Kansas City Zephyrs

Refer to the Kansas City Zephyrs reading from earlier in the week. For each of the 5 areas in dispute, answer the following: Who is right? Why? Submit your answers in your own Word document by the end of Week 1. Bill Ahem was asked to be an arbitrator in a major dispute regarding profitability between the Owner-Player Committee (OPC, the representatives of the owners of the 26 major League baseball teams in collective bargaining negotiations) and the Professional Baseball Players Association (PBPA, the players’ union). Baseball Accounting Dispute

The players felt they should share in the teams’ profits while the owners maintained that most of the teams were actually losing money each year so there would be no profits to be shared with the players. The OPC were asked to produce financial statements to support their position that most of the Baseball teams were actually losing and not making profits but the PBPA, who had examined the owners’ statements, claimed that the owners were hiding profits through a number of accounting tricks and that the statements did not accurately reflect the economic reality.

Ahern would need to review both parties’ information and make a decision on the profitability issue. His decision was important because it would affect the ongoing contract negotiations, particularly in the areas of minimum salaries and team contributions to the players’ pension fund. After meeting with the OPC and the PBPA, Ahern’s task was to review the Zephyrs’ financial statements, hear the owners’ and players’ arguments, and then reach a decision as to the profitability to focus on the finances of the Kansas City Zephyrs Baseball Club, Inc.

Both sides agreed this team’s operations were representative, relatively clean, a simple example to study, not owned by another corporation, and it did not own the stadium the team played in so private financial data would have to be revealed because the corporation was publicly owned. Who is right? At this point it is very premature to say who is correct. The PBPA does have a right to ask for an investigation into the OPC’s financial statements if they believe that the owners are in fact making a profit and believe they should get a part of it.

Why? The players are the reason the fans attend the games and spend their money on tickets and concessions, if the owners are making more of a profit than what they are claiming on their financial statements the players should have a right to also get a cut of the profits. Major League Baseball Major league baseball in the United States is comprised of a number of components bound together by sets of agreements and contractual relationships.

At the heart of major league baseball are 26 major league teams and each team operates as an independent economic unit, responsible for contracting their own players, promoting games, selling tickets, arranging for the use of a stadium and other needed facilities and services, and negotiating local broadcasting of games. The teams would then join together to establish common rules and playing schedules, and to stage championship games making the business of most teams limited exclusively to their major league activities.

Most teams are organized as partnerships or privately held corporations; very few are subunits of larger corporations making the individual teams relatively small with annual revenues between $20 million and $30 million. Each team maintained an active roster of 24 players during the playing season, plus 16minor league players “on option,” who might see major league action during the season bringing the total to 40 players on major league contracts for each team at any one time.

Each team played a schedule of 162 games during the season, 81 at home and 81 away. Collectively, the team owners established most of the regulations that governed the industry. The covenant that bound them was the Major League Agreement (MLA), to which was attached the Major League Rules. The rules detailed all the procedures the clubs agreed on, including the rules for signing, trading, and dealing with players. The commissioner also dministered the Major Leagues Central Fund, under which he negotiated and received the revenues from national broadcast contracts for major league games. About one-half of the fund’s revenues were passed on directly to the teams in approximately equal shares. Within the overall structure of major league baseball, the 26 teams were organized into two Leagues each with its own president and administration. The leagues were financed through a small percentage share of club ticket revenues and receipts from the World Series and pennant championship games.

Through Player Development Contracts, the major league teams agreed to pay a certain portion of their affiliated minor league teams’ operating expenses and player salaries. Who is right? There needs to be an organization and coordination of the teams which is what the leagues are formed to do. If the teams agree to follow the MLA there should be no discrepancies with contracts and questions on how the fund’s revenues are passed to teams in approximately equal shares. Why?

If the fund’s revenues are passed to the teams correctly, both owners and players should have a similar interpretation of how the financial statements are broken down. The difference between the Zephyrs owners and players financial statements came out to approx. $317,000 from 1984 to 1983. Meeting with the Zephyr’s Owners Ahern met with the Zephyrs owners’ representatives who presented him with the team’s financial statements for the years 1983 and 1984. The current owner was a corporation with five major shareholders, which bought the team on November 1, 1982, for $24 million.

