Better Reporting on Employees

Government “provides a tax deduction to the company that replaces a human with a robot, but offers nothing to the company that trains that worker to remain employable” – Senator Mark Warner, Virginia.

If you’re a CPA, you just cringed when you read that statement for two reasons. First, the statement is absolutely incorrect. The tax code not only allows for the deduction of the cost of training, but that cost is immediately deductible and is not required to be capitalized and recognized over a period of time like the cost of the robot. The second reason you cringed was because you realized this person’s lack of knowledge about how taxes really work is probably a good example of the majority of Congress. This is the very same Congress that is responsible for the tax law in the first place, but that is not the point of this blog.

The above quote was from an article in Harvard Business Review I recently read on “the problem of reporting employee costs as expenses instead of assets.” The writer of the article has the same misunderstanding of the difference between reporting on a cost and capitalizing something as an asset as Senator Warner has in understating how the tax code works. Simply put, slavery has been illegal in this country for over 150 years and I, for one, would like to keep it that way. That means I strongly believe employees should never be recognized as assets, but that does not mean that the goal of the article, better measurements and reporting of the most critical part of many businesses today, should not be improved.

The way to improve information on the employees is not to distort the meaning of an asset to capitalize costs. No, the way to improve information is to enhance the reporting on costs and other facts related to employees. I won’t go into all the studies about employee effects on the value of a business and business profitability. Instead, in the spirit of brevity, I will propose a few disclosures that could be combined into one simple chart. First, the disclosure should group employees based on the major employee responsibilities at the company, such as sales, customer care, retail (store) support, manufacturing, support staff (I would hate to say Finance probably goes here) and so forth. The 10% rule could be used for determining what groups need to be disclosed. Then for each group of employees, disclose the following:

  • Total number at end of period
  • Total compensation and benefits in period
  • Total improvement costs, such as training in period
  • # hired in period
  • # involuntarily terminated in period
  • # voluntarily leaving in period
  • Turnover ratio during period

Then, just like we have a whole section in the MD&A to discuss liquidity, we should have a section to discuss employees, including the value they bring to the company and how the company is working to protect and increase that value.

So what kind of reporting on employees do you think should be made by businesses?

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