Everton’s lingering PSR dispute: What it’s about, what the implications are and what happens next

As it marks the end of a financial year for many of them, and therefore is the last chance to bring in money to help stay within football’s profit and sustainability rules (PSR), June 30 has increasingly become a key date for clubs.

Keen to avoid a third successive breach, Everton have been particularly busy in the market already this summer, with Lewis Dobbin joining Aston Villa and Tim Iroegbunam moving in the opposite direction. Ben Godfrey, meanwhile, has joined Atalanta, of Italy’s Serie A — a transfer that has further strengthened the club’s PSR position ahead of that deadline tomorrow (Sunday).

There remains, however, an elephant in the room:

Everton and the Premier League are still in dispute over the club’s 2022-23 accounts, with a hearing expected this summer.

The verdict of that could have ramifications for their books covering that season and subsequent ones — hardly an ideal situation as Everton look to put PSR issues behind them.

Here, The Athletic explains what it all means.

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Haven’t Everton already been charged over the 2022-23 season?

Yes. After admitting to a breach of £16.6million ($21m) upon submission of their 2022-23 PSR calculation, Everton were deducted two points by an independent commission in April.

That followed a 10-point penalty, which got reduced to six on appeal, earlier in the season for another breach of PSR in 2021-22.

Selling Dobbin has helped Everton’s PSR ledger (Tony McArdle/Everton FC/Getty Images)

So what is this dispute about?

This is all fairly dry accountancy stuff, but try to stick with me as it is important.

The dispute centres on a difference of opinion over the capitalisation of interest payments — which basically means not including it in profit and loss — and therefore, whether these costs can be taken out of Everton’s PSR calculations.

In their 2022-23 accounts, Everton capitalised £19million in interest payments. They also retrospectively capitalised £6.6m of interest payments in the 2020-21 and 2021-22 financial years. The club and their auditors, Crowe UK, believe this is in line with International Accounting Standards (IAS). Crowe is regulated by the Financial Reporting Council.

Section IAS 23 of those standards, as everybody knows, says “borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset”. In layman’s terms, they don’t need to be included in PSR calculations.

Section IAS 8, meanwhile, covers changes in accounting policy and is relevant to Everton’s correction of past costs and accounting, particularly relating to the capitalised costs in 2020-21 and 2021-22.

Everton had previously written off some of these costs against income, but have now capitalised them, they would no doubt argue, to ensure consistency in approach.

In their 2022-23 accounts, the club distinguised between interest costs relating to the new stadium they are building — and therefore ones to be removed from PSR — and other interest to be included in their profit and loss. These moves did not bring them below the £105million PSR threshold but reduced the scale of the breach in the club’s eyes.

The league, though, believes the amount of money the club has capitalised is too high and that the breach is greater than £16.6million.

In its submissions, it claimed Everton seemed to acknowledge this when the club initially filed their PSR calculation in December, as it showed the club was £23.2million over the limit. That “admitted” breach became £16.6m when the club answered the league’s formal PSR complaint two weeks later. Everton argue the difference of over £6m relates to interest payments directly attributable to the stadium project and is therefore deductible from their PSR submission.

Faced with an ongoing dispute between club and league, the panel who sat to hear Everton’s 2022-23 case decided to delay “the resolution”. The common consensus was that the issue would be resolved this summer.

“It ­therefore remains to be determined whether Everton has exceeded the upper loss threshold by any further amount regarding the interest capitalised in FY21 (financial year 2021), FY22 and FY23,” the commission wrote.

“We accept that this defers the resolution of part of this dispute. The commission is acutely aware that there are many stakeholders — to name some: the Premier League, Everton, Everton fans, all other Premier League clubs, the public — interested in the speedy determination of these disciplinary proceedings. ­

“Nevertheless, in fairness to the ­parties in these proceedings, the commission decided that the issues which remain cannot be dealt with following the timetable set out in the standard directions.”

Ben Godfrey could be another plus for Everton’s PSR (Paul Ellis/AFP/Getty Images)

So what happens next?

A new panel was expected to sit this summer to hear this final element of Everton’s 2022-23 PSR case, but there has been no sign of that happening, and certainly not before the June 30 (or as some people now call it: tomorrow) cut-off.

“Where a commission feels it needs further time to deal with complex matters of accounting and financial regulation, then it’s good the issue is receiving the necessary scrutiny,” explains Sam Cuthbert, a sports law barrister at London legal-services group 4 New Square Chambers.

“The commission weighed the delay against the views of stakeholders and decided the proper resolution of the issue was the better manner in which to proceed.”

