[Dead Spin] How (And Why) An NBA Team Makes A $7M Profit Look Like a $28M Loss

lol that is such an ironic statement from the man named "therealist"

 

I'm an accounting major. Finance is more bull**** imo. We accountants keep them in check.

 

Accounting tricks can make profit turn into net losses, but accounting tricks can't create the money needed to pay all the contracts these teams are making.

Also you guys need to put everything into perspective. In this financial statement, if the franchise was on the up and up he'd make 7M profit. However he's invested around 300M into the NBA, and all he gets out of it is 7M? That's 2% return on investment, it like he put all his money on a savings account in a bank.

Not only that, keep in mind that more than half of that revenue came from the playoffs (4M), and this financial statement was way back in 2004, before the recession hit.

 

There's a lot of incorrect or misleading information being thrown about in this thread. So I registered (after a year of simply lurking) to try to clear this up a bit.

First thing is first: accounting basis. There are multiple basis of accounting, all of which can have wildly differing results on the financial statements because of the way they handle transactions. You have cash, modified cash, full accrual, and modified accrual. GAAP is full accrual. Any publicly traded company, such as the ones on the NYSE, anyone required to file a Form 10-K with the SEC must use full accrual for their financial statements that are publicly published/released/given to creditors/shareholders ect. Under GAAP, you cannot depreciate human capital. It simply doesn't exist. You have tangible assets such as PP&E (property, plant, and equipment), and intangible assets such as patents, copyrights, trade marks, licensing, and loan convenants. Tangible assets are depreciated, and intangible assets are amortized.

You then have your tax basis, which is really just your accounting method adjusted for whatever differences that occur due to tax law. A very common difference is when you have temporary and permanent differences in depreciation and amortization.

Lets say you buy an asset and, under GAAP, you choose to report it as having a 5 year useful life and depreciate it Straight Line (equally, so 20% of the original cost is deducted from the book value to compute depreciation). Under tax law, MACRS allows you to use 200% declining balance, so in the first year you can claim 40% of the original cost as depreciation. For example:

5,000 machine purchased on January 1. Under Straight Line, each financial year I would record depreciation expense of 1,000. Under MACRS, I would claim depreciation of $2,000. I've essentially reduced taxable income by $1,000 despite changing nothing on my financials. One set lets me report it one one, and the IRS lets me report it another way. ​

That's really all that's going on here. There's no magic accounting trickery here. People are just letting themselves get duped because they don't understand basic financial reporting when it comes to financial vs. tax reporting. People are letting the NBA owners hand them financials on a tax basis instead of full accrual.

 

That's only 2% considering what he is making on a yr to yr basis. The value of the asset has increased tremendously for most of these franchises. Jordan and the Russian guy were the last 2 to buy teams, or maybe the OKC guy. I believe each of their teams are worth more than what they paid for them, even in a bad economy.

 

Value of assets are tied directly to profitability. Why would something that's losing money every year (or in this case give you only 2% of what you invest) be worth a lot? Not only that since most owners don't want to pay money out of their own pocket they get more debt to refinance the franchise, which in turn lowers the value of the franchise. Also if you consider the inflation rate then the NBA owners really are losing a lot of money every year if their profit margins can't beat it.

Its just simple logic really, if NO was secretly profitable why will the Shinns have to turn over control to the NBA? Does Dan Gilbert hate the NBA players so much he's willing to fake having lost half of his franchise' value via accounting tricks?

At the end of the day not every NBA franchise is in trouble. But IMHO why are there in the red teams in the first place? As an owner, if you invest 300+M into a franchise and then see your employees making more money than you do then there's something wrong with the system.

 

I'm surprised nobody has said that this accounting trick is unlawful. They're escaping taxes.

 

They are depreciating the Franchise cost in reality, not the depreciation of the players. It is actually just like Real Estate. You get to depreciate an appreciating asset.

 

another great argument for scrapping the tax code entirely

 

the owners are looking out for #1(themselves) and the players are looking out for #1(themselves)….

who can hold out the longest wins…

everyone in life wants as much of the pie as they can get, i don't blame the players for taking crazy contracts like they get, the owners started dishing them out and now all the suddent they wanna rewrite the CBA to correct the monster they created and they want the players to deal with it and take it in the as$… millionaires fighting with billionaires.. pretty stupid..

 

sure, the owners are responsible for the stupid contracts, just the same as they are stupid for allowing those contracts in the previous CBA. this is the system trying to correct itself. what other form of recourse do the owners have in regaining control of their own league?? is it only ok for the players to take as much as they can with each CBA and every concession the owners make in the past becomes permanent??

this is how negotiations work. the players do what they have to do, the owners do what they have to do, and they wait it out... the side with the most money wins. hint: owners.

 

Touche!

 

Why can't we blame the GMs and team presidents and front office people??!! They're the ones giving these out of control contracts to players who aren't deserving of them. The owners' just sign off on them. Maybe we should take a hard and long look at THEM for a change. (Of course, THAT goes back to the owners, but whatever.)

 

For once, I agree with you wholeheartedly!!!

 

roslolian

Something losing $$ every year can still be worth a lot if it's a limited commodity that tons of folks want to buy. There are still suitors out there that want NBA teams (cities as well) and there are only 30 of them. Additionally, most teams aren't losing money every year. I broke down the worst 10 teams (value wise) and at least half of them weren't losing $$ every year. If anything, their losses seemed to be tied to them putting a crap product on the floor and being in a small market.

Lastly, to answer your question look at the New Jersey Nets. They had around 7 years of losses and the Russian still bought them for over $300M. And he wasn't the only person interested in buying the team. Could it possibly be that these teams aren't bad investments, even losing $$ in some years?

And the point that keeps getting overlooked is that some of these losses could be fixed with revenue sharing!!

 

Yes, we all should copy the Greek and Italian "tax systems" and "government handlings". The world would be so much better place. This has to be the funniest thing here in a while.

 

Oh really?

Greece debt = $494 billion

USA debt = $14.5 trillion

And that $14.5 trillion, is NOT counting interest.

 

This is true, but the Nets are being moved to Brooklyn. That potential increased their value. We also know that historically, sports team values have increased dramatically. Will it be that way forever? IDK, seems like it would hit a maturity level, and growth would flaten out.

I wish people that know nothing about accounting, would STFU, and tax the tax discussion to the D&D. It doesn't belong here.

 

So you're saying less than half of them were unprofitable? That's not a problem to you? You invest 300+M in something and there's 40% chance you'll lose money? I told the same thing aisishduh in the other thread, even if they didn't do accounting tricks the Nets only made 2% ROI. If the owner had invested that 300+M in T-bills instead not only would he make 3-5% year, there would also be no chance of losses at all.

The russian billionaire is another incarnation of Mark Cuban, he doesn't mind losing millions of dollars, cuz hey he has millions of millions more.

But not every owner is that rich, if the owner of your favorite team happens to only be an "ordinary" multi-millionaire then you're in trouble. Teams like the Pacers, Sacramento and yes, even Boston are finding it harder and harder to keep afloat. If want the Dallas Mavericks, LA LAkers, Brooklyn Nets and New York Knicks to be the only relevant franchises in the NBA while the rest are just fodder to get swept away then by all means, lets keep the current system. If you want more parity in the L though, then changes must be made because this system is broken, and a large part of that is because teams can't undo the mistakes they made when they signed the wrong guy for the wrong amount of dollars.

 

That writer discovered an error in his initial analysis and changed the title of his article to:

Exclusive: How An NBA Team Makes Money Disappear [UPDATE WITH CORRECTION]

Turns out the Nets did lose money in those years and didn't turn a profit. Ju