player’s registration is the benefit it gets from being able to use that player. That is why the only logical way to amortise the player’s value is on a straight-line basis. To do anything else assumes there is an “active market” and you can sell the player wherever and whenever you like.
This, of course, cannot be true when players have to agree to moves, with further hindrances to a truly “active market” such as transfer windows, squad limits and cost controls.
Derby did not call an independent expert witness in the first hearing but Delve and Pearce explained they believed you could expect another “future economic benefit” from a player’s registration, namely a potential transfer fee. The disciplinary commission thought this sounded like common sense. The appeal panel tut-tutted that this was “perilous”.
The bottom line, for the appeal panel, was that Delve and Pearce were “factual witnesses”, not independent experts, and Professor Pope’s explanation of FRS 102 should have been the only basis for any assessment of whether Derby’s method was legitimate or not.
Once you get past all the legal back and forth and accountancy language, the argument is very simple: Derby’s method was too clever by half.
As the verdict puts it, “the effect of the accounting treatment adopted by the club was dramatic”.
The panel did not let the EFL enter any further evidence but its ruling notes that the club’s draft accounts for the 2018-19 season, which still have not been published, reveal Derby were set to make “player-related impairments”, or write-offs, of between £11.7 million and £19 million for expected recoverable values that failed to materialise.
In a paragraph that clubs across the division will be sure to notice, the panel writes: “(The) EFL showed us statistics comparing the effect of the club’s amortisation treatment with that of other Championship clubs. The effect has been that by the treatment adopted, the club significantly reduced its costs in the years in question compared to other clubs, which had the effect that, because of FFP restrictions, they were potentially able to increase their spend on player purchases compared to what would have occurred had they adopted the straight-line treatment.”
Kieran Maguire, who teaches accountancy at the University of Liverpool and is the man behind the Price of Football book and podcast, estimates that Derby “saved” £30 million in amortisation costs in the three seasons in question.
Later on, the panel’s disapproval becomes even clearer.
“No other club has ever adopted the treatment utilised by the club for amortisation or anything similar,” it writes.
“Whilst that does not of itself indicate that the treatment adopted by the club was wrong, it is a very striking feature of this case that the club were seeking to do something no one else seems ever to have considered permissible.”
As the panel’s powers were limited to assessing only if the disciplinary commission had applied the law correctly — not whether it had assessed the facts properly — the three other grounds for appeal were quickly dismissed, as the Derby statement claimed.
That does not mean, however, the panel came to its very unusual decision to essentially overturn the disciplinary commission’s verdict reluctantly, or that the EFL won on some kind of technicality. Just the opposite, in fact.
Having explained there was no “error in law” in regards to what it called the “reliability”, “systematic” and “approach to expert evidence” grounds, the panel’s ruling then throws several paragraphs of what can only be described as shade at the original decision.
“We would not wish it to be taken that we would have necessarily reached the same conclusions as the DC on these matters,” it harrumphs. “On the contrary, it seems to us that the EFL had strong grounds for contending the treatment adopted by the club was neither systematic nor reliable.”
It notes that the club was unable to provide “a single document” to indicate how it determined each player’s expected recoverable value. All Pearce could offer to explain how they did it was to say it was “the club’s own view of such matters”, which they reached after consulting with agents and looking at websites like Transfermarkt.
“If this issue had arisen before us de novo, we might well have had sympathy with the contention that the club’s methodology was so subjective it was neither reliable nor
systematic.”
Ouch, what happens next, then?
As alluded to earlier, this question was the subject of what the panel described as “significant dispute” about the panel’s powers.
In short, Derby tried to argue the panel could not uphold the appeal because doing so would have deprived the club of its right to have an FFP-related case heard by a panel that included an accountant. It also would have denied the club the chance of a procedure-related appeal against the admissibility of Professor Pope’s evidence.
And the club also claimed a new disciplinary commission should be appointed to hear the whole amortisation argument again, in light of the appeal body’s FRS 102 ruling.
The league responded with arguments to the effect of, “Are you kidding me?” It pointed out that its rulebook gives the appeal body wide powers and to suggest we start again now is an outrageous attempt to stall.
The panel agreed with the league.
However, and this is where things get complicated again, the panel decided it does have the power to set aside some or all of a disciplinary commission’s decision and it can also impose sanctions. In fact, it probably should. But it does not want to.
Instead, it decided it would be “more sensible” if the decision on sanctions went back to the disciplinary commission, to avoid the possibility of having the appeal panel punish Derby for using a non-compliant approach to amortisation, and the disciplinary commission come up with a more fitting penalty for the club’s failure to properly explain what it was doing to the EFL for three years.
Now, this return to the original panel can only be done if both Derby and the EFL agree to it. The latter was reluctant to do so but felt it had little choice when such eminent lawyers made it clear this is what they wanted.
So, the matter returns to a disciplinary commission that initially handed Derby their biggest win of the season but has now been scolded for doing so.
The EFL, emboldened by a verdict it can hardly have imagined was possible after the trouncing its arguments received last summer, believes an example must be made of Derby. FFP rules depend on all clubs supplying consistent and correct numbers. It feels Derby willfully ignored this requirement and gained an advantage over their rivals for three straight years.
What would be a fair punishment for that? Three points a season?
Derby, naturally, disagree and maintain that what they did was legal and there was no intention to cheat. Any wrongdoing, therefore, was minor and of a technical nature.
What would be fair punishment for that? A fine?
But then there is the question of timing. It is a basic principle that justice delayed is justice denied. Sheffield Wednesday, who went down this season, were punished for FFP transgressions they committed over a similar timespan to Derby. Wigan were relegated from the Championship last season for entering administration that nobody but their former owners from China can explain.
And, perhaps most relevantly, Macclesfield Town were relegated when the EFL successfully appealed against a decision to impose a points deduction this season instead of last season, when the offence occurred. That appeal came after the season had been curtailed and Macclesfield thought they were safe.
If Derby are to be punished this season — and it would only require a one-point deduction to send them down instead of Wycombe Wanderers, who are watching proceedings very closely — the disciplinary commission will need to get on with it, as Derby would certainly appeal and next season’s fixtures will be announced in about six weeks’ time.
This is why the sensible money is still on Derby’s reckoning coming at the start of next season, in the Championship.
And if that is how this plays out, it will finally be the break Rooney asked for after that dismal defeat at Stoke.