Kansas City Zephyrs Case Study
Bill had to be an arbitrator between Owners Committee and Players Union
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. …show more content…
Stock options and pensions are the 2 most common forms of deferred compensation. This type of pay arrangement is generally reserved for top executives and employees in managerial positions, and can have advantageous tax implications. Learning how to account for deferred compensation requires an understanding of the Generally Accepted Accounting Principles (GAAP) underlying the treatment, as well as the portion of the Internal Revenue Code (IRC) that …show more content…
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