Official CBA/Labour Talks Discussion Thread II

[LittleOzzy]

Official CBA/Labour Talks Discussion Thread I viewtopic.php?f=32&t=1121231

Please continue the discussion here...

[Sleepy51]

And let's be clear on the timeline: Billy Hunter alleged that a lot of the losses could be dismissed as being interest and depreciation (why he thinks interest isn't a cash expense is beyond anybody who's thinking about the topic). After that, the NBA responded. Mr. Hunter hasn't said a peep about the subject since. That is telling.

Interest is a cash expense. But incurring interest expense is a result of capitalization strategy. Not an inherent component of cash flows. The reason that metrics like EBITDA exists is because investors find value in examining the books of a company in the absence of the prior owners capitalization strategy. You may have needed to, or chosen to borrow money to buy a business. That does not mean the next owner will have to do the same. That interest costs in not germane to understanding the cash flow value of the business.

Read the article I linked below on EBITDA.

And non of this is about "cooking" books. There are different, and LEGAL accounting standards for different business purposes. For the IRS, you want to show depreciation because it reduces your taxable profit.

For a prospective buyer, you want to show off EBITDA so that the buyer can apply their own capitalization and cash flow strategies to maximize their use of the businesses cash flows.

Fraud does not enter into it, beyond the parsing explanation given to reporters.

[Fairview4Life]

Party A says: "You, Party B, are deceiving me when you say x."
Party B says: "Here is the documentation supporting my claim of x."
Party A says: [nothing]

But that's not what happened. The NBA gave the players their books long before July. The documentation came before the statement from the PA. The PA said those books included accounting artifacts like depreciation and interest charges the players do not feel properly represent the financial health of the league. Then the NBA's CFO said they did not include purchase price amortization in the books released to the players. She also said this "Using the conventional and generally accepted accounting (GAAP) approach, we include in our financial reporting the depreciation of the capital expenditures made by the teams as they're a substantial and necessary cost of doing business."

In all of the leaked books, roster depreciation is included. This is important, since those follow GAAP, and there is absolutely no need to create a new set of books to give to the players. The goodwill impairment does not seem to be included, which is part of the intangible depreciation of the purchase price of the team. So the CFO can truthfully say that purchase price amortization was not included, and be referring to the goodwill impairment, and then say depreciation of capital assets is included, and be referring to the roster depreciation allowance.

Guess who most people are going to side with at that point? And that's what the NBPA has done. They have not responded to the refutation of their point - which, interestingly, is no longer their point. They're not contesting it, they're not disputing it: only you are. You are raising ideas of massive conspiracy and dishonesty on the part of the NBA, that they're presenting cooked books. The NBA did NOT "prepare a new set of books": they simply used the most cogent data in the existing books upon which to base the negotiations. Do you really think that's the case? That financial statements prepared by third-party auditors were altered after the fact for the purpose of a CBA negotiation? And yes: there are HUGE penalties in the US for deception viz. financial statements. As in, considerable jail time - not to mention having whatever professional designation as an accountant that you may have being revoked. "No person shall, for the purpose of promoting, directly or indirectly, the supply or use of a product or ... any business interest, by any means whatever, knowingly or recklessly make a representation to the public that is false or misleading in a material respect.(5) ... liable to a fine in the discretion of the court or to imprisonment for a term not exceeding five years or to both; or (b) on summary conviction, to a fine not exceeding $200,000 or to imprisonment for a term not exceeding one year, or to both." Competition Act, Sec 54. And that's Canadian law, which isn't as punitive as US regulation ATM in regards to corporate malfeasance - or so I'm led to believe.

I'm not sure why you went through all of that. I didn't say the NBA cooked their books. Just that what they told a reporter might not actually mean what you think it means. That isn't illegal.

[Reignman]

The Lakers, Knicks, Dallas and Miami are some of the biggest reasons why the NBA is actually making as much money as it currently is today. Without those teams, the NBA is making a lot less revenue. Turn those teams into .500 teams and some other teams win 55+ games a season. The NBA is a star dominated league. Whoever has Lebron, Kobe, Dirk, etc. is going to win a lot more games than other teams. None of the owners' proposals have really been methods of creating more competitive records in the NBA, other than the franchise player tag, which I'm not a huge fan of in some scenarios (I really don't like forcing a player to play in a place where he actually doesn't want to play for his entire career and never giving him the chance to make his own decision at some point - it allows owners to milk as much profit as they can from a star and just bungle all their other decisions and still make money and keep him around with no incentive torock the boat makign changes.

