Kansas City Zephyrs Baseball Club Harvard Case Solution & Analysis

1. CORRECT PROFITABILITY OF KANSAZ CITY ZEPHYRS:

The owners are correct about the laws and regulations regarding depreciation and salary expenses, but the figures of related party transaction of stadium rent contradicts between Kansas City club and other clubs which provides the sign of manipulation.

I consider players to be more accurate regarding the profitability of the club as depreciation of $19 million is a non-cash charge and is used for tax advantage. If this non-cash charge is added back to net loss, it will erode net losses and company will become profitable after tax. The dispute regarding related party transaction by players has also appeared to be accurate as the rent paid by Kansas City Zephyrs baseball club is higher than other clubs revealing a difference of $9.09 million for the year 2005. If the extra rent paid by owners in form of related party transaction is added back to net loss then the accurate picture will be more visible as argued by the players.

Hence players are more accurate regarding the profitability of the company and owners should consider their view of considering minimum salaries and allocating amount to team’s pension fund.

2. RECOMMENDATION REGARDING ACCOUNTING DISAGREEMENT BETWEEN THE OWNERS AND THE PLAYERS:

There are several recommendations by players regarding accounting techniques used by the owners in presenting their financial statements, these are as follows:

Kansas City Zephyrs Baseball Club Harvard Case Solution & Analysis

INITIAL ROSTER DEPRECIATION:

The player’s recommendation regarding initial roster depreciation is that; it should be recognized only when the whole teamwhich was purchased by the owners in 2003, is sold. Such statement by players does not coincide with the accounting laws. Under section 168 of IRS the owners could depreciate the company’s intangible assets including players contract, sponsorship agreement, luxury suite contract and various other intangibles, including the franchise itself over a 15 year period under section 197 of IRS. (Greenberg, 2015)

The method used by the owners for initial roster depreciation is in regulation with accounting principles and it should be presented in same manner as presented by the owners which gives a transparent view of the company’s financial statements.

As depreciation is a non-cash charge and is used by companies for tax sheltering purpose. After adding depreciation of $19 million back to net loss which is a non-cash charge, the company becomes profitable after tax and company should consider its minimum salaries and team’s contribution to the players’ pension fund.

OVER STATED PLAYERS SALARY EXPENSE:

The players think that owners overstate player’s expense in numerous ways. Firstly, players think that bonus paid by the company to players must not be a portion of salaries expense in income statement. According to players bonuses are just a portion of the compensation package and should be stretched out over the term of player’s contract.

According to accounting principles, signing bonuses are expensed when they are incurred and are payable when the employee begins his employment. If the signing bonus is refundable then it should be amortized for the period till it can be refundable, but in this scenario signing bonus is not refundable and is not subjected to amortization. In this case, the company has paid out all the bonuses in cash and thus are justifiable to recognize signing bonus as salaries expense. (www.proformative.com)...........................

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