How One Accounting Rule Wrecked The Middle Class

Tyler Durden's picture

Submitted by Daniel Drew of Dark Bid

 

How One Accounting Rule Wrecked The Middle Class

Maybe you heard your CEO say, "Our people are our greatest asset." He's probably lying. That's not how he really feels about you. Despite how much management talks about "human capital" as if it were an asset, it's not. The accounting system that the whole world uses classifies labor as an expense.

Anyone who has studied accounting even briefly can see that it's a lot of bullshit designed to appear objective. In reality, it is filled with assumptions, estimates, and sometimes, fraud. Yes, it is rule-based, but with any system, who makes the rules is often more important than the rules themselves. Accounting is the language of business, and in the mouth of a double-talking CEO, it's just another way to promote their own interests.

One of the most insidious rules in accounting is that labor must be classified as an expense on the income statement. Actually, it should be classified as an asset on the balance sheet. The accounting profession has rigged the system against the worker. The misclassification of labor as an expense has branded every employee with a negative dollar sign. The way the accounting system defines labor causes CEOs and upper management to view employees as expendable. When profits decline, the CEO says, "It must be those damned employees dragging us down! Let's fire a few thousand of them. That will get us on track again."

According to current accounting rules, inanimate objects like pencils, clothing, or any type of inventory are assets, but people are expenses. The CEOs want you to believe that a pen is an asset, but a person with knowledge, skills, and experience is an expense, something that should be avoided. This is actually what they teach business students in school all around the world, and the students just accept it as fact. Have we all gone insane? We are being held captive by dumbass accountants and shrewd CEOs who realize the whole system is rigged in their favor.

The proper way to account for labor would be to classify it as an asset on the balance sheet. The employee would be valued with mark to market accounting at every reporting period, and the value would be determined by calculating the profit per employee, the average tenure, and the net present value of this amount. This would accurately account for the true value of labor. If this rule were implemented, balance sheets would be dramatically altered. Some companies that appeared valuable before might look like complete garbage. Other companies would prove to be much more valuable than previously thought.

One company that understands the true value of employees is Costco. Their full-time employees make $43,000 per year, which is very high for the retail industry. The turnover there is only 5% for employees who have been there a year or longer. In 2004, The Wall Street Journal published an article about Costco's skeptics. Bill Dreher, retail analyst at Deutsche Bank, said, "From the perspective of investors, Costco's benefits are overly generous. Public companies need to care for shareholders first." Dreher said profit margins weren't as high as they should be.

However, Costco CEO Jim Sinegal, who owned 3.2 million shares of Costco at the time, said,

The last thing I want people to believe is that I don't care about the shareholder. But I happen to believe that in order to reward the shareholder in the long term, you have to please your customers and workers.

The CFO, Richard Galanti, agreed,

From day one, we've run the company with the philosophy that if we pay better than average, provide a salary people can live on, have a positive environment and good benefits, we'll be able to hire better people, they'll stay longer and be more efficient.

A study in the Harvard Business Review showed that Costco generated $21,805 in U.S. operating profit per hourly employee, compared with $11,615 at Sam's Club, a Walmart subsidiary. John Bowen, an investment manager and Costco shareholder, said, "Happy employees make for happy customers, which in the long run is ultimately reflected in the share price."

Fortunately, the Costco CEO didn't listen to the Deutsche Bank analyst who was complaining about their labor investments. In the last 5 years, Costco stock has risen by 139%. Walmart has only gained 41%.

What's interesting about the reclassification of labor as an asset is the implication for central bank policy. The federal minimum wage is only $7.25. Those in power don't see that as a problem. However, when asset prices decline, all of a sudden, they start worrying about deflation. That's why the Federal Reserve launched multiple rounds of quantitative easing, a policy which has essentially become QE Infinity.

While there is no official minimum stock market level like there is with the minimum wage, it's quite clear there is a de facto minimum level, and I guarantee you it's not $7.25. The Chicago Mercantile Exchange's "central bank incentive program" has proven that central banks buy S&P 500 futures to prop up the market. If labor is no longer misclassified as an expense, would the value of labor rise with all the other assets being inflated by quantitative easing?

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Ginsengbull's picture

People are a company's greatest liability.

Peter Pan's picture

Comany's have forgotten that an employee is also a consumer.

Thus over the last x number of years they have loaded the consumer with as many useless items as is possible and whn it seemed no more could be bought they lent him money and when tat limit was reached they lwered interest rates so the wealth effect of higher house prices woukd enable them to spend even more.

As I tell my kids, that society is not interested in you unless you are buying or borrowing.

