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Thursday, January 21, 2010
MLB Accounting
A very interesting (and heated!) debate on accounting implications of MLB teams with regards to the signing bonus. On one side:
A balance sheet, particularly one in which a current expense is accrued prospectively over a six-year period, is irrelevant to a business’s annual budget in the current year… He’s going to cost the M’s $10MM this year, so why not apply it all to this year’s budget? Am I missing something?
And the other side:
Felix’s signing bonus is accrued over five years, so it counts 20% against payroll. This is how MLB accounting works.... if you’re budgeting any large amount, it’s very common to budget capital payments spread across the length of the contract.
In short, the question is this: do the owners of an MLB team set a budget on a cash flow basis (meaning, here’s X amount of dollars you can spend this fiscal year), or do the owners allocate a budget based on how expenses are reported to MLB (where you can you “assign” part of the expense to future years, like a signing bonus that is paid 100% upfront).
Would a GM say give ARod a 200MM$ signing bonus for a 10MM$ a year 10 yr contract and say “Uh, George, I need 210MM$”..... “Yes, that’s about what the team budget is this year. Good job”.... “Uh, no, I need 210MM$ just to pay ARod this year! But, that’s ok, we can spread 200MM$ of that over 10 years”
So, I really don’t know how an owner would see it. Presumably, they expect a certain percentage of salaries to be spread out, and so, probably accept the standard MLB accouting practice. But, in the case of rather large signing bonuses, I suspect an owner will put a cap on that too, and would count, for his annual budget purposes anything over that cap in terms of cash flow. And perhaps if the team is owned by a conglomerate, they do it one way, and if a team is owned by a single-person where that’s the bulk of their net worth, they might do it another way.
I have no idea whatsoever.
I liked this comment the most:
Can we just proceed according to the assumption that Dave’s hypothesis is correct, and the team has extra money left? Because the alternative makes for a pretty boring thread, though nowhere near as boring as watching an argument that belongs on AccountantsTryingToGetLaid.com
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