Audit Reports

Generally

At the end of every Salary Cap Year, an Audit Report is prepared by hired accountants to provide the key financials of the Salary Cap Year.

The League and NBPA will come to an agreement on the substance of the Audit Report, and it will be used to define BRI, which in turn will then define the Designated Share, any additional payments made to the Players or back to the League, and the following Year’s Salary Cap Threshold.

Types of Audit Reports

There are three versions of the Audit Report.

1. Draft Audit Report – Due two weeks prior to the Final Audit Report.
2. Final Audit Report – Due by 6:00 P.M. eastern on June 30th. It is not deemed final until all parties confirm their agreement with the Audit Report.
3. Interim Audit Report – Provided if the Final Audit Report is not provided on June 30th..
   • If an Interim Audit Report has to be used, and the Final Audit Report would change the Salary Cap, then the change is applied to the subsequent Salary Cap Year.

Contents of Audit Report

The following information will be contained in the Interim Audit Report and the Final Audit Report:

1. BRI;
2. Designated Share;
3. Total Salaries and Benefits;
4. Adjusted Total Salaries and Benefits;
5. Overage Amount;
6. Shortfall Amount;
7. Actual Reduction Percentage;
8. Aggregate Reduction Amount;
9. Distribution Amount;
10. Aggregate Team Overage Balance (before and after Distributions);
11. Team’s Individual Overage Balance (before and after Distributions);
12. Prior Salary Cap Year’s Aggregate/Team Overage Balance if greater than zero (before and after Distributions);
13. Distribution Amount for each Tram;
14. The adjustments made to each Player Contract relating to the Distribution Amount;
15. Summary of the reconciliation payments;
16. Each Team’s Tax Salary and Tax Liability;
17. Any Minimum Team Salary Payment;
18. Any amount a Team exceeds the Second Apron Threshold.

NBPA Audit Rights

The NBPA is permitted to conduct an audit, at its own expense, of both the Teams and the League as part of the annual review of BRI Reports.

Basketball Related Income

Generally

Basketball Related Income (BRI), and defining what is contained within BRI, is critical for Players in determining what revenue they are entitled to. The broader the scope, the larger the pool of money to be split between the League and the Players.

BRI Definition

All income generated from the League and the League-Related Entities.

• League-Related Entities – Any businesses at least 50%-owned by the NBA, its subsidiaries or a Team.

Income includes, for example:

1. Tickets;
2. Concessions;
3. Parking;
4. Jerseys;
5. Naming Rights/Suites – Count at 50% because they are sold with other sports entities;
6. Licensing Revenue from League and Team licensed products not co-licensed by current or retired players.

BRI Categories

Other than actual BRI determined at the end of the Salary Cap Year, there is Forecasted BRI (used to calculated Designated Share) and Projected BRI (used to calculated the Salary Cap).

Forecasted BRI

A one-time estimated BRI for each Season covered under the entire length of the CBA.

It started in 2023-24 with 90.48% of BRI from the 2022-23, and increases at a fixed amount 4.5% for each subsequent Salary Cap Year.

Projected BRI

The NBPA and League will agree upon the Project BRI for the upcoming Salary Cap Year at the start of each Salary Cap Year. Should they not come to an agreement by the end of the Moratorium Period, then the formula below is used.

It is used to calculate the Salary Cap, and it combines the National TV Revenues for the upcoming Salary Cap Year–a fixed number that is known at the time–and a projection based on the most recent Season’s BRI.

Interim Projected BRI

The same as Projected BRI, but you use Estimated BRI instead of Actual BRI from the Prior Season.

The “Designated Share”

Generally

The Designated Share is the fixed amount the Players are guaranteed to receive in BRI. It can never be less than 49% and never be more than 51% of the BRI.

Formula

Below is the formula to calculate the Player’s Designated Share:

The Reconciliation Process

Generally

Once the Designated Share is calculated, the specific amount the Players are guaranteed to be paid is known.

However, what the Players actually earned throughout Salary Cap Year is never going to match the Designated Share, so a final “Reconciliation” must be performed.

