The non-assets and their disposal
We are not all assets (and my post about being an asset was not on par with generally accepted accounting standards - GAAP). In accounting, the language of business, assets have different meanings. A building is an asset. A power plant is an asset. Goodwill, resulting from a business combination, is an asset. Brand recognition is an asset. However, humans, human labor, our 9-to-5, our 5-to-10, and our bloody sweat are not considered assets in the sacred balance sheets. This is pure BS in my opinion. However, for the sake of the economy and the market, I will accept this injustice and talk about how to dispose of the “non-assets”.
The brilliant sales leader who had 10X revenue last year, the aggressive general counsel who prevented a big lawsuit, the accountant that built the first financial statements (Moi), the founders, well, guess what... Their costs and their salaries are not presented as assets. They are all period expenses and relegated to the statement of operations... yes merely considered as important as office supplies, travel, and meals. The big-screen TV is capitalized, but the AV manager who spent hours configuring it is nowhere to be found in the balance sheet and is relegated to the income statement. You are all expense lines, just like the filter for the coffee machines.
The exception confirms the rule... engineers, software programmers, and other similar professionals make the cut and can be partially recognized as assets if they have engaged in research and development (R&D) activities (ASC 730) or in the development of internally-used software (ASC 350) - and of course if the auditors bless your lengthy memo. These compensation costs (or fractions of them) are capitalized (and slowly amortized in the income statement) if they contribute to the research and development of a drug, product, or service that is sold or to be sold by the company. Move away, special product managers, designers, and brand strategists, your costs are not capitalized... you are not special (j/k). Maintenance and repair costs are expenses... they do not incrementally contribute to the value of the asset - also note that the asset is never called HUMANs but some insignificant names like “Intellectual Property”, “Internally-Developed Software”, “Patent” etc... Why are executives still saying that their employees are their best assets, the only assets that count when I have never seen an asset called “Employees” in any balance sheets. They should proclaim that their employees are their best expenses, worth every cent of that income statement.
Employees are expenses. Humans are expensive. And expensive expenditures get cut during financial turmoils. Payroll expenses and human expenses are usually the most significant for companies and represent on average 50% of the total expenses of an organization. In addition to wages and salaries, benefits, 401k, payroll taxes, and perks add an additional burden to the bloated expense line. Other non-cash expenses such as stock compensation also participate, making these non-assets costs extremely heavy for companies navigating choppy waters.
I studied how to account for the removal of assets in my “Complex accounting issues” class. ARO or asset retirement obligation is the legal obligation associated with the retirement of a tangible, long-lived asset, where a company is to clean, or remove a building, a piece of equipment, or hazardous materials at some future date. We spent two weeks discussing it and even had to prepare a group case discussing how to record and value the ARO linked to an oil pipeline. I also learned how to dispose of a fixed asset, how to properly record the disposal, and remove all the accounts associated with the assets, even the accumulated amortization. I never learned how to record the disposal of humans, termination, or layoffs.
I never learned how to record terminations in school, I learned without learning, I learned how to run the last paychecks, I learned that each state has different rules, I learn to read these severance agreements and I learned to put in place an off-boarding checklist. Terminations and layoffs are part of financial operations, just other parts of the process that needs to be documented or that need a checklist and definitely some entries.
A long time ago, management asked me to record these severance expenses as “extraordinary items” - below the lines in the financial statements and not part of the regular activities of the organization. It was non-recurring, a unique situation for an executive, a couple of them, and some employees that were not performing, a mere 10% of the headcount. These are unusual expenses, we shouldn’t be judged on these expenses. GAAP allowed it, I recorded, and the auditors agreed... until GAAP changed its mind and killed the concept of extraordinary items. Again, another betrayal and accounting reminding us again that humans are not extraordinary and that in fact, nobody or nothing is extraordinary. Sit down, be humble!
A couple of years after, when the request came back, I justifiably blamed GAAP and offered the comfort of a disclosure. A disclosure to explain that the additional expenses for accelerated vesting and one-time severance payments are not in the normal course of operations. No, they are not! But humans are still expenses. They are rarely presented in the balance sheets.
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