Publicus's picture

Classify labor as assest, then print money to fund wages.

usednabused's picture

That Deutsche Bank analyst is definitely overpaid. He should have his wages cut to the bone. After all, wtf good is he to anyone?

two hoots's picture

This will not change (even the title is past tense).  As soon as a machine can replace you, it will.  Whether building the pyramids or building cars, people are expendable.  We have lots of weird beliefs in births but, we are overpopulated for any quality of life for all (in the modern age).   It is also in our human nature to collectively ignore this and continue breeding and keep people existing far longer than any quality of life can provide (windfall for big pharma/medical equip makers/nursing homes etc.) 

DollarMenu's picture

I'll bet that human relpacing machine will be on the books as an asset.

0b1knob's picture

The only way laborers could be an asset would be if they were slaves.

 

Al Gophilia's picture

Ding ding ding.

Until they are not worth feeding.

Welcome aboard, grab an oar.

MonetaryApostate's picture

First off, some people are an asset, though if you were talking about the low wage workers, well you'd have to go to China or India to find them, because tight fisted Corporate leaders are never going to give you anything unless they can capitalize on your job.  Secondly, corporations will extract all of the intellectual property they can from people & then throw them away, hence when you work for a corporation, every idea you have is theirs, and if you can't come up with creative intelligent solutions, well you're history...

It's not that people aren't an asset, it's just that Corporations love to use people, and when they no longer have a use for them, they cut them off, and they don't care if you have a family to feed, that's not their business.  (Impersonal, selfish, assholes to the max, and if you don't believe, try saying high to one of them...  Perferrably one you don't work for...)

The wealthy class have a real air about them, snobbery maximus, and they answer roughly to underlings... (always)

Secondly Costco tailors to the middle class & rich, you won't find no EBT holders up in there, nope...

Lastly accounting is nothing but financial foolery that bean counters have mastered to evade taxes and increase the "Perceivable Value" of the corporation to increase stock value, and everything else is simply a casualty of war (Read Business, where they'll gladly put a dagger in your back as soon as you turn it).

ZD1's picture

Big government leaders love to use people, get them to fight their wars for them, and when they no longer have a use for them, they cut them off, and they don't care if you have a family to feed, that's not their business.  

Stuck on Zero's picture

At least in the military they classify people as "organic assets."  They classifiy weapons and vehicles as "inorganic assets."  That make the DoD more humane than business.

BobPaulson's picture

To count humans as assets they would have to quantify how much incremental profit is generated from trained staff compared to untrained staff, then to an NPV on that. That would require a lot of guesswork but in theory the concept has merit, it is just impossible to implement and obtain a reliable number.

IRC162's picture

The main Accounting  difference between assets and expenses is the timing of when a company can utilize the cash outlaw as a tax deductible expense. 

An expense is deductible in the year incurred.  

An asset is expensed through a mechanism called depreciation,  where the total cost of said asset of spread across the useful life (typically measured in time or units of production)  of the asset.   

Reclassification of employees as assets will only limit the availability of tax deductible expenses available to lower Taxable income.   Ergo,  everybody has higher Taxable income keteris paribus.  Oh,  and we can start calling our payroll expenses our payroll assets.   Should be a magical feel good moment,  especially in the finance department, as Payroll is typically the single highest line item expense for many SMBs.  

Ps did  you ever wonder why your employer gave you a bonus in Q1?  It's because tax law allows such bonuses to roll back to prior year expense and further reduce Taxable income for the year- companies pay it as a way to shape their Taxable income and reduce tax expense.   Congrats,  I think your capitalization of labor costs just eliminated the Q1 bonus plan.   But at least they can be called ASSets now.   

Please Don't Give These Sociopaths Any More Ideas. 

Dewey Cheatum Howe's picture

A laborer is a slave. Just like representative government is arbitrary and capricious. There is no difference between slavery and laboring just as there is no difference between a representative government or dictatorship. The who(se) doesn't change the what.

The whole matrix and illusion is enforced through positive law as opposed to natural law. Natural law is and can't be refuted by logic and science, positive law isn't and can be refuted by logic and science. Therefore positive law is arbitrary and capricious.

Al Gophilia's picture

They pay you in credits or cash because carbon paper costs too much as an outlay for your labour. They get to print, you get paid in pretty pieces of paper. What a mind-blowing scam to come up with. Wish I could do it.

Publicus's picture

You too can print e-coins!

Atomizer's picture

We’ve derivatived some folks on Pension, Social Security, and new income prospects.

11b40's picture

Corporations are the greatest liability of the people.

chunga's picture

Yesterday I went over to the sawmill not far from me that I heard about word of mouth. It is very remote, you could almost say it's something out of "Deliverence". Anyway, I passed an abandoned house on the way that has been empty for a few years I'm told.

