KANSAS CITY ZEPHYRS BASEBALL CLUB: A BASEBALL ACCOUNTING DISPUTE
This case is used to illustrate some basic accounting issues in a controversial setting. The controversy arose because the baseball team owners and the players association were engaged in collective bargaining negotiations and the outcome of those negotiations depended on the parties’ agreeing on the true profitability of the baseball business.
The case describes 3 areas in which the accounting is being disputed:
1. Roster depreciation;
2. Player compensation;
3. Transfer pricing of related party operations (stadium costs);
1. Roster Depreciation
The owners recognize depreciation of a value placed on the player roster at the time the baseball club was purchased apparently just because tax rules allowed them to do so. Tax rules allow this value to be set ...view middle of the document...
In contrast, injuries and retirements decrease it. The roaster should hence not be depreciated.
2. Player Compensation
A first controversy arises from the fact that some significant part of players’ compensation is not paid immediately in cash. Players suggest that the deferred compensation expenditure should be expensed only when the cash is expended. The economic truth however calls for the deferred compensation to be expensed when earned.
A second controversy arises from the fact that some significant part of players’ compensation comes in the form of signing bonuses. Owners suggest that signing bonuses should be expensed as incurred. The economic truth however call for signing bonuses to be capitalized and amortized over the lives of the contracts as players are signed in the first place because they are expected to provide benefits over the lives of their contracts.
A third controversy arises from the fact that some players no longer on the current roster are being paid amounts that were previously guaranteed in multi-year contracts. The issue is whether the payments should be expensed as they are made or whether the total future value of these payments should be expensed when the players are removed from the roster. Owners suggest that the total future value of these payments should be expensed when the players are removed from the roster. Players suggest that the payments should be expensed as they are made. The economic truth calls for setting up a reserve equal to the expected loss from non-roster guaranteed contract expense. The size of the reserve would depend on the probability that each player with a guaranteed contract will be released and not have his contract picked up by another team.
3. Stadium Costs
Players suggest that the stadium rents are set to understate the profits of the baseball club and to move some profits to the stadium corporation that is owned by two of the baseball club’s owners. The economic truth calls for an arms-length market price.