Kansas City Zephyrs

Case Summary:
This is a case relating to accounting and finance. In particular there is an argument between
baseball players and the owners of baseball clubs that unfair accounting practices are being used
to show that the baseball clubs are making losses and therefore are not able to provide greater
benefits to the players.
There are three groups that are involved in the case study;

Professional Baseball Players Association (PBPA, representing baseball players)

Owner-Player Committee (OPC, representing owners of baseball clubs)
Bill Ahern (person selected to solve the disputes between OPC and PBPA)

Bill Ahern, has been chosen to settle the disputes over what exactly should be the correct
accounting practices that should be followed. For this purpose, he conducts meetings with both
OPC and PBPA and listens to their viewpoints about what items of expenses should be shown in
the financial statements.
The case describes 3 areas in which the accounting is being disputed:
1. Roster depreciation; here OPC are stating that the roster of players required to be
depreciated because they lose value over time, but PBPA argued that there should not be
depreciation because the players are actually gaining experience and becoming much
better the longer they are involved in the baseball activities
2. Player compensation; here OPC is charging many amounts like signing bonus which is
quite a large sum of money immediately in the current year whereas the PBPA are saying
that since the players are going to play for the next four or five years the amounts like the
signing bonus should be charged only at a later time.
3. Transfer pricing of related party operations (stadium costs); here PBPA is stating that
many of the owners colluded with other parties to raise the prices of baseball stadium
costs as well as broadcasting costs while not showing related income in order to make it
look like the club is incurring a lot of losses.

1. How should Bill Ahern resolve the accounting conflicts between the owners and the
players?
Bill Ahern has proceeded in the right direction by first holding the meetings between OPC and
PBPA. But at the same time they should be aware that the right way to approach the solution of
the issues is to consider the economic impact that they actually have in practice and also to
consider the United States GAAP (accounting principles and practices) in addition to this Bill
Ahern should also consider the application of accrual accounting which is is an accounting
method that measures the performance and position of a company by recognizing economic
events regardless of when cash transactions occur. In particular we should keep the following
points in mind:
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.
4. 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 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 team.
5. Stadium Costs
Players suggest that the stadium rents are set to understate the profits of the baseball club and to
move some profits to the stadium corporation that is owned by two of the baseball clubs owners.
The economic truth calls for an arms-length market price.

2. How much of the Kansas City zephyrs earned in 1984?

Please check this question as the case does not provide any information on the year 1984 and
therefore this question may be a mistake.