Most business leaders agree that employees are their biggest assets, and training them is critical for an organisation’s success. Training employees makes an organisation agile, competitive and helps it generate more business – as it improves productivity and performance.
Employee training is an investment, after all.
But – and here the deviation starts – while all believe training is an investment, most write it off as an expense. Have a look at balance sheets of top-50 listed entities in India, and you won’t find a single line item called training investment on the asset side of the balance sheet. All spending made for training employees is actually written-off as ‘expense’ in the same year. So, why do organisations treat training as an expense, but keep saying that it’s an investment?
Any investment made in an asset generates a return (loss/profit) over a period of time. The key word here is ‘over’ a period of time. So, if employee training is an investment, shouldn’t it be added to the balance sheet on the asset side and amortised over a period of time, like other assets? Sadly, this isn’t true. The answer lies in the way our accounting standards are defined.
Accounting standards define an asset, i.e., a resource controlled by an entity as a result of past events from which future economic benefits are expected to flow to the entity. This is where accountants have difficulty recognising training expenses as an investment. How does an organisation confirm whether an employee truly has acquired knowledge and skills post training? While there are tools to loosely calculate this, there is poor evidence to present. Unless presented, the knowledge acquired cannot be assumed to generate future economic benefits. For the identified benefit to be a benefit for accounting purposes, there must be a measurable positive economic benefit such as increased sales, reduced expenses or improved cash flow. And this at the time when the investment is made, not later. Adding to this uncertainty, there is also an issue of whether such costs incurred create a resource that the organisation controls. This is possibly the biggest roadblock to recognise training as an investment. When an employee receives training from an organisation, the knowledge and skills acquired remain in the control of the employee, not the organisation. Post-training, the employee is free to quit the organisation with the knowledge and skills acquired.
What are the steps one can take? First, when accounting standards were defined, most businesses were manufacturing-based and machine-intensive. Current definitions for an asset worked well then. But now with businesses becoming more knowledge-driven, employees are key to success – it’s time to revise accounting standards. With the advent of AI and other technologies, organisations expect employees to be life-long learners, and will continue to invest in employee training & development. Estimates point to that yearly 3-5% of payroll costs are spent on employee training. For regulated businesses like banking, capital markets, financial services, legal, pharma and technology, compliance training is mandatory. Such investments, therefore, need to be represented well.
To be fair, not just training, other expenses like R&D and advertising are also often disallowed as investments and treated as expenses in the books of accounts for similar reasons. Accounting standards can review this and probably come with a reasonable method by which such expenses are fairly represented in the books of accounts. With investors becoming smarter and wanting to identify intrinsic value for any entity before investing, knowing how companies invest in employees can lead to better market valuations. In the era of knowledge economy, this could be a big differentiator.
All this needs long discussions and a radical shift in the way accounting standards treat such expenses. This can take time and getting all stakeholders on board can be a task. We can begin by forcing organisations to make better disclosures – on costs incurred on training, man days of training provided by employee bands, type of training and expected outcomes – not just as a footnote, but as a detailed disclosure. Increasing transparency can make organisations more accountable to shareholders on such expenses. In turn, such disclosures can encourage shareholders to get organisations to justify every dollar spent as training expense. The bottom line is that, between people, planet and profits, it’s the investment in people that we have missed to account well. It’s time investments in training are reported on the left side of the balance sheet and are no longer left behind in the footnotes of financial statements.
The author is an expert in the domain of skilling & employability, and is the former MD & CEO of BSE Institute Ltd. Views are personal