Sure enough, there was a van there doing something with a "Blackrock" sign on it. There's almost nowhere these motherfuckers haven't fucked shit up. 

pndr4495's picture

Was Larry Fink putting the sign up himself - sort of like a country doctor putting out his own shingle? Or was Mr. Fink inside the mill getting himself dirty and figuring out how to operate the saws and its supporting machinery? They haven't fucked shit up. They are acquiring assets on the extreme cheap to retool and CONTROL the prices of near basic survival necessities - lumber being one those necessities ( unless one can live off the land naturally like a fellow named Tom Brown down in the Pine Barrens of NJ ).

chunga's picture

The Blackrock house was on the way to the mill. Anybody that looked like Larry Fink on that dirt road probably would never be seen again. The road I live on is named after our closest neighbor and they've been farming the area since the civil war. Turns out the sawmill brothers are really nice guys but I got a "heads up"  on my behalf by my neighbor "Junior" before I went down there. There are Confederate flags everywhere and they do not like "fancy people". Open carry is very common.

ZD1's picture

Big governments are the greatest liability of the people. 

DerdyBulls's picture

Assets are expended (expense) to create income with the hope of creating more assets. Every asset becomes an expense at some point in the process. Hopefully the asset is expended in the most productive way possible. If it isn't it becomes a liability. This article shows a profound lack of knowledge about accounting. 

Umh's picture

Watching companies force employees to take vacation to get it off the books where it is a liability is almost insane. Many of the vacation days will sit on the books for a long time while if left alone. During a time when a company needs all the income it can get is not the time to tell the misguided dedicated employee to take off.

Uncle Rico's picture

The author is beyond moronic.....you don't have to pay the pencil a salary. The pencil doesn't get health insurance, nor can it quit. I think the author prefers slavery. "We demand to be treated like pencils, NOW"

Terminus C's picture

Uh... show me a pencil that produces anything.

Moronic indeed...

Joe Panama's picture

Or any asset for that matter.   That's a very good point you make.

The problem is that people are niether assets nor expenses... they produce and consume all that they produce.   Salaries can be expenses.   Insurance can be expenses.   Heating and cooling can be expenses... but people can't.

I think there needs to be a third catagory - the producer/consumer.   There has to be a way for a company to determine when an employee is either a net positive or a net negative for the company without just measuring dollars.   Essentially, the idea would be to keep the valuable employees and remove the deadwood.

Kirk2NCC1701's picture

"Figures lie, and liars do a lot of figuring." -old saying 

It turns out that the Government and Banks are the biggest Liability of a business. Because... unlike them, employees are an expense that generates revenue. 

Get Clarity, and keep your Focus, Resolve and Courage to Act -- to get the Parasites and Usurpers off our Balance Sheets and our lives.

Smegley Wanxalot's picture

The author is a dumb ass and I will explain why:  an asset is something one owns
If a business classifies labor as an asset, then it owns the fucking labor, and if you own the fucking labor, you own the employee that outputs it.  Sorry you fucking businesses and you fucking author, but no business owns me.

Labor is the asset of the employee and only of the employee.  The employee rents that asset to a business, much like I rented a car last week.  That car I rented is an asset of Avis and an expense to me; it was NOT an asset of mine. 

So fuck you, author - quit being a braindead dumbfuck.  If businesses classified employees as assets, the same stupid fucking author would write a diatribe bitching about people being property.  Mind you I know accounting well and principally disagree with a number of the concepts as well as the stupid shits polluting the profession, but labor being an expense to a business is not one of them.

And by the way, find me one fucking business that classifies routine office expenses like pencils and erasers as an asset (other than manufacturers or resellers who inventory them for sale).  Those are office supplies, and are also expensed.  That author is a lying faggot.

Buckaroo Banzai's picture

You could argue that while the company doesn't own the human being, it does own the labor of that human, so while the human is under the company's employ, the value of the human that provides that labor could be listed as an asset.

Another perspective: arguably, human beings with similar levels of skill, intelligence, and experience could be considered fungible, to a certain degree. One could list the "qualified human" as an asset on the books and if the current "qualified human" leaves the company and goes off the books, presumably he/she could be replaced with a human of similar skill/intelligence/experience. Remember that a hard asset like a machine or a building costs money to replace, while the hiring costs of a human are rather less. So once the value-creating "space" is created in a company for a particular type of human, one could consider that "space" to be an asset, presuming of course that the human required is available (to some degree) in the labor marketplace.

If one follows this line of thinking, one starts to understand a scenario where a company would subsequently have a real vested interest in a wide variety of social concerns such as education, religious and moral values, justice, etc. The CostCo example is illuminating in this respect. Certainly the attitude that human beings are an expense leads inexorably to a corporate attitude that is anti-human, which we certainly see today.

