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Whose Income Is It Anyway?

Today the Welsh Rugby Union (WRU) magnanimously offered to help the four regions in Wales out, with a temporary loan to tide them over whilst they wait for the delayed payments from European Rugby Cup Limited (ERC). An amount was due at the end of January of £800,000 but was withheld due to uncertainty over the future of that entity. Whether that is a reasonable course of action is open to significant question, but that is not the purpose of this piece.

The purpose of this piece is to examine how it is that the WRU treat the income that is received by the Welsh game from the competitions that the regions play in, as their own income. And whether common wisdom on the reasonableness of this policy is affected by today’s offer, and the clear message underlying that offer that if ERC don’t pay, then the credit risk falls on the Regions, not the WRU.

In background, until the holding back of money by ERC, it was assumed that competition monies was received by the WRU and the distributed by them to the four regions. However, it now appears that these monies are received directly by the regions from ERC. Given this, people say, how on earth is it this the income of the WRU?

In deciding whether this money is the income of the WRU, one has to look at the rules governing the way that accounts are put together in the UK. These rules taken together are known as Generally Accepted Accounting Principles (GAAP). The key rule in this instance is contained with Financial Report Standard 5.

The issue is whether the WRU is acting as principal (it is their transaction, and therefore, their money), or whether they are acting as agent on behalf of the 4 regions (when it wouldn’t be their money).

If we look at the relevant rules we are told that if the WRU were to be regarded as acting as principal they either need to have the risks and reward relating to selling price of the service or holding the stock. Well there is no stock, and the WRU have no control over the price as they are paid what ERC agree on. With, of course, RRW having the right to appoint a director to ERC. So they probably fail on that front.

There are then three more tests. Firstly, if the WRU modify the service or perform part of the service. Well they don’t. Next do the WRU have discretion in the choice of supplier? Well this may be less clear cut, but there is long contract for the 4 regions. Six years left to run at the last WRU accounts! Finally, there is the question of who bears the credit risk. Well, if the WRU are offering a loan, it is plainly obvious they suffer no credit risk, as they are not affected at all by the non-payment by ERC. The only people in Wales affected, are the regions.

Therefore it would appear, that the WRU are NOT acting as principal here, and should NOT be accounting for this money from ERC as their income.

The standard then goes on to talk about circumstances where the ‘seller’ (WRU here) are acting as agent, and the money isn’t theirs to account for as income. The non-assumption of credit risk, as the WRU are saying today happens in this case, is given as a key indicator that they are acting as agent, not principal.

So what? Well the WRU turnover in their last accounts was stated as £61m. Of that, approximately £5m is the income in question from ERC. There is a total of £9.1m which is ‘competition income’, but that includes reveunes from other competitions where the principal/agent relationship may be different (though one would think they would be similar if not identical). Excluding ERC income would reduce the WRU’s turnover by £5m to £56m. Profit would remain the same at £5.6m, as that money is paid out to the regions. So, why are the WRU so keen to count the ERC money as their income?

Might it relate to on the covenants (conditions) in the Barclays loan?  A key indicator of financial performance is “EBITDA”. The WRU labels this figure clearly in their profit and loss account. It includes the ERC income, but doesn’t include the payment of the same sum to the Regions. This comes after this figure as an ‘allocation to affiliated organisations’. So maybe, there is a covenant that relates to this EBITDA figure? Without ERC income this drops from £29m to £24m. If all competition income was taken out, this drops to £20m. Would this cause a problem with Barclays?

On the face of it, today’s offer to the regions from the WRU looks generous. That is what it is designed to do. In doing so though the WRU have clarified where the credit risk lies on ERC income, and have therefore, at the very least, questioned, whether they are correct in counting ERC income as their own. Bluntly, in my opinion, they have clarified that it is not their income at all. I do accept that there may be information not in the public domain that may alter my opinion, but given the credit risk issue, it would need to be very convincing information.

All should be clear soon, I am writing to the Financial Reporting Review Panel to ask them to investigate the WRU accounts on this very matter.