Last years ratings spike wasn't due to NBA fans tuning in more, it was due to the casual fan tuning in more to see the circus show known as the Miami Heat. That's not a sustainable audience. A sustainable audience is the fanbases of 30 teams tuning in PLUS the casual fan tuning in.

Also, the goal of the new system isn't to make the big market teams into .500 teams. If they became good because of solid moves and great management then they will remain good in the new system. If they became good because they spent much more in payroll than the average team and they are a destination city where good players force their way to then I hope the new system can curb that.

[Sleepy51]

Party A says: "You, Party B, are deceiving me when you say x."
Party B says: "Here is the documentation supporting my claim of x."
Party A says: [nothing]

But that's not what happened. The NBA gave the players their books long before July. The documentation came before the statement from the PA. The PA said those books included accounting artifacts like depreciation and interest charges the players do not feel properly represent the financial health of the league. Then the NBA's CFO said they did not include purchase price amortization in the books released to the players. She also said this "Using the conventional and generally accepted accounting (GAAP) approach, we include in our financial reporting the depreciation of the capital expenditures made by the teams as they're a substantial and necessary cost of doing business."

In all of the leaked books, roster depreciation is included. This is important, since those follow GAAP, and there is absolutely no need to create a new set of books to give to the players. The goodwill impairment does not seem to be included, which is part of the intangible depreciation of the purchase price of the team. So the CFO can truthfully say that purchase price amortization was not included, and be referring to the goodwill impairment, and then say depreciation of capital assets is included, and be referring to the roster depreciation allowance.

Thanks for the backup.

The NBA spoke at a level above the heads of the audience. They didn't lie, but there was definitely doubletalk in that statement. The denial addressed a different subject than the accusation.


I brought over the links I posted in the last posts of the old thread. Anyone who wants to draw their own conclusions can start here:


Page 3 of the 2005 & 2006 income statements for the New Jersey nets you will see a $40MM line item for depreciation and amortization. The Nets do not own their arena. There's no hard asset asset on the balance sheet on the preceeding page that could spin off that size depreciation expense. The largest asset listed is a $300MM "intangible asset." That's the roster depreciation allowance remaining after the amount depreciated in the income statement.
http://goingconcern.com/2011/06/who-wan ... tements/3/

This IS an audited financial statement. The Auditors letter is included.

Great explanation of the roster depreciation allowance tax break here:
http://econ.la.psu.edu/~ecoulson/veeck.pdf

Forbes has been providing EBITDA data on NBA teams that they claim has come from NBA league office sources for at least 6 years that I've been reading their "business of basketball" column. The NBA has never disputed Forbes data before this collective bargaining negotiation.

http://www.forbes.com/lists/2011/32/bas ... _land.html

Here is a brief accessible article on the rationale for using EBITDA instead of Net Income or earnings (GAAP) for certain approaches to business valuation.

http://www.fool.com/investing/beginning ... tions.aspx

[I_Like_Dirt]

So what would you define as parity, reignman? And by that, I mean something quantifiable, not something that arbitrarily meets your individual definition of the word 'fair.' The NBA isn't really so far off the levels of parity that are witnessed in the NHL or even the NFL. The NFL has comparable disparity in team spending to what the NBA has had over the past few seasons.

The NBA can never be like the NFL. It doesn't have the revenues and it's a game that relies on a lot less players. The NFL's revenues aren't due to every team having a chance. They're due partly to gambling, but also partly to the fact that football is a game played by way more people in the US than basketball is. That breeds more fans that will go see games even in smaller markets, and even there, there are some teams that are perenially good in the NFL.

[Sleepy51]

Does the author realize the difference between "tax deducation" and "operating expense"? Evidently not.

I definitely wanted to respond to this from the other thread. I stated that the Nets would be spinning off something on the order of $300MM in tax deductions over the next 15 years based on the roster depreciation allowance.

I am ACUTELY aware of the difference between a tax deduction and a business expense.


