Kansas City Zephyrs Baseball Club: A Baseball Accounting Dispute

KANSAS CITY ZEPHYRS BASEBALL CLUB: A BASEBALL ACCOUNTING DISPUTE

The controversy between the owners and players concerning how to account the expenses is crucial to understand if the company could be profitable and then able to meet players’ requirements. In this case three problems are under the scrutiny of the arbiter: roster depreciation, player compensation and the transfer pricing of related party operation, thus issues regarding the stadium cost. Players and owners are struggling against each other in order to win the bargain trying to force and emphasize their own reasons. Since they have not reached an agreement yet, a super-partes moderator has been asked to figure out the outcome of the bargain, relying on good and rational accounting principles.

Regarding the players’ salary, three related issues are displayed:

A first dispute arises from the fact that a portion (20%) of the best paid players’ (13/40) compensation is not paid immediately, but deferred after 10 years, in this way, say the owners, players pay less taxes and are provided some income after they retire. However, players advocate that compensation expenditure should be expensed only when there is an outgoing cash flow. They justify this argument basing on the fact that generally teams do not set money aside to cover future obligations. By hearkening the involved parties and relying on reasonable accounting principles it can be stated that the deferred compensation has to be expensed when earned, that is accounted for the whole amount today, togheter with the remaining part of the salaries. This explanation come out for prudential purposes, in fact it is common practice to account today the expenses for an obligation even if it has to be paid tomorrow. For this reason players’ requests are met.

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, while players assert, since bonuses are just part of the compensation package, they must be smothered along the entire life of the contract also because there is a strict correlation with performance that is in place for the entire career of a player not just for one year. Indeed, the economic discipline affirm 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. Now, owners were in force with their reasons.

A third debate 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 because of they are retired or injured. The issue is whether the payments should be expensed as they are paid out or