In reviewing the Kansas City Zephyrs Baseball Club, and hearing arguments from both the owners and player there have been some interesting findings. We see that both parties are motivated towards getting more actual cash flow for their respective sides. Using different accounting techniques resulted in two very different financial statements for the Kansas City Zephyrs Baseball Club. Although, both teams seem to agree on most of the financial statements there seem to be three specific areas that are causing dispute. The three causes of disputes are roster depreciation, overstated player salary expense, and related party transactions.
According to the owners the 50% of the 12 million dollar purchase price is being depreciated as roster depreciation. The reasoning behind the 50% rate of depreciation is that it is the maximum rate allowed by the IRS. This clearly shows that the owners are trying to cover as much profit without actual cash outflow through the depreciation expense.
According to the players there is an appreciation rather than depreciation as the players actually improve their skills as they increase in experience. Considering the facts it does not add value to depreciate teams that generally appreciate and therefore should not be included in the financials.
Overstated Player Salary Expense
There are three points of disagreement on player salary expenses; sign up bonuses, deferred compensation, and non-roster player salaries should be expensed in the year that it is paid.
Sign-up Bonuses: The players feel that the sign-up bonuses should be amortized over the contract of the players. This seems inconsistent with their prior argument to have the financials match cash flow as much as possible with an argument against depreciation. It doesn’t make sense to amortize part of a salary as an asset. Since the sign-up bonus is a cost incurred by the owners in one payment it should be expensed in the year in which it was incurred.
Deferred Compensation: Most players receive only 80% of their contracted amount with the remaining 20% deferred for 10 years. The argument of the players is that the salaries which aren’t incurred for 10 years are expenses a decade before they are due. It was also brought up that some companies put aside this money and others do not. Considering the fact that the remaining 20% is used as a pension for player’s who would no longer be on the roster an adjustment is due. The deferred salaries expense should be taken out of current expenses and put on the balance sheet as a liability if there is no separate fund. If there is a separate fund this can be put on the balance sheet as a other asset till they are expensed in the year they become a current payable.
Non-Roster Player Salaries: Since the players that are released have the possibility of getting signed-on with another team who would take over the contract there does not seem to expense the full amount in one period. Similar to the deferred salaries the cost of contracts released should be expensed as each year’s liability comes due and not before.
Considering the fact that Kansas City Zephyrs Baseball Club is expensing everything ahead of time it is important to note that they will not have these costs to offset profit from future years. The only Way to keep these expenses would to be to carry high player turnover on the teams which is not beneficial in an operational standpoint. However, since net operating losses are allowed to be carried forward 20 years by the IRS, Zephyrs managers may be able to extend the theme of no profit through off-setting future profit with prior year losses with their accounting methods in 1983 and 1984.
Related Party Transactions: The player’s argue that since two of Zephyrs’ owners are also sole owners of the stadium which is charging 80% more that other stadiums as well as similar activities with broadcast companies that own teams. However, they are comparing different contracts and an even wider spectrum of contracts with broadcast companies. It is difficult to gauge the claim on assumptions and the PBPA itself admits that it is something ‘hard to do’. As a result it seems more based on opinion than hard fact. There would be no way to arbitrate stadium and broadcast charges based on unique situations and contracts. The stadium costs would stay the same.
If the above recommended changes are implemented income before taxes will rise to $1,668,300 (Operating Income after other expenses). Therefore we see that Kansas City Zephyrs Baseball Club is profitable.
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