The following is a contributed piece from Marvin Weiss,retired professor of accounting and founding dean of the New York Institute of Technology School of Management. Opinions expressed are author's own.
CFOs are familiar with a big weakness of generally accepted accounting principles (GAAP): they don't recognize the investment characteristic of knowledge-based startups. As a result, these companies must tell their story using non-financial and non-GAAP metrics, for which there is no standardization.
To reiterate what has been stated by others as a set of standards, GAAP was developed when production was the primary driver of profitability, and labor was considered replaceable and expendable. While there was an element of intellectual capital, it was minor when compared to investment in production.
As the U.S. economy expanded and took on a global perspective, production was outsourced to lower-cost foreign producers, and companies were and are still being created that are knowledge- and service-based rather than production oriented.
Shares in publicly held knowledge-based companies have reached levels that cannot be explained solely on GAAP-based financial statements. That's because the large operating losses of these companies, as they invest in talent, is expensed in the current fiscal period while their most significant asset, workforce intellectual capital, is not recognized until the company is acquired, at which time the excess paid to acquire that talent is recognized as goodwill.
As a result of the limitations of existing GAAP, non-GAAP and non-financial metrics have been used by investors and analysts to evaluate company performance.
As these non-GAAP metrics have proliferated, organizations such as the Sustainability Accounting Standards Board (SASB) have been formed to standardize non-GAAP disclosures, and to eventually create a uniform reporting system that would incorporate both financial and non-financial data and to possibly extend the audit function to the entire report.
However, as the Securities and Exchange Commission (SEC) has demonstrated in its recent ruling requiring expanded disclosure in form S-K of non-financial data relating to several areas, including human capital management (HCM), not even regulators can decide what information should be provided by registrants.
They only specified that the information be material in understanding how the workforce-related data impacts company performance. What's more, there's no requirement this information be presented in monetary terms.
As a result, human resource consulting firms have been quick to fill in the absence of guidance by proposing what HCM data should be provided, leading to what can be best characterized as a kitchen sink approach.
The SEC also accepted the idea that what is material can vary from industry to industry.So, for example, a high turnover ratio would be material in a publicly held consulting firm but would probably be considered normal in the retail sector. This is reflected by the fact that SASB has also approached standardization on an industry-by-industry basis.
I do not think it relevant to detail why the accounting standards setters decided to treat certain internally generated intangibles as expenses, even if the outlays incurred are intended to produce future rather than current revenue, and thus meet the technical definition of an asset.
Some internally generated intangibles, such as patents, have led to identifiable and separable status, with definitive amortization periods. These intangibles are recognized as assets.
But what about the cost of developing the intellectual capital, represented either individually or collectively, by the workforce itself?
Standards setters rejected capitalization for workforce outlays because such "assets" were not identifiable or separable. There was no basis for amortization, and there was no legal ownership that would justify capitalization.
At one time that reservation might have been justified, because public policy the Employee Retirement Income Security Act (ERISA) is a good example actually encouraged labor mobility.
However, the economic environment has changed. Recruitment of talent in knowledge-based companies has become so competitive that, because of large initial outlays, retention of talent is crucial if these companies want to recoup their investment. That's why companies are offering expensive incentives such as profit sharing, stock options, "Cadillac" fringe benefits, at the same time that GAAP treats these outlays as period expenses.
I believe that the original basis for expense versus capitalization has changed. Companies would not incur these HCM costs if they expected their newly hired talent to leave, and they are willing to incur the costs required to retain that talent.
Will employees still leave prematurely? No doubt, but this is the exception, not the rule. From a behavioral perspective, when it comes time for those in the c-suite to make strategic decisions about their workforce, what will have the greater impact, information provided in financial terms in internal accounting statements, or the non-financial metrics proposed by the SASB and others?
With regard to amortization, actuaries are able to estimate average service life for pension and benefit programs, and these same estimates can form the basis for amortization and immediate write-off as a loss if employees leave prematurely.