Depreciation is treated as an expense because as equipment and plant serve their useful lives, they lose value through wear, tear and obselesence. As those hard assets decline in value, a business is accumulating an growing replacement cost for those assets. Depreciation is a tool to fund that replacement cost as a business expense over multiple years rather than having to fund it all in one year.

The problem with the Roster Depreciation Allowance is that you are not actually depreciating a hard asset. It is based on the 1954 theory that players are livestock, property of owners and with recurring replacment costs. But you are not accumulating a replacement cost with player contracts. You are constantly paying that replacement cost as an ongoing business expense in the form of new contracts to free agents, traded players and draft picks. There is no future replacement cost being funded here. And it's already a deductible expense.

The Roster Depreciation Allowance is a special interest tax break with ZERO corresponding real cash flow. The real cash flow is already accounted for as an expense in the player salaries line item.

The tax break is also specious because it is not based on the value of the roster. It is based on the purchase price paid for the entire franchise.

So yes, I do know the difference, which is exactly why I refer to RDA as a tax break and NOT as an expense. There is no real expense and it's a huge part of how profits are hidden on a GAAP statement.

[BorisDK1]

I've seen your responses, Sleepy51. I've responded to the majority of the assertions - such as that the Roster Depreciation Allowance (RDA) is part of what the NBA is using as the basis with which they have negotiated - already in my previous discussion with Fairview. You can refer to that. I'm at work right now and do not have the time as of today to respond to your assertion in depth that EBITDA is the primary valuator of a company (most people in the investment community believe the various ratios involving cash flows are far more helpful and meaningful than mere EBITDA).

Just as food for thought: the RDA is only a tax relief measure, not a separate item on the Statement of Operations. The claim that RDA showed up on the Nets' Statement of Operations in 2005 and 2006 has been refuted: that was, in fact, a bought-out contract belong to Dikembe Mutombo.

[Reignman]

So what would you define as parity, reignman? And by that, I mean something quantifiable, not something that arbitrarily meets your individual definition of the word 'fair.' The NBA isn't really so far off the levels of parity that are witnessed in the NHL or even the NFL. The NFL has comparable disparity in team spending to what the NBA has had over the past few seasons.

The NBA can never be like the NFL. It doesn't have the revenues and it's a game that relies on a lot less players. The NFL's revenues aren't due to every team having a chance. They're due partly to gambling, but also partly to the fact that football is a game played by way more people in the US than basketball is. That breeds more fans that will go see games even in smaller markets, and even there, there are some teams that are perenially good in the NFL.

Here's what parity would mean for me:

- Hard cap (Let's say $60 mil cap with a $45 mil floor)
- Franchise tag with no max
- No sign and trades
- No exceptions (MLE/LLE)
- Shorter contracts (I like the idea the owners put out - 3 years for FAs, 4 years for your own FAs and 5 years for the franchise tag)
- (maybe) 2 1st round picks for non-playoff teams

[Fairview4Life]

Just as food for thought: the RDA is only a tax relief measure, not a separate item on the Statement of Operations. The claim that RDA showed up on the Nets' Statement of Operations in 2005 and 2006 has been refuted: that was, in fact, a bought-out contract belong to Dikembe Mutombo.

That was the 04 books, there were 83 million in depreciation and amortization expenses added in the 05 and 06 consolidated books. The amortization and depreciation costs are included in the operational expenses section, page 5 of 20 of the PDF, page 3 of the document.

[Sleepy51]

I've seen your responses, Sleepy51. I've responded to the majority of the assertions - such as that the Roster Depreciation Allowance (RDA) is part of what the NBA is using as the basis with which they have negotiated - already in my previous discussion with Fairview. You can refer to that. I'm at work right now and do not have the time as of today to respond to your assertion in depth that EBITDA is the primary valuator of a company (most people in the investment community believe the various ratios involving cash flows are far more helpful and meaningful than mere EBITDA).

Just as food for thought: the RDA is only a tax relief measure, not a separate item on the Statement of Operations. The claim that RDA showed up on the Nets' Statement of Operations in 2005 and 2006 has been refuted: that was, in fact, a bought-out contract belong to Dikembe Mutombo.

