Since they have not reached an agreement yet, a super-partes moderator has been asked to figure out the outcome of the bargain, relying on good and rational accounting principles. Regarding the players’ salary, three related issues are displayed: A first dispute arises from the fact that a portion (20%) of the best paid players’ (13/40) compensation is not paid immediately, but deferred after 10 years, in this way, say the owners, players pay less taxes and are provided some income after they retire. However, players advocate that compensation expenditure should be expensed only when there is an outgoing cash flow.
They justify this argument basing on the fact that generally teams do not set money aside to cover future obligations. By hearkening the involved parties and relying on reasonable accounting principles it can be stated that the deferred compensation has to be expensed when earned, that is accounted for the whole amount today, togheter with the remaining part of the salaries. This explanation come out for prudential purposes, in fact it is common practice to account today the expenses for an obligation even if it has to be paid tomorrow.
For this reason players’ requests are met. 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, while players assert, since bonuses are just part of the compensation package, they must be smothered along the entire life of the contract also because there is a strict correlation with performance that is in place for the entire career of a player not just for one year.
Indeed, the economic discipline affirm 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. Again, players were in force with their reasons. A third debate 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 because of they are retired or injured.
The issue is whether the payments should be expensed as they are paid out or whether the total future value of these payments should be expensed when the players are removed from the roster. Owners asseverate that the total future value of these payments should be expensed when the players are removed from the roster because they are no more active players, hence they do not affect company’s current revenues. However, players want to persuade them the payments should be expensed as they are made.
If it is not, income numbers would be heavily subject to high volatility depending on when they are released and on the duration of the contracts. Additionally, players say, these contracts could be picked up by another team as well, and then the company would not have to pay any liability. Reasonably, 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.
This solution is consistent with a rational basis, because keeping into count an estimate of non-roaster guarantee contract expense prevent the arise of wrongdoings as accounting this when it is paid out considering only the cash flow. The creation of a reserve recall the carefulness principle in the sense that when an obligation arise it has to account today even though it will happen tomorrow, but only for the estimated value of that expense since in this case the company is dealing with random events.
Hence, the decision this time is in favor of the owners. Relating on roster depreciation, the owners recognize it 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 unconvenient to set it at a lower value for tax purposes). Then, the amount is capitalized and depreciate spreading linearly over six years. This is a widespread practice in the baseball industry.
The players do not think that any roster depreciation should be shown: if anything, they argue, the roster appreciates as the players become more experienced Again, depreciation expense show up only when a team is sold; the market decide what the fair depreciation is, in this way the problem of having two identical teams showing different values if one is sold while the other one is not, it can be avoided. By scrutinizing the topics it can be asserted 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. Thus, the roaster should hence not be depreciated. It is reasonable to assume that there can be surplus instead of depreciation, and sometimes the contrary, but looking also at the true value of the roster that arise during the market valuation it can be said the depreciation may underestimate the real value of a team, bearing in mind there could be something wrong as injuries that, anyway have to be considered as an exception rather than a rule.
Another point for the players then. Accounting to the last issue, related-party transactions, two more questions are left to the discretion of the arbiter. First of all players argue that two of the company owners, that are also the sole proprietary of the stadium tend to high the rent expense, compared to the average rent that other teams pay and keep it as a benchmark value, to overcharge the company’s costs with the intent to make it appear not profitable and to abscond some of the corporation’s profits to the stadium as well.
Players reinforce this argument showing examples of other companies bahaviour and other industries connections with this kind of transactions. They stress the motivation that it is impossible to have a total absence of convenience in doing this, posing issues of conflict of interests and independency of operations. Owners instead, do not report any information about the proprietary structure of the stadium. It is fully rational then, as the economic principles teach to rely on an arms-length market price.
The intervention of an appraiser in mandatory in order to evaluate a fair market price for the rent. Keeping in mind the rent is quite above the average plus the things already analyzed but bearing also that a certain degree of freedom is setting a price is necessary it can be confirmed that players reasons are preponderant that the owners ones. Hence the rent must be evaluated and very likely it will result in a lower price respect to the value originally set by the stadium’s owners.
For these reasons the players collect another victory. The last issue is related to the treatment of how to account the skybox revenues. Owners state that since the skybox are considered to be sold every five years in front of a unique immediate solution payment, their value must be smothered across five years. However, players go in the contrary direction because they think is more fair to account the payment in one solution for one year.
By rationality since the revenues are paid out immediately in one solution but they concur to the profits of the company for the entire life of the contract seems reasonable to account these revenues in the year they effectively pertain then a spread of the cash over five years is considered fair and appropriate in accordance with good accounting principles. Hence, owners adjudicate this last fight. +
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