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

Do you considers stocks that appreciate but pays no dividend a bad ROI? It is also a status symbol to own a team. You don't look at a Maserati as a bad buy if it depreciates as you buy it and drive it right? Except NBA is a status symbol that appreciates. Plus you get get to hold a city hostage to basically have a tax payer funded arena (think of that value) built for you every 10 years or so. How much money do owners get for naming rights again?

Parity of the league is more to do with revenue sharing than bad contracts. The max contract is seven years. Plus unlike the NFL, rookies get paid peanuts relative to their value, which means yes, you can still do well when signing a bad contract.

 

Lol. I got my MBA in Management and I will say this. Accounting is very subjective, as we see here. Finance is objective, and as a financial manager presented with this income statement, I would say the team was unprofitable. Even if you do away with the $25,000,000 expense, they are still $2M in the hole.

All companies depreciate their "assets" and get tax breaks on that depreciation. I.e. Paying Tim Duncan $21M this year because he performed that well up front but isn't capable any more. They should be allowed to quantify that in terms of dollars. If I buy a $60K van for my painting company (hypothetical, I can't really paint) and agree to pay 14k per year for 5 years, I'm still paying 14k years 4 and 5 but the van has some miles on it and is not worth 60k anymore. I get to depreciate it's value and take a tax break on that. Now when I sell it, that is counted as income/residual value.

If you use an activity based cost system, which I'm certain people a lot smarter than all of us decided to do, they are factoring in indirect/variable costs like player transportation between facilities, family meals and perks, tips for hotel staff, after practice meals, etc. These things will show up in the accountants income statement, but not the one page we see here. They are all legit expenses because someone (owners) had to pay for them. They are lumped into "operating expenses".

 

yeah I didn't really get that either (and I'm in finance, derivatives actually, heh)

 

I'll say it again: human capital is not a depreciable asset for financial reporting. Beyond this tax shelter, RDA (which is only for tax reporting), mentioned in the article, it cannot be done. If you do it, you are WRONG.

The whole point of depreciation is to comply with one of the core accounting principles: the matching principle. The matching principle says that our efforts (expenses) should match our rewards (revenues) for the current reporting period. That's why assets like PP&E are depreciated over the years that they're in service. We want to take portions of the cost and expense them in each subsequent period in which the machine is used to generate revenue. It's the foundation of accounting that gives accruals, payables, prepaid expenses ect...

Just because the contract is multi-year, it doesn't suddenly lend itself to saying you get to take extra expenses if you feel the person didn't play up to that contract. These contracts outline each year's compensation. At the end of the year, what you paid is ... what you paid. It's a payroll expense and nothing more. An NBA player on contract isn't much different than a normal salaried employee. For us, if we don't live up to our salaried wages, we get a pay cut or fired. There's no special expense our employer gets to claim. The only difference between an average joe on a salary and an NBA player on contract is that it's harder to fire the player on contract specifically because of the contract.

Contracts exist because they're necessary for players to hedge risk. If they were to be paid like a normal salaried person, an injury that sidelines them for most or all of the season who have tremendous financial impact on them. It works both ways. Owners get young players on the cheap, and in cases like Derrick Rose, they pay pennies on the dollar compared to what the player is really worth to the organization. Beyond that, an NBA player on contract is not different than a salaried employee. The only difference is the terms of their employment (contract vs. salary).

 

The Nets are being moved to Brooklyn, Anaheim was courting the Kings, OKC stole the Sonics and Seattle still wants another team. I think it's fair to say that there will always be more rich guys or cities interested in teams than there are teams available. The Nets still could have sold for a profit even if they weren't moving to Jersey. I believe even the Bobcats sold for a profit when Jordan bought them.

The better question is what team sold for a loss?

 

I'm saying half of them aren't losing $$ every year. Losing $$ in a recession when everyone is losing $$ (mostly) doesn't mean the system is broken. Losing $$ because you have a garbage product on the court that no one wants to pay to see doesn't mean the system is broken. Let's not equate "half of our teams lost $$ in last years recession" to "half of our teams continuously lose $$ and owning a team is a bad investment under the current system". Most investments don't make $$ every single year.

The billionaire wasn't the only person trying to buy the Nets. If any owner offered to sell their team now they would have multiple suitors. The only reason the Hornets haven't sold yet is because the league has them tied to New Orleans.

And revenue sharing would fix this, right?

First of all, the NBA hasn't had parity in 35 years. You don't win without a top player, no matter where your team is. The Lakers keep winning because they always have a top player. Every other big market team sucked until they got a top player. The Bulls drafted theirs. The Mavs drafted theirs and constantly spent $$ on surrounding talent to convince him to stay. The Knicks hadn't had one in forever and they suck. The Celtics sucked until they made trades for stars. Same for the Pistons. The Spurs and Thunder have clearly proven that a small team can be successful at keeping their star if you build around him properly. Even LeBron gave the Cavs one extension before he left. As far as parity and teams having success, things are just as they have always been. Find a way to get a star or you're ****ed.

And why should teams be allowed to undo their mistakes? Isn't that the purpose of having good management and making right decisions? Ariza agreed to come here as a free agent. Now that we shipped him off to NO should he be able to rip up his contract and hit free agency again because he made a mistake? When Baron Davis decided to sign with the lowly Clippers because Brand was supposed to be there and he wasn't, should he be able to say I made a mistake so let me hit the market again? Owners need to be accountable for what they do, and that's a big part of the players position and it makes perfect sense. The system isn't broken because your dumb owner decides to give Lewis a max deal when everyone knows he isn't worth it. The system isn't broken because the Knicks decide to give Amare a max deal even though insurance won't cover his contract. The only thing broken is managements ability to make proper basketball decisions. And again, this could be fixed with revenue sharing!!!!

