How Accounting Explains the NBA Lockout

After many weekends spent this term on accounting and missing my beloved football games, I couldn’t help but think that there must be a way to bring the two together.  Accounting and sports.  A match made in heaven?  Well, maybe not quite, but I was able to enjoy a brief break from reading the Journal Entry of the Week by looking at some financial statements that were a little more interesting.

First, let’s start with the NFL.  It wasn’t too long ago that we were all on pins and needles about the NFL lockout.  What would happen if we had no professional football?  My fantasy football league can’t play itself.  I don’t own an X-box….yet….and if I did, would seeing a virtual Dirty Bird suffice?  No, it would not.  But why oh why would these players walk?

The claim from NFL owners was that they needed to reduce the player’s salaries by 18% ($1 Billion) because there was a loss in revenue.  Was that valid?  Wellllllll, in reviewing the financial statements that were leaked revenues in 2010 are down by $21.4M from 2009.  Hmm..we’ll need to keep digging though.  Ahh…the answer to why the owners are complaining is of course in the notes.  “Note 5- Debt & G-3 Stadium Program” explains that the program that gave low interest loans to teams to build stadiums ran out of money in 2007.  So the league isn’t loaning money anymore to owners and owners have loans to repay to the league for stadiums in huge amounts.  Team revenues are down, and owners need to cut costs.  Players’ salaries account for the largest portion of operating expenses, therefore to increase Net Income, owners wanted to…cut salaries.  Wow, I think I just had an accounting breakthrough.

Alright, alright, well, the NFL Lockout is a thing of the past, and I can turn on the Thanksgiving Day games and watching the nail biting Cowboys v Dolphins game.  The NBA Lockout is really what we are focusing on.  Once again, player’s salaries are on the firing line as the league claims that the teams are losing revenue.  The NBA claims that 22 out of 30 teams lost money in 2010.  So what do the financial statements reveal?  In this case, there may be some truth to the owner’s claims.  The leaked 2009 financial statement from the New Orleans Hornets the 2008 season resulted in a $17M loss.  The team recovered in 2009 with a $1.8M profit.  So you say, “Wait, they were positive again in 2009.  How’d they do that after such a bad year in 2008?”

Then you use some Schipper-like detective skills.  Salaries went down by $3M, but hmmm…what is this weird line in 2009 of “Gain on modification of relocation” in the amount of $4M increase on the Income Statement? Note 10 in the financial statements gives the answer.  When the Hornets moved from Charlotte to New Orleans they had to pay a relocation fee.  This was being paid out in installments.  However, in 2009 they were granted a deferral of $4M.  Ahhh…so without this deferral the Hornets would have been about $2.2 in the red again.  The owners also gave short term loans to the franchise, but then issued Long Term loans to repay those borrowings (see Note 15).  Hmmm…I dunno…on the fence on this one.

I’m not happy so far because accounting is explaining way too much of this story.  Salaries, salaries, salaries.  Let’s see if accounting can explain this.  Is the salary cap a bad thing for all of these professional sports programs?  Well, actually, it could be helping the players make bigger bucks.  Allan Sloan, from Fortune Magazine, says that salary caps are actually just creative accounting designed to lower the average salary reported out each year.  One year you have a big salary next year a low salary, so on average you report out a lower salary.  As I suspected, accounting is to blame.  That was the answer I was looking for.  Now I’m going to go see if I can remember what my pillow looks like.

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