The Kansas City Zephyrs accounting dispute and the earnings game

Coporate Finance/Accounting

The first area of dispute in the Kansas City Zephyrs accounting disagreement between the owners and the players is roster depreciation, which the owners claim causes them a loss of 2 million dollars and which the players do not recognize. It appears as though the players are correct for not recognizing this loss, since the only time that expense occurs is when a team is bought by someone else. Additionally, by mitigating this possibility with the effect that players improve with experience and training and the players are right.

In terms of current roster salary it appears as though the players are right in the case of the Zephyrs. Their rectitude is based on the fact that the owners are actually paying part of the player's salary much later (10 years) than they are recognizing losses for. The Zephyrs are not paying that money now, although other teams are.

The owners are definitely right about the issue regarding the amortization of signing bonuses, which is a matter of $716,000. This is money that they have paid out. Moreover, it is possible that players may not complete the terms of their contract, which means these losses are valid.

The players are definitely right about the dispute regarding the non-roster guaranteed contract expense. These expenses should be recorded when they are actually disseminated and paid, not when a player leaves the roster for the simple fact that it is possible the player can sign to another team which will pay that expense. This is a difference of $750,000.

The players of the Zephyrs are right about the stadium operations expenses, since two of the owners of the team are also the sole owners of the stadium and are reaping the benefits of this situation accordingly.

The phenomenon in accounting practices that was dubbed the Earnings Game in the 1990's article by Justin Fox is the clever manipulation of earnings in order to consistently meet the projected earnings of a publicly traded company by the myriad of analysts who evaluate it. The goal, of course, is to not fail to meet your earnings by a penny, as well as to not exceed expectations by too much -- since doing so could dramatically later future expectations and throw off the smooth, regulated meeting of earnings. Companies play this game, of course, because it helps to bolster their stocks. The public and the financial community in general is greatly impressed by companies that meet their earnings over a sustained period of time. There are many different ways in which companies can subtly manipulate their earnings to meet the expectations of analysts. One is to defer recording revenue until it is advantageous to do so -- a similar process may involve losses. The point, of course, is to keep investors pleased by demonstrating stability.