You are absolutely unequivocally incorrect.

http://goingconcern.com/2011/06/who-wan ... tatements/

The buy out of Dikembe was the "Loss on Player Contracts" line item shown on the 2004 Nets financial statement.
http://goingconcern.com/2011/06/who-wan ... tements/2/

2005 & 2006 are showing $40MM in depreciation from the $300MM intangible asset a little over half of which which IS the roster depreciation allowance. http://goingconcern.com/2011/06/who-wan ... tements/3/


And I did not say EBITDA was "the primary" tool for valuations. There are different tools for different purposes. EBITDA has specific uses as do earnings. In looking at privately held corporations, EBITDA can give very useful insights as can net income.

Forbes was satisfied using EBITDA and the NBA was satisfied with Forbes reporting for at least half a dozen years before this argument of convenience arose.

[Indeed]

So what would you define as parity, reignman? And by that, I mean something quantifiable, not something that arbitrarily meets your individual definition of the word 'fair.' The NBA isn't really so far off the levels of parity that are witnessed in the NHL or even the NFL. The NFL has comparable disparity in team spending to what the NBA has had over the past few seasons.

The NBA can never be like the NFL. It doesn't have the revenues and it's a game that relies on a lot less players. The NFL's revenues aren't due to every team having a chance. They're due partly to gambling, but also partly to the fact that football is a game played by way more people in the US than basketball is. That breeds more fans that will go see games even in smaller markets, and even there, there are some teams that are perenially good in the NFL.

Here's what parity would mean for me:

- Hard cap (Let's say $60 mil cap with a $45 mil floor)
- Franchise tag with no max
- No sign and trades
- No exceptions (MLE/LLE)
- Shorter contracts (I like the idea the owners put out - 3 years for FAs, 4 years for your own FAs and 5 years for the franchise tag)
- (maybe) 2 1st round picks for non-playoff teams

Hmm, does that lead to parity?
I am seriously doubt Hard cap can lead to parity.

What you are assuming is, all the cities are the same, players would go for the money. Therefore, every team with the same cap will result in competition. But there are too many reasons that it will not fall into those assumptions, tax rate for instance.

[BorisDK1]

Depreciation is treated as an expense because as equipment and plant serve their useful lives, they lose value through wear, tear and obselesence. As those hard assets decline in value, a business is accumulating an growing replacement cost for those assets. Depreciation is a tool to fund that replacement cost as a business expense over multiple years rather than having to fund it all in one year.

The problem with the Roster Depreciation Allowance is that you are not actually depreciating a hard asset. It is based on the 1954 theory that players are livestock, property of owners and with recurring replacment costs. But you are not accumulating a replacement cost with player contracts. You are constantly paying that replacement cost as an ongoing business expense in the form of new contracts to free agents, traded players and draft picks. There is no future replacement cost being funded here. And it's already a deductible expense.

I'm aware of that. My specific assertion is that the RDA has not been entered into the SOO as discussed: that was assumed due to a line-item on the Nets' SOO as leaked, "Loss on players' contracts". In fact, that was a buy-out for Dikembe Mutombo's contract - NOT an RDA entered onto the SOO. We've been all around the mulberry bush on that topic several times already.

So yes, I do know the difference, which is exactly why I refer to RDA as a tax break and NOT as an expense. There is no real expense and it's a huge part of how profits are hidden on a GAAP statement.

...except it isn't on any GAAP Statement of Operations.

[floppymoose]

Party A says: "You, Party B, are deceiving me when you say x."
Party B says: "Here is the documentation supporting my claim of x."
Party A says: [nothing]

Aside form proving nothing if it *were* true, it's *not* true.

The players association paints a different picture of the league's health. "Our belief," Hunter told ESPN.com's Henry Abbott, "is that a small number of teams are suffering, and their problems can be addressed through revenue sharing."

Union president Derek Fisher placed the blame squarely on the teams' front offices. "We've run into situations where teams have either mismanaged spending, overpaid staff, or made decisions on rosters and personnel that weren't in their best interest -- things that we're now being asked to take the hit for," Fisher said in October.

The league says it has provided full financial data to the players association to substantiate its losses. "We've given [them] our certified financial statements," Stern said. "We've provided access to our tax returns, and if there's more needed, they'll get more."

"We're very comfortable because we've given the players association more financial information than has ever been done in the history of sport," he said.