That delay, though, is likely to be a source of frustration for Everton, who are in the unique position of knowing their PSR position may change after this weekend’s deadline but with no way of rectifying it through player trading.

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What implications could it have for Everton’s PSR position?

“There’s a huge ripple effect here,” says Kieran Maguire, a football finance expert and lecturer at the University of Liverpool. “If we have a retrospective decision that impacts on the 2022-23 accounts, then your PSR losses will be higher and there will be a further breach.

“Instinctively, it seems very harsh, because it looks like a strict application of an accounting issue. Everton have had to borrow money to fund the stadium. It’s fairly standard practice that those costs are capitalised. The rules themselves are very particular in the accounting world.

“Everton are on their third set of auditors in four years. The auditors will be well aware of FRS (Financial Reporting Standard) 102, which is the relevant accounting standard. They are entitled to qualify the accounts if they believe the directors haven’t presented them appropriately. The auditors have not done that.

“I don’t think the Premier League is applying the law of common sense here with Everton, and I can understand the club feeling quite aggrieved.

“The question is: why is the league doing this to one of its member clubs? The war in Ukraine changed everything for Everton (businessman Alisher Usmanov, who had sponsorship links with the club, had his assets frozen as part of sanctions related to the Russian invasion) and that’s why they had to go to third-party lenders. Why not say, ‘These are unusual circumstances and Everton have already suffered penalties’? There’s no evidence they’re trying to gain a sporting advantage here, so why give them a sporting sanction?”.

Disagreements of this kind are nothing new. The league successfully argued in Everton’s first case that some interest costs were not directly attributable to their new stadium, something the club disputed.

In their 2021-22 appeal, Everton’s lawyers produced a waiver from lender Rights & Media Funding that gave the club permission to use their loan for stadium costs. But this was rejected by the league and the commission, with the latter finding Everton had been “less than frank” over the funding source for the Bramley-Moore Dock project.

Once again, the club’s case is likely to rest on their ability to provide evidence the loans were used to meet new stadium construction costs.

“Everton’s legal team have got to show that the money was put into a general pot and used for the stadium; that because of the change of circumstances of the club, they originally borrowed the money in good faith and had to use it for other purposes such as the new stadium, and therefore the league should allow it to be capitalised,” Maguire says. “That would probably be the argument.

“I don’t think there has been a good relationship between Everton and the league over PSR. If we look at some of the lines from the first commission over ‘misrepresentation’, that’s quite a strong criticism. There’s not much trust between the two parties, so the Premier League is taking a hard line.

“The broad argument is that the money owner Farhad Moshiri put in is being treated separately to money from Everton’s lenders. Because it specifically said in the lending agreement it was for working capital, the Premier League said it couldn’t be capitalised.

“Everton’s argument is, ‘We borrowed some money and it went into a pot, from where we paid (stadium constructor) Laing O’Rourke’.”

How the new stadium looked in March this year (Tony McArdle/Everton FC/Getty Images)

What are the possible outcomes here, and could other clubs launch complaints?

Everton are likely to defend their position robustly, in the knowledge their accounts were signed off by regulated auditors Crowe. But further sanctions are possible if the follow-up hearing goes against them.

“Ultimately, the capitalised interest arguments go to PSR breaches, so it’s unlikely we’ll see sanctions different in nature to those which have been made to date in matters of PSR breach; any sanction is likely to be a points deduction,” Cuthbert says.

“It’s unlikely, given where Everton finished in the league (14 points clear of relegation), that any other club could bring an action against either them or the Premier League.

“We’re unlikely to see a sufficiently large points deduction such that a relegated club could argue the counterfactual that, were it not for the capitalised interest contributing to the PSR breach, they wouldn’t have been relegated. To that extent, I’d be surprised if it gave rise to any other claims.”

What are we hearing about Everton’s 2023-24 PSR position?

As we listed above, Everton have moved to strengthen their PSR position before June 30, with winger Dobbin sold for around £9milion and defender Godfrey having joined Atalanta on Friday for an initial fee of close to £11m. As an academy graduate, Dobbin’s sale represents pure book profit, while Godfrey’s book value was estimated to be £4million to £5m. Alex Iwobi, Demarai Gray and Tom Cannon were also sold for a combined £40m last summer.

These deals represent positive steps towards compliance, but the outstanding complaint for 2022-23 makes it harder for anyone — the club included — to be certain regarding Everton’s PSR status.

The sooner clarity comes there, the better.

Everton and the Premier League declined to comment when contacted by The Athletic.

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(Top photo: Paul Ellis/AFP via Getty Images)