The Zephyrs did not own any of their minor league teams or their stadium, but two of the Zephyrs’ owners were part owners of the private corporation that owned the baseball stadium. Ahern met with Keith Strong, the owners’ lawyer who went over the team’s financial statements for the years 1983 and 1984. * The controversial issues pending with the owner’s financial statement were the following: * Explaining the players’ salaries expense entries to which Strong answered the total player salaries expenses on the 1984 income statement totaled 10,097,000 with most of the expense represents cash outflows in 1984. Strong explained that they agreed to defer a portion of their highest paid players for 10 years which would help the players save on taxes and provides them with some income after their playing days are over. * The non-roster guaranteed contract expense to which Strong explained was also a player salary expense broken down separately because the salaries are paid to players who are no longer on the active roster.

The non-roster salaries are amounts the team owes players whom were released and still had long-term guaranteed contracts. The financial statement showed an amount of $750,000 still owed at the end of 1984 to two players: * Joe Portocararo, a veteran pitchers who signed a four-year guaranteed contract last year suffered a serious injury before the season started and between the player and the team it was jointly decided it was best he retire. * U. R.

Wilson was released during spring training with hopes that another team would pick him up and pay his salary, but none did. * Roster depreciation expense to which Strong explained when the team was bought in 1982, 50 percent of the purchase price ($12 million) was designated as the value of the player roster at that time which was capitalized and is being amortized over six years. 50% is the maximum percentage that the Internal Revenue Code will allow for amortization when purchasing a sports team. When asked if there was anything else in the statements that the players disputed Strong replied that the rest of their accounting was very straightforward with most of their revenues and expenses result directly from a cash inflow or outflow. * Strong wanted to clarify that regarding baseball finances in general, it is thought that teams generate huge profits but the rules and regulations governing the clubs comprising the league are essential to the creation of the league as an entity and have virtually nothing to do with pricing policies of the individual clubs.

The objective of the cooperative agreements is not to constrain the economic competition among them, but rather to create the league as a joint venture that produces baseball during a season of play. Without such rules of conduct, leagues would not exist. Who was right? The owner’s explained in details why the broke down the player’s salaries expenses, roster depreciation and defended their accounting stating that they follow the rules of conduct imposed to them by the leagues. Why? The owner’s interpretation of their financial statement breakdown sounded very straight forward without any hidden agendas.

The owner’s believe that deferring a portion of the player’s salary is a long term investment plan for the player to fall back onto after he is out of the game, the non-roster guarantee expenses were dues to players that could not fulfill their contracts due to disability or cut from the team (the team still honored their salary contracts), roster depreciation was explained by 50% of the purchase price designated as the value of the player roster at the time it was capitalized and amortized over six years. Meeting with the players

Ahren then met with the PBPA representatives and their lawyer, Paul Hanrahan to go over their financial statements for the same years, 1983 and 1984. * The PBPA’s income statements were very similar to those of the owners except for a few items: * The players’ version of the financial statements showed profits before tax of $2. 9 million for 1983 and $3. 0 million for 1984 as compared to the losses of $2. 4 million and $2. 6 million on the owners’ statements. * Explaining player salary expenses, Hanrahan believes the owners overstate player expense in several ways. One is that they expense the signing bonuses in the year they’re paid. The players feel the bonuses are just a part of the compensation package, and that for accounting purposes, the bonuses should be spread over the term of the player’s contract. Information was gathered on the bonuses paid in the last four years and the contract terms, adjusted to the owners’ income statements by removing the bonuses from the current roster salary expense and by adding an “amortization of bonuses” line.

The net effect of this one adjustment on 1984, for example, was an increase in income of $373,000. The PBPA believes that it is safe to assume that even if the owners have really paid out all the bonuses in cash, and there is no guarantee that the players will complete their contracts, the number of players who do not complete their contracts is very small, and they think it is more meaningful to assume that they will continue to play over the term of their contract. * Second adjustment made to the players’ salary line was to back out the eferred portion of the total compensation. Many of the players, particularly those who are higher paid, receive only about 80% of their salaries in any given year. They receive the rest 10 years later so the PBPA feels that since the team is paying this money over a long period of time, it is misleading to include the whole amount as a current expense. This adjustment increased the 1984 income for the Zephyrs by $1,521,000. No salary expense deferred from prior years was added back in because that form of contract is a relatively recent phenomenon.

