I received a fascinating question the other day. My questioner, who I suspect would rather stay anonymous, asked:
Why are staff an overhead? When they add value to your business could they not be an asset?
It just seems that if any cut is announced the staff are the first to go because they are overheads and are the easiest things to shed. If staff where to be assets (adding value to the business) then savings would need to be found in places like cheaper electric or gas supplies harder in the elastic power market.
Now to most accountants that question would seem plain daft, if I'm honest. The answer is staff are an overhead becasue that's what the rules say and accountants abide by the rules.
Which means that accountants are all to often the ones who are plain daft because inside the question is the very obvious understanding that in a service activity (especially) people are the key to all value generation. And they're not an overhead as such - they are the profit centre.
But that's not the way that accounting, based on the prescription of capitalism wishes to see the issue. Accounting was organised on the logic that the focus of attention was the generation of funds for the owners - the capitalists. Anything that depleted the funds left to the owners was, therefore, a cost unless potentially resaleable when it became an asset, even if the value attributed was very often somewhat arbitrary.
This logic is now falling apart. The International Accounting Standards Board has decided that accounts are not now prepared on the basis that the sole users are the owners of the company. They think all suppliers of capital are users of accounts - but the impact has been to make the balance sheet as a whole rather then the bottom half of the balance sheet in isolation the focus of attention.
What if though there are no supplies of capital, per se? For example, why are International Financial Reporting Standards now being applied to local authorities when the concept of capital is irrelevant to them? How can measures designed for private sector use be applied to the public sector when it is very clear that the creation of a surplus to ensure repayment of capital is not the objective the activity? Isn't that just plain wrong? (To short cut your guess work - it's not just plain wrong it is patently absurd - so please stop the exercixe now and save a great deal of money as a result).
But in that case why not refocus the accounts on the key relationship which exists in local authorities - which is the relationships between staff and the users of services? After all, isn't that what the whole thing should be about and not about "facilitation" as some made Tory councils think?
And in that case hasn't my questioner hit the nail on the head?
Its a sad day when it takes a lay person to ask the right question about accounting. But the truth is far, far too many accountants have no clue about accountability, and we see the consequence all around. If accounting is the plumbing of the economy then it's no wonder our economy is in a mess. We sure as heck have got the plumbing wrong.
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Hmm. Labour costs, like all costs, require a debit to record them. Costs either result in an asset or an expense. I sympathise with the point of the question but if labour is not accounted for as an expense then it must be accounted for as an asset. This too brings a conceptual or moral problem. Assets appear on an organisation’s balance sheet. Should this idea extend to human assets so that an organisation’s human resources are listed as an asset? Might this not smack a bit of slavery where the stocks in trade were humans? This may be OK for a premier league football team but do we really want to go down this route for other organsiations?
The best approach to accounting for labour that I have come accross so far is the Value Added Statement. This is an alternative statement to the traditional income statement produced by accountants. It shows labour not as a cost, but as an allocation of reward for the value that it has helped to create. Unfortunately, VASs did not take off when they were first mooted in this country.
Putting staff on the balance sheet is a nonsense.
You have been critical (rightly so) in the past of such things as mark to market, “fair value” accounting, where the whole concept of prudence is ditched and items are slapped on the balance sheet at the market value at the height of an economic boom, the accounts looks rosy and the directors get their bonuses etc etc.
Classifying staff as an asset would increase profits and be absurd. There is no way a company is going to get back the wages paid in a future accounting period.
No wonder your poster opted for anonymity.
The simple answer is that not all staff costs are overhead. Supervisory and support functions that are unlikely to grow or fall in line with production or sales are treated as overhead, while staff costs involved with manufacturing or revenue generating activities would generally be treated as direct costs.
The whole idea of overhead is to project an idea of a company’s fixed and variable costs. Obviously it is not perfectly accurate because if a company produces less it need fewer of the staff and other costs associated with overhead but it is still a useful concept.
It’s an interesting argument but I can’t see how it works. An asset is something that an organisation has control and can assert ownership over.
Staff can leave at any time and take their own experience and knowledge with them, and that process is (largely) outside the control of the employing entity. Slaves could be considered assets in that way: staff cannot.
Staff do of course add value to an organisation, and their value is reflected in the income that their work generates, and assuming that they do indeed add value also reflected in the profits or surpluses generated.
International Standards are extremely complex, and there is an argument that they render pretty much everything they are applied to difficult to understand outside the world of accountants and/or analysts.
However, in the case of the public sector I’m not sure what your case is. Balance sheets can still clearly show the funds held by a public sector organisation, and crucially how the public money entrusted to the organisation is expended. If we separately in the UK want public sector organisations to describe the impact of their services on users in non-financial terms in some form of annual report, there is nothing to stop us doing so.
@Chris and others
I am not actually saying that it is necessarily appropriate to put the spend on the balance sheet. the “either / or” approach you evidence is clear indication of the poverty of thinking that the profession is hide bound by.
The question is not whether or not this is a debit that does not have enduring time value – the question is how accounts themselves are presented
The issue is whether the logic of P & L (transcribed to income and spending for local authorities) giving rise to a surplus or deficit attributable to capital suppliers is the right structure of reporting in all cases
Or is there a bette way of presenting data than that when it is so clear that labour is actually at the core of so much that is done in business and yet gets very little attention given to it?