 

Yeah, I was gonna say (in a joking manner) that maybe he was a Finance student and hadn't gotten to the "imaginary" parts like derevatives yet. Finance is clearly more "creative" than accounting. That's one of the main reasons one is considered boring and the other one isn't.

 

GAAP is typically written to address loopholes created by finance people to manipulate income. For instance, FIN 46 was written to address the Enron mess. Enron was circumventing the consolidation rules and setting up special purpose entites to hide debt and inflate income/reduce expenses.

Andrew Fastow was a finance executive, not an accountant.

 

As someone who has worked in accounting for years (with no formal education in it)... it seems to me:

what matters to the players is the net profit (which doesn't include all aspects of the business)

what matters to the owners is the bottom line (which includes tax breaks like the depreciation of players)

so whatever spin each side wants to put on it they can... which is why they feel like they are right in each instance

Personally, it sounds like to me that the owners screwed up in giving too much to the players before and taking it away again is going to be impossible.

It's going to be a loooooooong lockout.

 

It's the contract they are depreciating... not the player as a person (at least that's my understanding.

 

This doesn't make any sense. Whether or not players can be depreciated should be irrelevant here - you should still only be counting them once. Depreciation doesn't let a business double-deduct $1 they paid - all it does is change WHEN the deduction occurs. If you spend $10,000 and you get to count it against next year's income, then you don't get to count it against this year's also. You can't create extra losses or gains by using depreciation.

I'm not exactly sure what's going on here, but I don't think the article is accurate at all.

 

you are right. People are not depreciable. That's why it's not listed as "depreciation expense, player" on the income statement. But it's a little bit of perfectly legal slight of hand to compensate for the Eddie curry types. Anyone would agree that paying a player of this type is not "economical".

 

This^ the contract has a monetary value to it, as it is the right to a players services. As the player declines or underperforms (I.e.Eddie Curry) that contract loses value. Therefore, it is depreciated. Most nba contracts lose value as they go along, until the final year.

 

Well real estate tax law allows you to double deduct each $ spent up to a point. If you have a rental property you can deduct interest expense (used to secure and pay off the property) and you get another depreciation expense on that piece of property. That double deduction puts a lot of real estate investors in the red even though they are making $$.

 

But the practice is shady because some players are clearly more valuable then their contract amount (Rose or even LeBron) but these contracts aren't appreciated on the books.

 

First off, if a contract (that has value) were to lose value, you don't "depreciate it." You recognize it as an impairment loss which is a separate line item and not included in operating expenses.

NBA contracts do not have a monetary value to them for accounting purposes. Go look at the balance sheet for the Nets in the Deadspin and let me know when you find "NBA Player" on it. They're not there because they're not assets. If it has value and the entity holds ownership of it, it reports it on the balance sheet. You can't have an impairment loss for something that has no value.

Contracts only have value if they are for some specified tangible benefits. For example: futures contracts. I'll sell you 1,000 barrels of oil 90 days from now for $90 dollars a barrel. The contract has a present value and it changes based on what the selling price is for a barrel of oil each day until the contract can be exercised.

NBA contracts are mutual agreements wherein the franchise offers a certain level of compensation in exchange for the player's services. If a player doesn't play at the level you expected relative to the compensation you offered, then you simply overpaid. You don't get to suddenly write off a portion of the contract and claim it's lost value. That's not how contract labor works in accounting.

 

No, you're not double dipping. Your total cost to purchase the rental (your total expense) is the principle amount + interest from the loan assuming you've financed it. Your basis in the property is only the principle portion which can be depreciated, and the interest portion is simply an interest expense item on your income statement. You're not double dipping at all.

You purchase a $500,000 house, and the total interest you'll pay over the life of the loan is say... $50,000. For depreciation, you use the $500,000. Your interest expense is whatever portion of your total annual payments that are allocated to the interest portion of the loan.

 

No, you are essentially double dipping. You typically get a deduction for something you paid $$ for. In the case of deductions for real estate property, you are only coming off of $$ once yet you get two deductions for it. In all other cases of depreciation deductions for property, the deduction amount is still tied into the $$ you shelled out for the asset. Now this changes if you don't finance the real estate, but if you do you are essentially getting 2 deductions for shelling out $$ one time (double deduction for 1 transaction).

 

It's not double dipping... the cost of financing a purchase is a separate expense. If you chose to buy computer equipment and finance it, you'd have two expenses for that as well: depreciation for the computer equipment, and interest (which is the cost of financing).

In the example I gave above, your total cost of purchasing the house is $550,000. You paid $500,000 for the property itself, and another $50,000 in order to finance it. At no point do you get any deductions that lets you exceed your total expense of $550,000... thus you are not double dipping on any portion of the expense.

 

It is a seperate expense but you are still essentially getting two deductions from the same transaction. Most deductions that you get are directly related to what you spent to acquire something, the value of what you donated, etc. I gave $100, I get a deduction of $100. You purchased an asset once. You get two deductions related to that asset if you finance it. These two deductions allow you to create a loss, in the case of real estate, even though you have a net positive from purchasing that asset.

The real estate example was just one example because it's typically the one most taken advantage of to create a tax loss when a loss doesn't actually exist.