The contract states very clearly that the player is to receive, say, $500,000, of which $100,000 is deferred to the year 1984. The team has paid only $400,000 in cash some teams set money aside and recognize that amount as a current expense but the Zephyrs don’t set any money aside. * Non-Roster adjustments to the players’ salaries due to players who are no longer on the roster should be recognized when the cash is paid out, not when the players leave the roster.

Unless that is done, the income numbers will vary wildly depending on when these players are released and how large their contracts are. Furthermore, it is quite possible that these players’ contracts will be picked up by another team, and the Zephyrs would then have to turn around and recognize a large gain because the liability it has set up would no longer be payable. * Roster depreciation. When asked why the player’s financial statement did not have roster depreciation Hanrahan replied that the PBPA feel it gives numbers that aren’t meaningful.

The depreciation expense arises only when a team is sold, so one can have two identical teams that will show dramatically different results if one had been sold and the other had not. They don’t think the depreciation is real because most of the players actually improve their skills with experience, so if anything, there should be an increase in roster value over time, not a reduction as the depreciation would lead you to believe. * Related-party transactions-The PBPA listed Stadium Operations at about 80% of what the owners charged.

Two of the Zephyrs’ owners are also involved with the stadium corporation and are the sole owners of that stadium company which leads the PBPA to think that the stadium rent is set to overcharge the team and help show a loss for the baseball operations. This was researched with what other teams pay for their stadiums. Every contract is slightly different, but it is assumed that two of the five shareholders in the team are earning a nice gain on the stadium-pricing agreement.

The objective is to look at all these related-party transactions if baseball’s true position is to be fairly stated. The overall effect of all these adjustments we have made to the Zephyrs’ income statements changes losses to profits. In 1984, the change is from a loss of $1. 7 million to a profit of $1. 4 million. * In the labor negotiations, the owners keep claiming that they’re losing money and can’t afford the contract terms which the PBPA feels are fair. The PBPA feels the owners are “losing money” only because they have selected accounting methods to hide their profits

Who is right? The players’ version of the financial statements showed profits before tax of $2. 9 million for 1983 and $3. 0 million for 1984 as compared to the losses of $2. 4 million and $2. 6 million on the owners’ statements. The players believe that the owners were holding back information on how much they truly owned in stadium shares and hiding their profits by setting their stadium rent and overcharging the team in order to show a loss for the baseball team operations.

Why? Players feel the owner’s overstated the player’s salaries. Information was gathered on the bonuses paid in the last four years and the contract terms, adjusted to the owners’ income statements by removing the bonuses from the current roster salary expense and by adding an “amortization of bonuses” line making this one adjustment on the financial statement 1984, for example, an increase in income of $373,000.

The PBPA believes that it is safe to assume that even if the owners had really paid out all the bonuses in cash, and there is no guarantee that the players will complete their contracts, the number of players who do not complete their contracts is very small, and they think it is more meaningful to assume that they will continue to play over the term of their contract.

Many of the players, particularly those who are higher paid, receive only about 80% of their salaries in any given year. They receive the rest 10 years later so the PBPA feels that since the team is paying this money over a long period of time, it is misleading to include the whole amount as a current expense. This adjustment increased the 1984 income for the Zephyrs by $1,521,000.

They don’t think the depreciation is real because most of the players actually improve their skills with experience, so if anything, there should be an increase in roster value over time, not a reduction as the depreciation would lead you to believe. Bill’s decision/Final conclusion Hearing both sides of story has opened up more questions regarding whose interpretation of which financial statement is the correct one.

The owners outline what they believe is a fair player salary program that looks out for the player long term (regardless if they stay with the team or not) but do not state that the two of the Zephyrs’ owners are also involved with the stadium corporation and are the sole owners of that stadium company Two of the Zephyrs’ owners are also involved with the stadium corporation and are the sole owners of that stadium company making it a little questionable on if the profits belong to the Zephyr’s owners or the team.

The player’s had good points on their adjustments to the player’s salary and bonus breakdown so that the numbers now look positive instead of at a loss. In conclusion it will have to come down to which interpretation follows the Baseball Leagues rules and if the Zephyr’s owners are subject to disclose any private ownership of stadiums when disclosing team related financial statements.

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