Letter to Management
This letter addresses a key issue in the dispute between players and owners: the profitability of the Kansas City Zephyrs baseball team as a proxy for league profitability. Three major accounting issues are disputed between players and owners: 1) initial roster depreciation; 2) player salary expense; and 3) related party transactions. All three of these issues are important; however, in assessing the “most significant” of these issues, I have interpreted that phrase to mean: the issue that would shed the most analytical light on the profitability of the league. By that standard, two issues stand out: 1) Player salary expenses, which account for a $30.5 million differential in 2004 and $26.99 million differential in 2005; 2) Related-party transactions, which account for $7.48 million in 2004 and $9.09 million in 2005. Although player salary expense issues account for a greater proportion of money, and thus could swing the team from an accounting loss to an accounting profit, I have chosen related-party transactions as the most significant issue for examination for the following reasons: 1) The magnitude of its contribution to league profitability is not known; thus, even though a clear ruling on player salary expenses may lead to a clearer answer, it will still not satisfy the underlying issue that owners may not be transparent with related party transactions. That is, without resolution on this issue, the dispute will not be solved.
The owners’ position on related-party transactions is not to break out those transactions related to firm owners’ that also own the stadium or receive revenue through broadcasting rights. The players’ position on related-party transactions is to discount expenses on stadium operations, or to zero out revenue for broadcasting if the team owners also own those rights. According to US GAAP ASC 850, there should be “disclosure of all material related party transactions, other than compensation arrangements, expense allowances and other similar items in the ordinary course of business.”
As the arbitrar, I would recommend that, in the spirit of US GAAP regulations, owners of each team would declare related-party transactions either through stadium or broadcast revenue in the financial reporting process. Ideally, not only the type of transactions would be revealed, but also the type and approximate amount of the transactions involved.
Overall, there is a compelling argument to be made that employee salaries should be the main focus of this inquiry. After all, salary expenses, at least based on the discount that the players union puts on stadium expenses, is of much greater monetary importance than related-party transactions. This surety, however, is illusory. If related-party transactions are as ubiquitous as suggested, and if they are related to large revenue items such as stadium expenses and broadcasting revenues, this number must be accurately estimated in order to assuage player concerns that owners are using “accounting tricks” in order to hide revenues that would swing the league into profitability. The potential clarity offered by this examination is more important in assessing the “true” profitability of the league that will then allow both of the parties to negotiate in good faith. Even if the player salary expense issue is resolved, players might not accept the findings as they do not address resolution of related-party transactions.
Kieso, Donald. “Intermediate Accounting.” Boston: Wiley, 2010. Print.
Merchant, Kenneth and Krishna Palepu. “Kansas City Zephyrs Baseball Club, Inc. 2006.” Boston: Harvard Business Review Case, 2011. Print.
US GAAP ASC 850. “Related Party Transactions.” Available on GAAP website.