Compare ATSB to the Designated Share

The actual amount paid to the Players is called Adjusted Total Salaries and Benefits (ATSB).

If ATSB > Designated Share: There is an Overage Amount.

• Players must pay repay the Overage to the Teams;
• To prepare for repaying the Overage, Teams withhold a percentage of Compensation from the Players, which is 10% (unless there is Cap Smoothing and the Teams agree to lessen the amount);
• In the Guide, this is called Withheld Compensation.

If ATSB < Designated Share: There is a Shortfall Amount.

• Teams must pay the Players the excess in proportion to their Salaries

The “Carryover Amount”

Before allocating any Overage/Shortfall Amount, Prior Salary Cap Years must be reviewed to see if there is any unpaid Overage Amount.

The Carryover Amount is any unpaid Overage Amounts from Prior Salary Cap Years, less any Shortfall Amount that was unpaid in the Prior Salary Cap Year (it would be unpaid because it was used to pay another preexisting Overage Amount).

The “Distribution Amount”

Generally

The Withheld Compensation and any Shortfall Amount are combined to make up the total Distribution Amount to be allocated as described below.

Adjusting Withheld Compensation

Before allocating the Distribution Amount, you determine if the Withheld Compensation is adjusted. To do so you calculate the following:

Allocating the Distribution Amount

You allocate the Distribution Amount in the following order:

1. Pay off the Carryover Amount;
2. Pay off the Overage Amount;
   • If an Overage remains after exhausting all of the Distribution Amount, then you allocate the Additional Benefit Amount (i.e. 1% BRI) from the Post-Career Income Plan to pay the remaining Overage Amount;
   • If an Overage remains after Exhausting the ABA, then the remaining Overage Amount becomes the Carryover Amount for the subsequent Salary Cap Year;
3. If the Carryover Amount and Overage Amount are paid and a Distribution Amount remains, then it is paid to the Players;
   • The Players are paid in proportion to their Salary;
   • If the Distribution Amount exceeds the Withheld Compensation, then the NBPA decides how it is allocated.

Setting the Cap

The Salary Cap Threshold is set using the following formula:

Initial Formula

Below is the initial formula used to set the Salary Cap before any potential adjustment:

• Projected Benefits – Estimated Employment Benefits. If it’s not reasonably calculable, then take previous Season’s numbers and increase by 4.5%.

Adjustments to the Cap

The Salary Cap gets adjusted depending on whether the Prior Season’s Designated Share is less or more than the actual Salaries that were paid to the Players.

The adjustment is calculated in the following way:

Designated Share More Than Salaries

If there is a Shortfall Amount and no Carryover Amount, then increase the Salary Cap by 1/30th (i.e. the number of Teams) by the Shortfall Amount.

Designated Share Less Than Salaries

If the Designated Share is less than 6% ATSB (called the “Overage Amount”), then you adjust in the following manner:

Step 1

Calculate 6% of ATSB.

Step 2

Subtract the 6% from the Overage Amount.

Step 3

Calculate (i) the percentage Projected BRI exceeds BRI and (ii) the percentage that the Overage Amount is of ATSB.

Step 4

Option 1 Adjustment

If (i) Projected BRI does not exceed BRI by more than 8%, or (ii) the Overage Amount exceeds 9% of Total Salaries and Benefits, then:

• Divide the number from Step 2 by 30 (number of Teams) to obtain the amount of reduction in Salary Cap.

Option 2 Adjustment

If (i) Projected BRI exceeds 108% of BRI, and (ii) the Overage Amount does not exceed 9% of Total Salaries and benefits, then:

• Subtract 108% BRI from Projected BRI;
• Multiply the difference by 50%;
• Subtract that amount from the amount in Step 2 above.
• Divide that amount by the number of Teams to obtain the amount of reduction in Salary Cap (if the number is 0, then there is no reduction).

Final Adjustments – No Decrease; Cap Smoothing

Despite all of the formulas and adjustments above, the Salary Cap can never be less than the Prior Year’s Salary Cap and can never increase more than 10% of the Prior Year’s Salary Cap (commonly called “Cap Smoothing”).