Players' Arguments: Major League Baseball Is Profitable

PLAYERSÐ'ÐŽÐ'Ї ARGUMENTS: MAJOR LEAGUE BASEBALL IS PROFITABLE

In our view, the ownersÐ'ÐŽÐ'Ї accounting methods do not reflect an accurate picture of the overall economic health of the baseball team. Contrary to ownersÐ'ÐŽÐ'Ї claims that the team is losing money, and a large amount of them, we believe that the major league baseball is actually profitable.

1) Roster depreciation, independent of the accounting rules, does not reflect the economic truth.

When someone buys an existing business or starts a new business they get a grace period where they can use an accounting tool called amortization to get their business off the ground. Simply put, business owners are allowed to depreciate any business assets they need to get their business going. For instance, letÐ'ÐŽÐ'Їs say you own a restaurant. You need stoves, dish washers, cash registers, plates, silverware, etc. to keep that business running. You are allowed to write off the depreciation in value of those items because you will have to pay the cost of replacing them someday. So, in essence, you get to count the cost of those items twice in your taxes for their first few years.

Although strictly speaking, players count as business assets, so the amount paid for them can also be amortized over the first few years, but in the case of the baseball team roster, its value almost always appreciate with time, instead of depreciate.

Accurately, firms can only depreciate fixed assets, which are those assets of the business that have a long life, are used in the business and are not for re-sale or for conversion to cash, e.g. motor vehicles, machinery, buildings, land, office equipment, etc.

So in our opinion, the owners cannot depreciate the players like they are some farm equipment. This is because a baseball roster can be sold and when that happens, the value of the roster will usually increase because most of the players actually improve their skills with experience.

In fact, evident in the Major League baseball, most baseball teams are sold at a value much higher than their initial purchase value, even though the owners claim that they are suffering huge losses. More often, such teams are purchased by those who have owned baseball teams, and whom have also claimed to have their fingers burned while owning and managing such teams. These are men who have seen the books, know the true economics of the sport, and are still coming back for more. It is therefore tough to believe that all these people are rushing to re-enter a business they know to be a sure money loser. All these make the financial reporting of baseball teams dubious.

2) Capitalizing the value of the playersÐ'ÐŽÐ'Ї roster as allowed by the Internal Revenue Code is an arbitrary tax rule allowed for tax purposes and, therefore, this doesnÐ'ÐŽÐ'Їt mean at all that the roster has to be depreciated for financial accounting.

The owners attribute (for accounting purposes) half the price tag of the team's acquisition to player contracts Ð'ÐŽÐ'Є and then amortize this figure over six years. This convention provides an attractive tax benefit for the owners for the first six years following the purchase of the club. This means that the owners can actually create artificial losses which reduce their tax liability without actually costing a cent! In our opinion, this tax rule should be used solely for tax purposes and should not be exploited by owners as a claim of poverty.

The owners cannot deliberately use phony accounting to hide profits and underreport earnings just to evade taxes. More importantly, they cannot use such phony figures and insist that they reflect the economic health of the team.

3) Expensing signing bonuses when they occur does not reflect the economic truth and does not at all relate expenses to the revenue earned and violates the matching accounting principle.

The matching accounting principle states that when a given event affects both revenues and expenses, the effect on each should be recognized in the same accounting period.

Therefore, costs are reported as expenses in the period when:

(i) there is a direct association between costs and revenues of the period;

(ii) costs are associated with the activities of the period itself;

(iii) costs cannot be associated with revenues of any future periods.

As such the signing bonuses should not be recognized as expenses when they occurred as they are then not rightly matched against the revenues earned. On the contrary, such signing bonuses should be capitalized and amortized over the contract term.

4) Expensing deferred salary payments at the time when it is known that these expenses will be incurred also does not reflect the economic truth and fails to match expenses to the revenue earned, violating the matching accounting principle.

In line with the arguments stated in point