I’m not saying I have an answer. I am asking a question – and I do know the existing accounts paradigm does not work – as does the observer from outside the profession who asked the question
This is about more than numbers, a concept that’s self-evidently difficult for some of my brethren.
I thought we accountants were supposed to be business advisers as well as mere record keepers. As business advisers, should we not be encouraging our clients to recognise the importance of those they employ to the success of their businesses, something so many businesses say they understand but fail abjectly to reflect in the way they treat their employees.
This question can’t be reduced simply to where we put the debits and credits or how we classify them; it’s about stability – staff turnover, average length of service and so on – because those things make such a crucial difference to the continuing success of a business.
I may run only a tiny accountancy practice but, throughout, I’ve been blessed to have wonderful people around me who’ve saved my bacon on many occasions. We’ve all tried to treat each other well and we’ve all benefitted as a result.
Yes, I am – we are – in this to make money but we’re also in it for the long haul and choose to want to enjoy what we do. Why would I not be interested in nurturing stability, enthusiasm and satisfaction in my workforce? Why would not any rational employer?
@Stephen you say it would smack of slavery as if there is no slavery, low paid workers are slaves to companies that keep rights down so that the wages barely cover living expenses. Banks control the monies paid in wages by forcing low paid workers to use their facilities as cash is bad and could be laundered that is why we have these problems. banks control every aspect of the worker by controlling the monies he has. the worker little or no rights to say they disagree with the company he works for as employment law is weighted in favour of the employer.
@patrick why wouldnt you get back the wages if the staff are generating revenue? putting a building down as an asset wont get you back the monies unless you sold the building and then only if you managed to get back what you valued for?
@chris staff can leave and do and is this not the argument that the top bankers put forward that to stop this they get bonuses? well if you treated your employees fairly and as assets them you would better manage them?
the big family businesses of the past cadbury, boots, guiness all amassed big fortunes and at their heart was the value that the staff made them the monies and that protecting them they work harder generating more income. these have all been sold to investment companies and the ethios has changed. how much monies are they now losing?
just my thourghts
Ok – so lets say you have secured the services of Ronaldo (the portugese one perhaps rather than the brazilian) for an up front outlay of £50m and a weekly wage of £150K. What are you proposing to do with the various debits and credits? Might be an interesting accounting question and one to which accounting rules and conventions would apply. Which makes the point that accounting rules are what is relevant here.
But the assumption the questioner makes are wrong. Staff costs are not the first to go, but usually they are the highest profile for obvious reasons. A headline like “Bloggs inc has decided to change its telecon supplier to save 25% pa” is hardly headline news!
But Richard, your switch to public sector is interesting. Of course it is possible to argue that on many levels public sector organisations are cost centres rather than contribution centres. But I reckon if you actually asked a CEO of a local council he or she would give you a very different answer.
@alastair
Such CEOs need sacking – because they fundamentally misunderstand the activities they manage if what you say is true
Public sector is a service activity -and only people can meet the needs they fulfil
Maybe you’ve never had to encounter such services but I have – and I massively appreciate them
Richard – sorry if I seem ‘hide bound’! 🙁
In follow up, I would note that the Charity SORP does try to address this issue, in that it lays down significant requirements for the narrative element of an annual report. This is recognising that a charity cannot report its achievements and outcomes through numbers alone.
@Chris
A good point!
Public sector is a wide unbrella term for lots of different sorts of organisation. But taking local councils as an example, they are charged with many complex and varied tasks with many and varied stakeholders. But also an overriding responsibility in getting value for money. Value is not the same as profit, but nor is it the same as cost management.
Apply the same principle to the NHS. Its why outcomes are considered important, which is a measure on which the NHS does not always shine when compared to others.
I guess its also why such CEOs command such large pay packets.
Employees, staff and external consultants are neither overheads nor assets of the company. They are people.
Staff COSTS on the other hand are COSTS incurred in the earning of profits (or otherwise carrying on the business activities). Some such COSTS are directly attributable to turnover and a COST of sales. Some COSTS are only indirectly attributable so are shown separately. Sometimes these are described as overhead COSTS. I thought this was simply a convenient description of the COSTS (not the people) to show that they are not directly attributable – and thus don’t vary by reference to levels of production and sales.
Mind you – it’s 30 years since I studied such things!
An accountant writes: How many comments by accountants have you removed folowing this spectacularly ridiculous piece?
@Andrew K
None that I recall
Disagreement is allowed – and it’s apparent that many will disagree with what I have written
I only blog offensive comment or comment that mindlessly promotes neoliberalism
@Mark
I sympathise with your views about the way employees are treated in the UK and the lack of legal protection they have. This poor treatment does not amount to slavery though. Slavery is the trade in human beings as if they were commodities. Employment relations in this country are governed by contracts even if those contracts are incomplete and often lop sided.
Unfortunately, as Richard says, accounting statements are prepared with shareholders/owners as the focus.In other words they are prepared for capitalists to support their decisions. I expect it may be possible to adapt the accounting model so that Labour is the focus, ie, so that the accounts are prepared for the benefit of labour, not the owners. It would be an interesting project.
@Andrew K
Andrew, why do you deem this piece as “spectactularly ridiculous”.