Scott Reyburn has a look at Sotheby’s earnings somewhat through gnashed teeth. Reyburn’s overall point is that Sotheby’s seems to be doing better by controlling costs (more on that in another post) and he points to the added revenue from the Art Agency, Partners advisory business.

Then Reyburn goes on to play a game of gotcha claiming that AAP was paid $4.4m in compensation for the quarter:

In the first half of 2016, year-on-year private sales declined 33 percent to $249.6 million. But Sotheby’s S.E.C. filing does register $3.4 million of income from advisory fees — though the company did have to pay Art Agency, Partners $4.4 million in compensation for the privilege.

Turns out, that’s not really what’s going on here. In Sotheby’s 10-Q filing, the company makes clear that it owes AAP an additional $35m if certain sales and profitability targets are met. To be able to pay that $35m some time in the future, Sotheby’s must accrue the expense. In plain english, that means Sotheby’s is putting $4.4m in a cookie jar for a later date when AAP might reach its targets.

The principals of AAP have not been paid that $4.4m or the $2.2m accrued the quarter before, according to Sotheby’s spokeswoman.

Here’s how the filing describes it:

Sotheby’s has agreed to make earn-out payments to the former owners of AAP not to exceed $35 million in the aggregate over the next four to five years, contingent on the achievement of a minimum level of financial performance in the Agency segment within the Impressionist, Modern and Contemporary art collecting categories, as well as from AAP’s existing art advisory business. For accounting purposes, the earn out payments are recorded as compensation expense within Salaries and Related Costs and are being expensed on a prorata basis over the earnout period. For the three and six months ending June 30, 2016, Sotheby’s recognized approximately $2.2 million and $4.4 million, respectively, of compensation expense related to this earn-out arrangement.

How Sotheby’s Found a Path to Higher Profits (The New York Times)

Sotheby’s Q2 2016 10-Q Filing