Wednesday, July 6, 2011

Closing The GAAP: How Much Has The NBA Lost?

The NBA claims that its teams combined to lose $300 million last season, and nearly $1 billion over the past 3 years. As well, the NBA contends that 22 of its 30 teams lost money.

On the flip side, the NBPA argues that the NBA has inflated its losses. The players say that if you look at actual money teams lost and don’t take into account creative accounting, losses of $370 million in 2009-10 actually drop to $120 million.

So who’s right? Well both sides.

The NBA has applied generally accepted accounting principles (GAAP) principles when determining its losses. That means that they take things like interest, taxes, depreciation, and amortization into account when figuring out losses.

Here’s the thing: while they go on the balance sheet, there is little or no economic substance to something like amortization. It does not represent actual money that is going out the door.

And that’s where the players step in saying that the losses are inflated. The players say let’s measure actual cash that is lost. In short, they measure operating profit and not the more creative book profit.

By way of example, the New Jersey Nets claimed losses of $49 million in 2005 and $57.4 million in 2006. However, if you toss aside GAAP principles, the losses drop to just $7.5 million and $17.2M in 2005 and 2006 respectively. So rather than having lost $106.5 million over 2 years, the Nets lost $25 million. The players rightfully argue that this is a pretty substantial difference.

It is important to note that the NBA is not being misleading; they are simply calculating losses in keeping with accepted accounting principles. And the players know that - so they aren’t being misled or confused.

That being said, the NBA is losing money – the issue is just how much. Forbes looked into it and found that 17 of 30 teams were losing money. Forbes also found that 11 of these 17 teams lost less than $8 million annually. Still, though, a loss is a loss is a loss.

Here's the big concern for the NBA: while ratings, interest and fan momentum are on the rise, profitability has gone down. According to Forbes, collective league profitability has fallen over the last 4 seasons. That’s not the sign of a healthy business.

And when that happens, it is clear that the players need to make meaningful concessions.

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