But the union disagrees with the story the numbers tell.

"There has been ongoing debate and disagreement regarding the numbers, and we do not agree that the stated loss figures reflect an accurate portrayal of the financial health of the league," Hunter said in a statement released during the All-Star break.

[Sleepy51]

Depreciation is treated as an expense because as equipment and plant serve their useful lives, they lose value through wear, tear and obselesence. As those hard assets decline in value, a business is accumulating an growing replacement cost for those assets. Depreciation is a tool to fund that replacement cost as a business expense over multiple years rather than having to fund it all in one year.

The problem with the Roster Depreciation Allowance is that you are not actually depreciating a hard asset. It is based on the 1954 theory that players are livestock, property of owners and with recurring replacment costs. But you are not accumulating a replacement cost with player contracts. You are constantly paying that replacement cost as an ongoing business expense in the form of new contracts to free agents, traded players and draft picks. There is no future replacement cost being funded here. And it's already a deductible expense.

I'm aware of that. My specific assertion is that the RDA has not been entered into the SOO as discussed: that was assumed due to a line-item on the Nets' SOO as leaked, "Loss on players' contracts". In fact, that was a buy-out for Dikembe Mutombo's contract - NOT an RDA entered onto the SOO. We've been all around the mulberry bush on that topic several times already.

So yes, I do know the difference, which is exactly why I refer to RDA as a tax break and NOT as an expense. There is no real expense and it's a huge part of how profits are hidden on a GAAP statement.

...except it isn't on any GAAP Statement of Operations.

Go back and look at all of 04, 05 and 06. You have bad information.

[Reignman]

So what would you define as parity, reignman? And by that, I mean something quantifiable, not something that arbitrarily meets your individual definition of the word 'fair.' The NBA isn't really so far off the levels of parity that are witnessed in the NHL or even the NFL. The NFL has comparable disparity in team spending to what the NBA has had over the past few seasons.

The NBA can never be like the NFL. It doesn't have the revenues and it's a game that relies on a lot less players. The NFL's revenues aren't due to every team having a chance. They're due partly to gambling, but also partly to the fact that football is a game played by way more people in the US than basketball is. That breeds more fans that will go see games even in smaller markets, and even there, there are some teams that are perenially good in the NFL.

Here's what parity would mean for me:

- Hard cap (Let's say $60 mil cap with a $45 mil floor)
- Franchise tag with no max
- No sign and trades
- No exceptions (MLE/LLE)
- Shorter contracts (I like the idea the owners put out - 3 years for FAs, 4 years for your own FAs and 5 years for the franchise tag)
- (maybe) 2 1st round picks for non-playoff teams

Hmm, does that lead to parity?
I am seriously doubt Hard cap can lead to parity.

What you are assuming is, all the cities are the same, players would go for the money. Therefore, every team with the same cap will result in competition. But there are too many reasons that it will not fall into those assumptions, tax rate for instance.

Tax rate is already accounted for by the NBA. For eg, there are some exceptions for high tax regions like Toronto/Canada built into the payroll. Couple that with some schrewd accounting and the difference is negligeable. Especially when you factor in the no max franchise tag with hard cap.

[Fairview4Life]

Depreciation is treated as an expense because as equipment and plant serve their useful lives, they lose value through wear, tear and obselesence. As those hard assets decline in value, a business is accumulating an growing replacement cost for those assets. Depreciation is a tool to fund that replacement cost as a business expense over multiple years rather than having to fund it all in one year.

The problem with the Roster Depreciation Allowance is that you are not actually depreciating a hard asset. It is based on the 1954 theory that players are livestock, property of owners and with recurring replacment costs. But you are not accumulating a replacement cost with player contracts. You are constantly paying that replacement cost as an ongoing business expense in the form of new contracts to free agents, traded players and draft picks. There is no future replacement cost being funded here. And it's already a deductible expense.

I'm aware of that. My specific assertion is that the RDA has not been entered into the SOO as discussed: that was assumed due to a line-item on the Nets' SOO as leaked, "Loss on players' contracts". In fact, that was a buy-out for Dikembe Mutombo's contract - NOT an RDA entered onto the SOO. We've been all around the mulberry bush on that topic several times already.

