The concept of accounting, which conventionally involves placing assets on one side of the company’s balance sheet while liabilities on the other, and separation of revenue and expenses in the profit and loss statement to arrive at net profit/ loss, calls for a rethink in a rapidly changing world where social equality and human capital are gaining more relevance every passing day.
Businesses around the globe have been spending on CSR (Corporate Social Responsibility) activities and are also re-training and re-aligning their workforces to meet the upgraded technicalities of today. But have financial statements depicted a true and fair picture of such elements is a question that seeks an urgent answer.
Expenditures on salaries of staff, on re-skilling of existing workforce, on activities like rewards and recognitions (R&R) have traditionally been treated as a part of the expenses side of the profit and loss statement; never could they achieve the tag of being an asset (that will produce returns in the long-term) in the balance sheet.
In the same context, while companies earmark m andated portion of their profits for spending on CSR activities, such expenditure isn’t recognized in any account, whether of the corporate or of the government (which accounts for capital expenditure in budgetary exercise); hence any returns from these actions by corporates, including spending on health, education, food and other elementary needs of the deprived, remain overlooked with respect to their expected returns.
Another argument in this favor is the tilt of economic growth toward service sector that has significantly overshadowed manufacturing and primary activities ranging from the mining of minerals to agriculture and animal husb andry.
This service sector of any economy, comprising of companies active in tourism, healthcare, information technology, banking and insurance, is much more dependent on the human capital of any company than on investments in l and or plant and machinery; when the profit and loss statements of such enterprises are viewed, the head ‘Salary’ is the chief component.
The logic here is when an enterprise operating in manufacturing sector capitalizes expenses on the procurement of assets that have a long-term revenue-generation capacity, why spending on equally long-term advantageous assets in the services sector, for say spending on re-skilling of employees, is not capitalized and treated as an asset in the balance sheet.
It is to be recognized, at the earliest, that accounting principles that we follow today while preparing financial records were established during times when manufacturing, agriculture were the mainstays of economies around the world. When the 17th-century Britain was burning fossil fuel in large factory establishments, no one could think of a day when human capability, not coal’s calorific value or the efficiency of the power loom, would decide GDP growth rate and inflationary pressures.
Findings suggest that some companies have incorporated practices that recognize and report expenditure on human resource, Infosys and Tata are a few prominent names here; however, the need is to m andatorily treat such outlays as assets and provisions be made in respective laws to capitalize them in financial statements; hence the need of codification of rules.
On the other h and, the government of a country must also reflect spending on CSR activities as a part of their annual Finance Bills so that such planned capital expenditure is factored in a while preparing long-term social and infrastructure spending plans of government. Corporate houses may have been directed under laws to expend a certain portion of their yearly profits on social welfare activities, but the true impact of this exercise can only be noted by way of accounting.
In this 21st-century world, one driven by tech startups and disruptive ideas and technologies, economies around the world are to reconsider accounting norms and st andards. The sooner we realize and act, the better we are placed in forecasting future.
Also read: Are We Prepared For Financial Year Change?
