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Currency hedging tips Premier League into loss

The Premier League is set to announce a record loss after new accounting rules and the declining value of sterling forced it to declare the cost of protecting itself from the currency risk attached to its lucrative TV contracts.

The organisation behind the top tier of English football will reveal a pre-tax loss of £312m when it releases annual results, according to documents seen by the Financial Times.

Next week, Companies House will publish the Premier League’s filing for the financial year ending on July 31 2016, which covers the 2015/16 season that culminated in Leicester City’s dramatic Premier League triumph.

For many years the TV contracts that have fuelled the league’s boom have been paid in sterling, dollars and euros with the company paying the league clubs in sterling and using derivatives to manage the exchange rate risk.

Last summer was the first time the Premier League was required to present its results under new UK accounting standards that changed the reporting for derivatives. Companies using hedges to insure against unexpected or adverse moves in the currencies market had to value their contracts annually at market prices, instead of making a final record once any deals had matured.

On the last day of the Premier League’s financial year, July 31, the pound stood at $1.32, a 12 per cent decline since the EU referendum.

That turned what would have been a gain of £638,000 under the old standards into a paper loss of £250m, the Premier League said. It insisted that the figure had no impact on its real income or operations, or on its ability to pay the clubs.

The Premier League has a number of hedging contracts lasting for periods up to three years and maturing at different times. Some of these remain open. If exchange rates remain stable then the Premier League may crystallise its losses when they run out.

The UK’s Financial Reporting Council has warned companies they face complications surrounding the reporting of results following the Brexit vote, such as the effect exchange rates may have on financial instruments. “The volatility in the markets following the referendum result may have an impact on balance sheet values,” it said.

The Premier League gains substantial income in US dollars and euros, mainly through the sale of international broadcasting rights. This season, clubs in the league will benefit from their split of an estimated £3bn from overseas rights deals.

Revenues continued to increase, reaching £2.04bn, up from £1.99bn. It will have more cash this year, thanks to its new £5.1bn domestic television rights deal with Sky and BT.

The English group’s earnings far outstrip rivals across Europe. Last June, Germany’s Bundesliga signed a four-year broadcasting deal with Sky and Eurosport for €4.6bn — a record for Germany’s top division.

The Premier league distributes the vast majority of its income to its 20 member clubs, as well as making other payments to support “the English football pyramid”, which includes lower leagues and grassroots football.

Football clubs have sought advice from lawyers and financial consultants about the potential impact of Brexit on their activities.

The sharp fall in the pound has already led to clubs facing higher bills to acquire foreign players. In the weeks after the vote, Daniel Geey, a sports lawyer at Sheridans, said: “If there is a euro amount to a player’s buyout clause, that amount has become more expensive and has potentially scuppered deals.”

Like the Premier League. the biggest clubs in the league hedge against currency, earning euros from playing in European competition and dollars from international sponsorship deals. But smaller clubs looking to acquire foreign players are most likely to be stretched by the drop in the pound.