NBA Financial Troubles?–What the Numbers REALL say

Long-term professional sports don’t look to fare well as it looks like the economy is entering a long-term and protracted decline. Nevertheless, it appears that NBA owners are using accounting tricks to turn profits into losses—all to squeeze player salaries. NBA owners may claim that they are overpaying for poor performing players–but nobody put guns to their heads to overpay for the likes of Corey Maggette, Gilbert Arenas, Rashard Lewis, and Elton Brand (to name a few)…

Zach Lowe of the NBA Point Forward blog has the details at CNN/SI.
On Tuesday, Nate Silver of The New York Times wrote a crucial piece claiming that publicly available estimates, via Forbes and other sources, show the NBA has been moderately profitable over the last few years — and the profits that big-market teams typically earn are more than enough to compensate for the losses of their small-market brethren. Such a finding would bolster the union’s long-held claim that the NBA has exaggerated its losses, and that increased revenue sharing would be enough to stabilize the league.

In the big picture, this is not news. This argument has gone on for years, and it’s a testament to the complexity of accounting that no one can actually agree whether the NBA has lost or made money overall during the last half-decade or so. It is important to note that even the most optimistic analyses, like Silver’s (based on the Forbes estimates) concede that about half of the NBA’s 30 teams have lost money over the last couple of years, and that the league is not nearly as profitable as Major League Baseball or the NFL. Heck, the Celtics barely made a profit in 2009-10, when they made the Finals, according to Forbes.

But Silver’s piece and the NBA’s response to it Tuesday night have focused the debate on one broad issue: Are the league and its teams creating paper losses by using (perfectly legal) accounting tricks that allow them to factor in costs, depreciation and other expenses associated with the purchase of teams into their annual balance sheets? Silver and others claim that they are, and that those “losses” mask the reality that the value of an NBA franchise continues to rise each year.

Here’s a key excerpt from Silver’s piece:

There are several reasons to be skeptical of the N.B.A.’s figures. First, many of the purported losses – perhaps about $250 million – result from an unusual accounting treatment related to depreciation and amortization when a team is sold. While the accounting treatment is legal, these paper losses would have no impact on a team’s cash flow.

And here are two excerpts from this must-read piece by Larry Coon, a contributor to and author of the most comprehensive guide to the league’s salary cap:

[Union executive director Billy] Hunter was referring to the accounting practice of amortizing certain assets related to the purchase of the teams themselves. These show up in the balance sheet, but there is little or no economic substance to the amortization. It does not represent actual money that is going out the door.

And this, on the Nets:

But these [financial] statements also illustrate the accounting practices to which Hunter and the players’ association take issue. Brooklyn Basketball (the Nets’ parent company) paid $361 million for the team. In order for the balance sheet to balance, it had to show assets in that amount. Some of these are real, physical assets, accounts receivable, and the like. Other parts are “intangible” assets, which represent the amount the buyer paid above the value of the tangible assets. These assets (but not the franchise itself) are amortized over their “useful lives,” with a portion of their value (a total of $200 million for the Nets) counted as an operating expense each year. For the Nets, this expense added up to $41.5 million in 2005 and $40.2 million in 2006.

In other words, $41.5 million of the Nets’ $49 million operating loss in 2005, and $40.2 million of its $57.4 million in 2006, is there simply to make the books balance. It is part of the purchase price of the team, being expensed each year.

These would seem to be clear analyses that arrive at one conclusion: Ownership groups that have purchased teams in recent years record expenses, both tangible and intangible, related to those purchases in a way that dirties their balance sheets with losses on an annual basis going forward.

And here’s the most important excerpt from the statement the league released last night disputing Silver’s piece (with bolded text from me):

We use the conventional and generally accepted accounting (GAAP) approach and include in our financial reporting the depreciation of the capital expenditures made in the normal course of business by the teams as they are a substantial and necessary cost of doing business.

We do not include purchase price amortization from when a team is sold or under any circumstances in any of our reported losses. Put simply, none of the league losses are related to team purchase or sale accounting.

The league would appear to be saying here that Coon and Silver are just flat wrong when they say any expenses related to the purchase of a franchise are used in the way those two say they are. In financial accounting, there is always room for some middle ground between two apparently contradictory statements — some trick of semantics that makes both sides technically “correct” in what appears to be a black-and-white dispute. I’ve reached out to a few experts this morning to see what that middle ground might be, but a league source has already told me there is no such middle ground — that Coon and Silver are wrong, and that costs related to the purchase of a franchise are not factored into losses the league claims teams are suffering.

Either one side has to be right here, or there has to be some accounting gray area that allows both to stick to their guns on this very esoteric — but crucial — issue of the lockout. Let’s hope we get some increased clarity as the lockout rolls on.

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