The case study at hand presents several accounting problems faced by the Kansas City Zephyrs baseball club. The disputes arise because of the disagreement between the baseball team and the club owners on the benefits provided to players. Both parties are involved in bargaining negotiations, the ultimate purpose of which is to find out the true profitability of the club. It is suspected that unfair practices are implemented to create an illusion that the club is non-profitable and can no longer provide any benefits to the team members.
The areas of controversy include:
- Roster depreciation: The dispute is about whether the players should or should not be depreciated over time.
- Overstated player salary expense:
- some amount of the player compensation is not paid directly in cash;
- another part of the compensation is paid as the signing bonus;
- players who have been removed from the current roster receive benefits specified in their contracts.
- Related party transactions: The problem concerns the accountability of the stadium rent costs.
According to Owner-Player Committee (OPC), which represents the owners of the club, the roster of players must be depreciated as their value is decreased over time, whereas Professional Baseball Player Association claims that this measure would be unfair as the players become more experienced, which means that their value increases. On the one hand, depreciation is just as tax rules allow setting a value not exceeding 50% of the purchase price (the process is spread over a period covering six years). However, the owners are not right in this case as the processes of appreciation and depreciation run simultaneously. The value of the roster is increased because of trades and training and decreased through retirements and injuries. That is why the roster should not be depreciated.
As far as the second problem is concerned, players believe that, since they are not paid immediately in cash, deferred compensation is due when the cash is expended. However, the owners are right in this case: deferred salaries should be expensed in the same year when they were earned. Moreover, this 20% is spent on pensions for those who are no longer on the roster.
According to players, signing bonuses should not be paid entirely in the signing year as it is better to spread them over the whole contract term. Amortizing bonuses over the lives of contracts would significantly reduce annual salary expenses. Nevertheless, the owners are right: this argument is inconsistent with an argument against depreciation. There is no reason to provide bonuses over the length of the contract as they should be expensed in the same year in which they were incurred.
Another problem is to identify whether payments to players who have been released should be expensed when they are made or at the moment the player is removed from the roster (as the owners suggest). In this case, players are right: those removed from the roster can sign a contract with another team, so there is no point in expending the full amount at once as the contracts will be taken over. If the owners still insist on their decision, they should set up a reserve that would cover unpredicted losses.
As for related transactions, players claim that the owners of the club are also the sole owners of the stadium, which means that they can intentionally charge higher prices for the rent to demonstrate that the club has to sustain losses. It is hard to say whether they are right or wrong but still, their argument is indefensible. The price should remain the same since it cannot be changed based on opinion only.