Before environmental, social and governance (ESG) investing became the focus of attention, there were many proposals to incorporate workforce investment under the rubric of human resource accounting, or HRA. The problem with many of these proposals was that the amounts to be capitalized were based on esoteric methods that were far removed from the concepts underlying GAAP.
What seems to have been lost along the way was the idea to capitalize the original outlay cost of HR-related investments that met the definition of an asset (intended to produce future benefit) and amortize that asset using the expected service life of the employee. Those leaving prematurely would result in the unamortized balance written off as a loss. (Conventional GAAP treatment would apply for tax purposes).
Most HRA proponents rejected this as too simplistic and also not providing information about the value of the workforce in an ongoing organization.
However, the increase or decrease in the balance of this "asset" would be a clear indication of whether or not investment was being made to increase or retain the workforce, and the expression of this amount in traditional financial terms would be a common denominator in all industrial sectors. That's different from the industry-specific non-financial disclosures proposed by SASB.
Incorporating these "assets" in GAAP-compliant financial statements would bring this information under the attest function, a marked improvement over the non-financial disclosures that today are often the product of a company press release.
Critics of capitalizing and amortizing talent like the asset it is complain that deferring such costs would overstate income in the early stages of workforce development, but if a company cut back on its workforce investment, the reverse would be true.
Continue reading here:
GAAP is obsolete; treat talent like the asset it is - CFO Dive
- Recruitment - Wikipedia - January 27th, 2017 [January 27th, 2017]
- Resource-based economy and pay-it-forward | The Moneyless ... - January 30th, 2017 [January 30th, 2017]
- A Resource Based Economy - worldsocialism.org - January 30th, 2017 [January 30th, 2017]
- Trump's Flawed Logic Regarding US-Mexico Relations - Fair Observer - February 7th, 2017 [February 7th, 2017]
- Economic freedom achievable through knowledge based economy, innovative technical skill development - President - Asian Tribune - February 7th, 2017 [February 7th, 2017]
- Younger generation inheritors of knowledge-based economy: President - Lanka Business Online - February 7th, 2017 [February 7th, 2017]
- Morguard - 2017 Real Estate Investment Trends to Watch in Canada - Canada NewsWire (press release) - February 7th, 2017 [February 7th, 2017]
- Ask Yourself These Two Questions About America's Economic Future - Fortune - February 8th, 2017 [February 8th, 2017]
- The Informal Economy and Decent Work: A Policy Resource ... - February 8th, 2017 [February 8th, 2017]
- Thunder Bay's population experiencing low growth - Tbnewswatch.com - February 9th, 2017 [February 9th, 2017]
- Substantial investment in agriculture needed to ensure enough food for all - Daily Nation - February 9th, 2017 [February 9th, 2017]
- Can Russia project power while battered by economic woes? - Asia Times - February 9th, 2017 [February 9th, 2017]
- When will Russia finally break its 'resource curse'? - Russia Direct - February 10th, 2017 [February 10th, 2017]
- TEA & TWO SLICES | On Giant Snow Penises And Christy Clark's Shudder-Worthy Interview - Scout Magazine (blog) - February 10th, 2017 [February 10th, 2017]
- Can Russia project power while battered by economic woes ... - MENAFN.COM - February 11th, 2017 [February 11th, 2017]
- Siemens backs Qatar''s economic ambitions with innovation - MENAFN.COM - February 12th, 2017 [February 12th, 2017]
