Financial Analysis Dispute in Zephyrs - Essay Example

The PBPA is concerned that the OPC overstates compensation expenses by expensing bonuses in the year in which they are paid and states that bonuses are part of the compensation package and should be divided equally throughout the player’s contract period for accounting purposes. However, the OPC is right in using the above manner because the deferred compensation should only be expensed when players earn it, that is, it is an expected expense for the OPC (Palepu, Healy, & Bernard, 2007).

Amortization of signing bonuses

The OPC is right because bonus depreciation is a legal process available to all businesses and it allows firms to deduct an extra depreciation expense for the qualifying item, which is taken right away in the year that the item in question is put in use (IRS, 2013). It is a method of accelerated depreciation used on new items only. Nonetheless, the process creates a loophole in valuation by helping businesses to make tax losses thus raising concern for the PBPA.

Non-roster guaranteed contract expense

The above expense is associated with the salaries paid to players who no longer provide services to the team but whose contracts with the team have not expired. The OPC is right to expense the whole amount in one year because the affected players do not contribute to the team’s current revenues. Corporate financial reporting uses accrual as opposed to cash accounting where expected cash outflows from economic transactions are recognized as expenses when computing the net income (Palepu & Healy, 2012). Accrual accounting fills the gap left by cash accounting when closing accounting books since the latter does not report full economic repercussions of transactions undertaken in a certain period and gives incomplete information about a firm’s periodic performance.      

Stadium operations

Since the stadium’s owners are also shareholders in Zephyrs, then it is possible that the rent could be overcharged given that managers can use disclosure policies that make it difficult for external users to discover the firm’s true economic picture, and such overlapping revenues are not usually reported in the income statement (Palepu & Healy, 2012). However, the $250,000 down payment for the luxury boxes should be reported as revenues in the current financial year as provided for by accrual accounting where expected cash receipts for delivery of services are recognized as revenue and used to compute net income