Thursday, January 31, 2019

Tactical Workouts Present: Newbie RIT training and People Asset or Expense

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People Asset or Expense

By: Tom Feinberg

A common claim or statement made by many organisations is, “ Our greatest and most valuable asset is our people. “ Organisations always need people and their efforts in order to operate. This statement however could fall under the category of marketing or public relations. When viewed from a purely financial reporting or accounting perspective however, the statement would be considered as incorrect or misleading. When organisations produce their financial reports, people are not generally recognised as an asset, but rather as an expense. In order to understand this aspect of reporting people as an expense in financial reporting, defining the purpose and usage of the Statement of Financial Position needs to be understood. It will also be necessary to define what an asset and an expense is in terms of financial reporting. A major reason for defining a person as an expense rather than an asset is as a result of the difficulties involved in the measurability or estimating a value of human capital. This issue will also be discussed. There are however some possible exceptions when defining a person as an expense as a result of the evolving nature of accounting practices and the changing nature of the type of information being reported which will also be examined.

The Nature of the Statement of Financial Position

An important and critical report in relation to producing useful financial information to users is The Statement of Financial Position. The purpose of a statement of financial position as defined in SAC 2 (AASB 2002) is: To disclose information in regards to resources an entity has control over, that is its assets, relevant to users in order that they may make informed financial and economic decisions as to the allocation of scarce resources.

The purpose of this financial report is to communicate information regarding the financial position of an entity at a particular point in time in an understandable format. The users of this information need to be able to recognise the relative liquidity of its assets.

From the above definition and usage of the statement of financial position, a comprehensive list of the entities assets are to be produced. People or personnel are not listed in this financial statement as an asset. The reason this is so lies in the ability to obtain and value the relative liquidity of assets in this information. Liquidity may be defined as: The ability if an entity to satisfy short-term obligations as they arise. In simple terms, the ability to convert assets into cash in order to pay any obligations the entity may encounter as they arise. How then is it possible to convert personnel (if they are to be considered as an asset) into cash in order to meet obligations? It is not possible for an entity to place a cash value on personnel in order that this person may be converted onto ready cash at short notice. For this reason, people are not listed as an asset in the statement of financial position.

What is an Asset An asset as stated in SAC 4 is: Future economic benefits controlled by an entity as a result of a past transaction or event.
The three crucial elements of an asset therefore are future economic benefit, controllability by the entity and having a past transaction or event occurring. It could be argued that a person employed in an organisation meets with these three criteria. A person has been employed under certain conditions, past event, a person must meet certain conditions of employment as layed out by the organisation, controllability, and through effort and expertise assist in profit generation for the entity, future economic benefit. Although all the criteria for the definition of an asset are met, people are not recognised as assets in financial statements. The reason for this is that, using professional judgement; a reasonable estimate cannot be made as to the amount involved. Measurability thus becomes a governing factor for an accountant in deciding on the issue.

A new CEO employed by an organisation may cause that organisation share price to rise as a result. This could be used as a guide as to the measurement on the value to place on the new CEO as an asset. The organisation then would need to recognise the value as an asset of other management in luring the new CEO, and then the problem arises as to how to value in terms of an asset non management personnel. It becomes clear as to the problems associated with placing a monetary value on human capital. It is for this reason people are not recognised as an asset in financial reports.

What is an Expense

An expense as defined in SAC 4 is: Consumptions or losses in future economic benefits in the form of reductions in assets or increases in liabilities of the entity. A crucial element in the above definition is consumption or loss in future economic benefits. The cost of employing a person by an organisation is seen in the form of as salaries, insurance, sick leave pay, superannuation, bonuses etc. These out goings are all measurable or quantifiable to the accountant and can be offset against the profit line of the entity. It is reasonable for an accountant to make a more realistic estimate on the value of human capital once personnel are recognised as an asset.

What is Measurability

It is necessary to examine the term “measurable”, as it is a crucial element in recognising human capital as an expense rather than an asset. Measurability, as stated in SAC 4 is: Assets will have a cost or value that can be measured reliably in accordance with the accounting model used.

It is also necessary in understanding measurability to examine the term reliable. Reliability when used in measurement, as stated in SAC 3 is: It is important that financial information be reliable. Information may be of a type, which bears upon user decision making, that is be relevant, but also be so unreliable in nature as to be useless or misleading. 

Tom Feinberg has spent more than 15 years working as a professor at the University of Maine. Now he spends most of his time with his family and shares his experience about writing essays. Tom Feinberg is a right person to ask about where to find custom term paper.

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