- The 'Dutch disease' reexamined: Resource booms can benefit the wider economy - USAPP American Politics and Policy (blog) - February 13th, 2017 [February 13th, 2017]
- Charles Lawton: Here's a proposal to create real equality of job opportunity - Press Herald - February 14th, 2017 [February 14th, 2017]
- India can't write-off coal-based energy so soon: World Coal Association - Economic Times - February 14th, 2017 [February 14th, 2017]
- The pathologies of redistributive resource transfers - Livemint - February 15th, 2017 [February 15th, 2017]
- Jessica Wright: Well-managed farmland benefits community, watershed - Conway Daily Sun - February 15th, 2017 [February 15th, 2017]
- Evaluate FLSA for its Ability to Keep Pace with Today's Workplace, SHRM Tells House Subcommittee - SHRM - February 16th, 2017 [February 16th, 2017]
- Officials hope fiber optic expansion helps diversify Decatur's economy - The Decatur Daily - February 16th, 2017 [February 16th, 2017]
- 10th Biennial Nehalem Bay Estuary Cleanup set - Tillamook Headlight-Herald - February 16th, 2017 [February 16th, 2017]
- Howard gives Barnett a hand on hustings - The West Australian - February 18th, 2017 [February 18th, 2017]
- EDITORIAL COMMENT: Let's celebrate President's birthday with ... - Chronicle - February 20th, 2017 [February 20th, 2017]
- Kentucky Main Street Program Communities Contributed $110M to State Economy in 2016 - WMKY - February 20th, 2017 [February 20th, 2017]
- GM, Steelcase see a web of opportunity in the circular economy - GreenBiz - February 21st, 2017 [February 21st, 2017]
- The sputtering energy economy: Can it be revved up? - Meridian Star - February 21st, 2017 [February 21st, 2017]
- The difference between Malcolm Turnbull and Justin Trudeau - The Australian Financial Review - February 21st, 2017 [February 21st, 2017]
- In the Face of a Trump Environmental Rollback, California Stands in ... - Yale Environment 360 - February 22nd, 2017 [February 22nd, 2017]
- Report: Boundary Waters nets $77 million from summer visitors - Duluth News Tribune - February 22nd, 2017 [February 22nd, 2017]
- DENIM SPIRIT: An economy based on abundance - Finger Lakes Times - February 23rd, 2017 [February 23rd, 2017]
- HR International to hold confab on African economy - Guardian - February 24th, 2017 [February 24th, 2017]
- Event promotes innovation and technology expansion - News - Castlegar News - February 24th, 2017 [February 24th, 2017]
- The Venus Project Plans to Bring Humanity to the Next Stage of Social Evolution. Here's How. - Futurism - February 24th, 2017 [February 24th, 2017]
- Best returns since 1900? Resource based countries, including ... - Financial Post - February 24th, 2017 [February 24th, 2017]
- Economic growth projected for Saskatchewan in 2017 | Regina ... - Regina Leader-Post - February 24th, 2017 [February 24th, 2017]
- Energy as a Model for US-Mexico Economic Partnership - RealClearEnergy - February 24th, 2017 [February 24th, 2017]
- Science and Technology: Minister says FG will harness natural ... - Pulse Nigeria - February 24th, 2017 [February 24th, 2017]
- Montana Jobs Not Well Positioned - Big Sky Business Journal - Big Sky Business Journal - February 25th, 2017 [February 25th, 2017]
- The future of WA's economy: Life beyond mining - WAtoday - February 27th, 2017 [February 27th, 2017]
- Verdant Zeal set to celebrate decade of providing media solutions - Guardian - February 28th, 2017 [February 28th, 2017]
- Lessons from Canada's scientific resistance - Bulletin of the Atomic Scientists - February 28th, 2017 [February 28th, 2017]
- St Ann can do better Earl Jarrett - Jamaica Gleaner - February 28th, 2017 [February 28th, 2017]
- Firm canvasses technology strategy - The Nation Newspaper - March 3rd, 2017 [March 3rd, 2017]
- Mandryk: Next Saskatchewan boom needs to be from our heritage fund - Regina Leader-Post - March 3rd, 2017 [March 3rd, 2017]