So yes, I do know the difference, which is exactly why I refer to RDA as a tax break and NOT as an expense. There is no real expense and it's a huge part of how profits are hidden on a GAAP statement.

...except it isn't on any GAAP Statement of Operations.

http://edge-cache.deadspin.com/deadspin/nets0506.pdf

Page 5 of the PDF, or page 3 of the document if you go by the numbers on the scanned page instead. Down near the bottom of the expenses. The details of the amortization and depreciation are on page 12 of the PDF/10 of the document.

[Sleepy51]

Depreciation is treated as an expense because as equipment and plant serve their useful lives, they lose value through wear, tear and obselesence. As those hard assets decline in value, a business is accumulating an growing replacement cost for those assets. Depreciation is a tool to fund that replacement cost as a business expense over multiple years rather than having to fund it all in one year.

The problem with the Roster Depreciation Allowance is that you are not actually depreciating a hard asset. It is based on the 1954 theory that players are livestock, property of owners and with recurring replacment costs. But you are not accumulating a replacement cost with player contracts. You are constantly paying that replacement cost as an ongoing business expense in the form of new contracts to free agents, traded players and draft picks. There is no future replacement cost being funded here. And it's already a deductible expense.

I'm aware of that. My specific assertion is that the RDA has not been entered into the SOO as discussed: that was assumed due to a line-item on the Nets' SOO as leaked, "Loss on players' contracts". In fact, that was a buy-out for Dikembe Mutombo's contract - NOT an RDA entered onto the SOO. We've been all around the mulberry bush on that topic several times already.

So yes, I do know the difference, which is exactly why I refer to RDA as a tax break and NOT as an expense. There is no real expense and it's a huge part of how profits are hidden on a GAAP statement.

...except it isn't on any GAAP Statement of Operations.

http://edge-cache.deadspin.com/deadspin/nets0506.pdf

Page 5 of the PDF, or page 3 of the document if you go by the numbers on the scanned page instead. Down near the bottom of the expenses. The details of the amortization and depreciation are on page 12 of the PDF/10 of the document.

You can only lead a horse to water.

[ranger001]

And let's be clear on the timeline: Billy Hunter alleged that a lot of the losses could be dismissed as being interest and depreciation (why he thinks interest isn't a cash expense is beyond anybody who's thinking about the topic). After that, the NBA responded. Mr. Hunter hasn't said a peep about the subject since. That is telling.

Interest is a cash expense. But incurring interest expense is a result of capitalization strategy. Not an inherent component of cash flows. The reason that metrics like EBITDA exists is because investors find value in examining the books of a company in the absence of the prior owners capitalization strategy. You may have needed to, or chosen to borrow money to buy a business. That does not mean the next owner will have to do the same. That interest costs in not germane to understanding the cash flow value of the business.

That still does not mean you can throw away interest expenses when deciding whether a business is profitable or not. The players cannot just eliminate all interest expenses and say "just use a different capitalization strategy. Pay cash if you want an NBA franchise".

[Sleepy51]

And let's be clear on the timeline: Billy Hunter alleged that a lot of the losses could be dismissed as being interest and depreciation (why he thinks interest isn't a cash expense is beyond anybody who's thinking about the topic). After that, the NBA responded. Mr. Hunter hasn't said a peep about the subject since. That is telling.

Interest is a cash expense. But incurring interest expense is a result of capitalization strategy. Not an inherent component of cash flows. The reason that metrics like EBITDA exists is because investors find value in examining the books of a company in the absence of the prior owners capitalization strategy. You may have needed to, or chosen to borrow money to buy a business. That does not mean the next owner will have to do the same. That interest costs in not germane to understanding the cash flow value of the business.

That still does not mean you can throw away interest expenses when deciding whether a business is profitable or not. The players cannot just eliminate all interest expenses and say "just use a different capitalization strategy. Pay cash if you want an NBA franchise".

You are absolutely correct that depreciation of TANGIBLE assets, Interest and taxes are real cash flow items. I have acknowledged this fact multiple times since I first posted that table.

But on a $76MM purchase price and with GAAP statements "claiming" no taxable income, assuming 100% financing, the (deductible) interest on debt and depreciation of hard assets are not going to come close to turning the Spurs $61MM EBITDA into a loss without that monster roster depreciation allowance.