UPDATE July 2, 11:10 am: We need to make you aware of some flaws in the accounting used by Deadspin (and repeated here) in their original post that was the basis of this one. However, I don not believe it changes the overall theme that completely legal and widely accepted general accounting principles allow an NBA team to inflate losses or even hide small profits, with the losses all being paper.
To the corrections. First, the loss on player contracts cited in this article of $25.1 million almost certainly was a buyout of Dikembe Mutombo. A legitimate loss to write off. That said, the RDA that allows owners to write off players depreciation is in place, legally allowed and used.
Also, the NBA does not include the amortization of losses on buildings in its figures. Finally, it should be noted the Nets owners at the time were forced to take out loans that year to cover the losses.
The examples used here turned out not to be ideal ones. But as anyone who has dealt with accounting like this before will tell you, there is a lot of way to move money around on paper — the Nets claimed losses of more than $100 million over a couple years, ESPN’s accountants looked at it and found closer to $24 million in actual losses. Still, those are actual losses, you understand the owners concerns about the financial system the game has been using. The point that one should be cautious with the claims of ownership about the size of the losses they incur remains valid, however. But we strive here to be accurate.
June 30, 2:36 pm: It simpler to explain cold fusion than to explain the finances of an NBA team.
But Deadspin has gotten its hands on the books of the New Jersey Nets — from 2003 to 2006, so they are not new — and while they are outdated they also shed some light on how accountants for teams can turn small profits from teams into losses on paper.
Which would allow someone like David Stern to talk with a straight face about how 22 of the 30 teams are losing money, when in fact what you and I would consider the real numbers tell a different story in a number of those cases.
Deadspin’s Tommy Crags explains how the Nets lost $27.6 million in 2004:
That’s not a real loss. That’s house money. The Nets didn’t have to write any checks for $25 million. What that $25 million represents is the amount by which Nets owners reduced their tax obligation under something called a roster depreciation allowance, or RDA.
Bear with me now. The RDA dates back to 1959, and was maybe Bill Veeck’s biggest hustle in a long lifetime of hustles. Veeck argued to the IRS that professional athletes, once they’ve been paid for, “waste away” like livestock. Therefore a sports team’s roster, like a farmer’s cattle or an office copy machine or a new Volvo, is a depreciable asset….
If we’re trying to arrive at some idea of how much money the Nets really made in 2004, we’ll need to do a little crude math. Knock out the $25.1 million RDA — a paper loss, remember — and add the $9.1 million in tax savings. Suddenly, that $27.6 million loss becomes a $6.6 million profit.
It gets more complex when teams are sold, as the Nets were, because the new owners get to write off part of the purchase price. Larry Coon does a good job explaining this over at ESPN. And then there are the other businesses tied to this an NBA team owner may also own — if he owns the building you can charge rent or not, do all sorts of things to move the money around on paper. There are countless other examples.
Nobody — not even the players — are arguing that some markets are not hurting and that the system does not need adjustments. It does. More than the players want to admit. Owners in the NBA should have a fair opportunity to turn a profit — but if you put a bad product out on the floor and do a poor job marketing, you should not be guaranteed a profit. Like any business, you should need to earn it.
What we’re saying here is don’t take the owners word on what they are losing as fact. It’s very complex and there are plenty of ways to hide profits on paper — all legally, under generally accepted accounting principles — and make things look worse than they are.