Contemporary Issues in Financial Accounting
The need for harmonization of accounting policies is present due to the prevalent trend of having ‘globalization'. There are a number of accounting standards and systems which are different, which create dissimilarities. To have a comparable form of reporting, therefore these various systems need to ‘talk' to each other for them to make sense. As accounting is a language used by businesses to provide information on their economic health, it has become imperative to have a common language or a compatible version so that accounting standards used in by one system can be translated into another for ease of use.
As a Member of the Board of Directors, it is necessary for one to understand that the need is there for presentation of one standard or accounting system to be presented into another so as to have ease of understanding along with cost reductions. If there were no standardized systems of conversion of accounting policies and systems, the costs to do the same in a specialized manner would be very high. Also, the degree of complexity would also be significantly higher which would again result in cost escalation and lesser degree of ease.
It should be recognized that although significant diversity still remains, however with harmonization done by bodies like the IASB there is a rule of method or a bar of standards for compatibility. This has resulted in wide acceptance, adaptation as well as convergence to harmonized systems.
2.0 IASB Roles in harmonizing cultural differences
Presented here is an abstract of the term harmonization according to Business Dictionary (2016), which refers to having a common set of statements for the purpose of aligning or adjusting differences amongst methodology, measurements, procedures, etc. for the purpose of ease of reporting as well as for uniformity and compatibility.
To put it in context of reporting standards the role of IASB and like bodies have brought in Accounting Standards which are internationally recognized and agreed so that there is a common set of principles for businesses to work on. The set of rules as agreed are commonly now referred to as IAS. It was more prevalent in the European and the rest of the world business community and has now also gain recognition and increased acceptance in the US markets as well. It can now be safely concluded that bodies like IASB have played a major role in the field of harmonization of policies and systems by which businesses do financial reporting.
3.0 Conceptual Framework
With the above abstract and role in mind, the question for the purpose of stating a framework is to have a standardized or harmonized way for which to recognize the cost of Training and Development of Human Resources.
It is recognized by the Board that our company is in the business of providing consultancy services in the area of Accountancy. In this background and with the review that a significant portion of cost is towards development of Human Resource Capital, it is my opinion that the Board recognize the significant and relevance of having a standardized / harmonized methodology by which to recognize the costs of training and development. Our fundamental and crucial resource is the development of Human Resource for effective consultancy in our field. By developing the right Human Resource, we can establish a significant role in our business which would be cost optimal as well as beneficial in terms of financial prudency. It also makes economic sense as a well trained and focused team would provide synergies which go beyond reporting as well.
In our line of business it would provide the following benefits:
a. Reduce cost of reporting and preparing worldwide and consolidated financial statements. Increase of reach to other countries and becoming a global player.
b. Have synergy by having presence in other countries and subsequently transfer personnel from one accounting regime (country) to another.
4.0 Argument for Recognition of Training and Development Costs of Employees
The IAS no. 38, or Accounting for Intangible Assets is to identify and quantification of intangiblesincluding training, and related development costs that are not covered by other Standards. The principal issues involve finding out the nature of intangibles, assessment in terms of quantifying the same, cost evaluations as well as need for gauging of amortized values and / or losses due to impairment, if any.
It is important that we being the Firm which does consultancy especially in the Accountancy field recognize this standard as an important one for the recognition of an asset which is imperative for our Human Resources. Further, its relevance is further augmented due to the recent high expenditure done for one of our clients, M/s. Maafolhey Senses and Spa.
The argument is simple. There is a standard which recognizes and provides a rule for determination of costs and its treatment so that this cost can be done for the rightful recognition and statement of financials especially the Income Statement which has a big impact on other statements like Statement of Assets and Liabilities and Statement for Cash Flows.
5.0 Accounting Treatment for the Training and Development Costs of Employees
The statement applies to recognition of Training and Development Costs which are a form of intangibles and do not come under the category of Financial Assets (for which IAS 39 is available).
The standard applies because the training and development costs have the following:
1. Identifiability - it arises from contractual obligations and / or other legal rights. The costs involved are definitely identifiable.
2. Control - it can be considered as to provide future economic benefits as the trained employees would work more beneficially for the Firm even if there is no enforceability (as the trained staff might leave employment and work elsewhere).
3. Future Economic Benefits - the trained staff would augment the Firm through better skill base and can also lead to cost savings as more experienced staff and / or well based skill force is more expensive to hire.
Recognition and Measurement:
Initially the asset or the costs may be measured at direct expenses incurred including monies due to the Government, less concessions and other deductions etc, as well as any other direct expenses if any. These may include employee benefits (at least an estimate of one), fees given to experts in the field, and expenditures for commissioning, etc.
These charges are not to be delayed according to the standard to more than the period they were encountered in; although the benefits or the potential benefits can carry forward for more than one year or accounting period. This is because of the control measure as there is no enforceability to the expenses incurred (in this case the employees).
If the costs are paid and extended to periods which are considered to be over any credit periods provided under normal course of business, the costs is the price paid immediately while the remaining amount is to be recognized as finance expense charged over the period of the credit term.
The probability of potential benefitson economic terms is shownat objective value and is a presumed figure. Such benefits are to be noted separately from goodwill. For fair value it should be noted that market transactions which are equivalent to other such transactions and / or cited prices are to be assumed.
Hence in my opinion the training and development costs need to be expensed out the year they are carried out as per the IAS quoted above in view of the following:
1. The training costs are not necessary to bring the asset (in this case Human Resources) into intended location and condition.
2. Also even if they were to be considered as expenses for the workings of the asset, however as per IAS the asset is to be recognized only if the same can be controlled by the Firm (which is not the case of employees) and also potential benefits if any are in all probability foreseeable to flow to the Firm (also not a probability as already highlighted, as employees might leave).