KANSAS CITY ZEPHYRS BASEBALL CLUB: A BASEBALL ACCOUNTING DISPUTE
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 arbitrarily at a maximum of 50% of the purchase price (It would be foolish to set it at a lower value for tax purposes). The depreciation is spread linearly over six years and comes to $2m per year. The players do not feel that any roster depreciation should be shown: if anything, they argue, the roster appreciates as the players become more experienced. The economic truth is that player rosters - baseball clubs’ most valuable assets - appreciate and depreciate over time: good scouting, trades, and coaching increase the roster value. 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...