Kansas City Zephyrs

1. Identify the controversial accounting issues about which the owners and players disagree.

1. Players’ salaries expense
2. Initial Roster Depreciation Expense
3. Related-Party Transactions (Stadium Costs)

1. For each controversial accounting issue identify:

1. What accounting (accrual versus cash accounting) are the owners using?

• Accrual Basis Accounting

1. What accounting (accrual versus cash accounting are the players proposing?

• Cash Basis Accounting

1. What accounting you think best reflects “economic reality?”

• Because the Kansas City Zephyrs are a corporation that is publicly owed they should be following the accounting method required by GAAP which is the Accrual Basis Accounting method

1. I you were the arbitrator, what adjustments would you make to the owners’ financial statements so that they “better reflect economic reality?”

1. For the player’s salaries expenses I would leave the “portion of the 2005 salary deferred until 2015” alone because I think the owners have accounted for that correctly by showing it when it earned and not when it is expended.  However, I do think that the owners should put the deferred amount into a reserve account until it is paid.

I would however address the fact that signing bonus’ are being expensed at the time they are incurred.  I believe that the signing bonuses should be capitalized and then amortized over the period of the player’s contracts.  

I would also address the “Non-Roster Guaranteed Contract Expense.  I believe rather than the owners reporting this as an upfront expense at the end of the year, the owners should set up a reserve account and set the money they expect to pay into that account.  If they realize the obligation in the year it is due, then they take from the reserve and realize it as an expense.  If they don’t realize the obligation, because another team picked up a player’s contract that they thought wouldn’t play baseball again, then they don’t realize it as an expense.

1. For the Initial Roster Depreciation expense, I believe the owners are incorrect in depreciating their rosters since a roster can both depreciate and appreciate over time.  The adjustment I would make is to remove this expense until the team is sold; at that time an owner can realize the depreciation or the appreciation (as a gain) of the roster.

1. For the Related-Party Transactions (Stadium Costs) I believe that in order to mitigate any conflicts that may come from to of Zephyrs owners also being the sole owners of the stadium company, that an intermediary (un-bias 3rd party) may need to help come up with the correct stadium costs based market research and other comparable to see what other similar baseball clubs are paying in order to get the correct fair value.

How does your adjustment net income compare to what the owners currently report and what the players believe should be reported?

• Compared to the owners currently reported net income, my adjusted net income would be higher and probably even show a gain rather than a loss (depending on what the stadium cost is after the intermediary comes up with correct market price)

• Compared to net income the players believe should be reported, my adjusted net income would be in line with theirs but a little less because I still have the “Portion of 2005 Salary Deferred Until 2015” in my calculation where they do not.  Also, the net income number would differ based on the stadium costs that the intermediary comes up with.