- Bank of Canada channels Al Gore - Toronto Sun - March 3rd, 2017 [March 3rd, 2017]
- Australia's economy has been growing for 25 years straight Quartz - Quartz - March 4th, 2017 [March 4th, 2017]
- The Venus Project envisions a sustainable redesign of our cities and civilization - Inhabitat - March 4th, 2017 [March 4th, 2017]
- State's high-tech hits $1 billion economic milestone - Daily Inter Lake - March 7th, 2017 [March 7th, 2017]
- The startup economy - Canadian Lawyer Magazine - March 7th, 2017 [March 7th, 2017]
- Nehalem Bay Estuary Cleanup - North Coast Citizen - March 7th, 2017 [March 7th, 2017]
- Pipelines to be a 'fundamental' issue for NDP leadership race: Julian - Hill Times (subscription) - March 8th, 2017 [March 8th, 2017]
- Prime Minister Trudeau, no fan of the middle class - Hill Times (subscription) - March 8th, 2017 [March 8th, 2017]
- Finally, Democrats Have A Pro Wrestler In Their Corner - Huffington Post - March 9th, 2017 [March 9th, 2017]
- WA election: Labor outlines campaign costings and debt reduction plan - ABC Online - March 9th, 2017 [March 9th, 2017]
- WA election: Death threats, One Nation legal action, stadium stoush campaign trail action - ABC Online - March 9th, 2017 [March 9th, 2017]
- Russia, Israeli firm agree to invest $100 mln in Russia's dairy industry - Reuters - March 10th, 2017 [March 10th, 2017]
- Maine deserves a chance to capitalize on the North Woods monument - Bangor Daily News - March 10th, 2017 [March 10th, 2017]
- MAN, RMRDC, others to promote resource-based MSMEs,funding - The Nation Newspaper - March 10th, 2017 [March 10th, 2017]
- Jobs, education focus of Gov. Brown's Prineville visit - KTVZ - KTVZ - March 10th, 2017 [March 10th, 2017]
- HIKE NETARTS BAYOCEAN SPIT - North Coast Citizen - March 11th, 2017 [March 11th, 2017]
- Jobs versus or for the environment? - Budgeeter News - March 11th, 2017 [March 11th, 2017]
- Canada Invests $325 Million in the Fish and Seafood Sector - Yahoo Finance - March 11th, 2017 [March 11th, 2017]
- We are taking steps to overhaul economy through knowledge-based ... - TheNewsGuru (satire) (press release) (blog) - March 11th, 2017 [March 11th, 2017]
- Canada Invests $325 Million in the Fish and Seafood Sector - Marketwired (press release) - March 12th, 2017 [March 12th, 2017]
- Saskatchewan gender, immigrant wage gaps among widest in Canada - Saskatoon StarPhoenix - April 8th, 2017 [April 8th, 2017]
- Week in Film: Endless LOLs, an Acid Western, and Great Advice ... - Bedford + Bowery - April 8th, 2017 [April 8th, 2017]
- Famous fish the focus of 'steelhead ecology' hike - Tillamook Headlight-Herald - April 8th, 2017 [April 8th, 2017]
- 'Explore Nature' sets Cape Lookout hike - Tillamook Headlight-Herald - April 8th, 2017 [April 8th, 2017]
- Califonria Lawmakers approve billion dollar gas tax | KBAK - Bakersfield Now - April 8th, 2017 [April 8th, 2017]
- Globe editorial: On pipelines, Ottawa must have the final say - The ... - The Globe and Mail - June 6th, 2017 [June 6th, 2017]
- Politics biggest determinant of economic future, says Page - Tbnewswatch.com - June 6th, 2017 [June 6th, 2017]
- Our Turn: Pass SB 129, save 900 New Hampshire jobs - Concord Monitor - June 6th, 2017 [June 6th, 2017]
- We'll Always Have Paris: Trump's Impact On The Climate Agreement - HuffPost - June 6th, 2017 [June 6th, 2017]
- A strategy that will make Canadian innovation flourish - The Globe and Mail - June 6th, 2017 [June 6th, 2017]
- Ocean Conference Side Events Highlight Cooperation on SDG 14 ... - IISD Reporting Services - June 7th, 2017 [June 7th, 2017]
- We must tap 'blue economy' for progress - Daily Nation - June 8th, 2017 [June 8th, 2017]
- Minnesota Power Proposes Next Step in EnergyForward Plan - POWER magazine - June 9th, 2017 [June 9th, 2017]