All that said, I don't necessarily disagree with your point of view, but the idea the author brings up is certainly worth thinking about.

 

Smegley Wanxalot's picture

Actually one can not argue that the labor of an employee is an asset to a business.  It is always an expense. Your arguments above are stretched and esoteric, though I appreciate the attempt.

The business does not own the "labor of that human" as you state, rather it owns the output of that labor as determined and utilized by the business.  It is the same as if I rent a jackhammer from Home Depot - Home Depot owns the jackhammer as the asset, I rent it (expense to me), and the hole I dig (the output of the jackhammer as utilized by me) on my land belongs to me and not Home Depot.  If that hole adds value to me, that is my asset, but the utility of the jackhammer is still Home Depot's.  If I provide the space on my property to deploy the jackhammer, that space is my asset, but the rented equipment is not, and if Home Depot wants it back then I must return it (barring any time-dependent contract, which is rarely the case in labor markets).  And if I rent the jackhammer but just park it in my garage for a day and obtain no output, it is still my expense for that day and Home Depot's asset, and I have no claim on its future productivity (as I would with an asset) unless I continue the rental (aka "expense") relationship with the asset owner.

There are accounting principles for assetizing labor expenses, actually.  Capitalization of qualifying engineering expenses such as R&D, or other labor costs that are part of a qualifying project associated with future long-term definable benefits come to mind, but the labor costs of the cleaning lady, the secretary, the person bolting planks together or stocking shelves or flipping burgers, running cash registers, or selling wash machines do not qualify.   The R&D rules, however, only assetize the labor expenses, and not the labor itself ... there is a big difference.

Buckaroo Banzai's picture

Agree that the company owns the marketable residue of that labor, not the labor itself. That is an important point-- otherwise we devolve into Marxism

If you consider that a company is an aggregation of human skill and physical plant, the synergistic combination of which creates value greatly in excess than the value of the individual parts, then the corporate asset in question is the embedded productivity of the human asset. We can agree that humans without any phsyical assets can form a company, but that a company cannot be formed solely of physical plant. Human beings are required to at least some degree, therefore, the value of a company is strictly defined by how much it can leverage the human input into market value. If that is the case then the human resource must be considered to be an asset in some way.

You are making an interesting point about how R&D expenses can be capitalized. Similarly, marketing and advertising expenses can be capitalized as well. So the accounting system does accommodate this to a certain extent.

Interesting topic.

 

TheGreatRecovery's picture

ASSETS are NOT always owned.


Company Aplus has 100 employees and a gross income of $5 million a year. 

Company X has 100 employees and a gross income of $1 million a year. 

Both companies have similar equipment. 

Both companies are roofing companies. 

Why does Company Aplus do 5 times as much business as Company X?  Because Company Aplus's employees are much more experienced and much more motivated.  And because those experienced motivated employees have built a better, happier company base for Company Aplus.  Something called "Good Will"?

This happens always and everywhere.  Roofers, plumbers, tree trimmers, stores, mechanics, lawyers, consultants, brokers, engineers and architects.

Now suppose that I personally inherit a bunch of cash and want to buy a company.  I would be willing to pay more for for Company Aplus than for Company X.  So, again, Company Aplus's employees are an ASSET.

TheRedScourge's picture

An INTANGIBLE asset. VERY important distinction.

LooseLee's picture

No. PINKO FASCIST COMMIES (aka Ginsengbull) are humanity's greatest liability. Why don't you take your Punk Ass greedy self to North Korea where you will live in an environment you can thrive in, fool.

New_Meat's picture

Client: "how much is two plus two?"

CPA: "how much do you want it to be?"

disabledvet's picture

What's really funny is accounting labels "housing" (so defined as a financial product now) as an asset.

I think the "we're not counting that" profession has a lot more problems than how they are told to classify labor.

Still..the girls love it!
"Who did you fire today!" is always the first words out of their mouth when the fucking cunts pour the first beer to Boss Asahole from out of State.

I would argue "good business insurance" as a better approach.

nmewn's picture

Pretty much.

But I tend to agree with the authors premise, that the corporate propaganda is as deep as its ever been. From the Rah Rah!-Go Team! bullshit (instead of the decent wage deserved to keep the employee happy & on their payroll) to ahhh, yep, we had a bad quarter so lets lop some heads off "The Team" in order to justify our (board members) bonuses & salaries.

A pink slip, oh really?...lol.

It is (Team Spirit) totally contrived & manipulative to keep these goofball kiddies in-line and cheering until their time comes.

Us "old timers" know it ;-)

Kirk2NCC1701's picture

Remain Calm. Mind the GAAP.

Colonel Klink's picture

Yet banks can ignore FASB and marked to market rules.  Because accounting is always an honest account of the situation. :eyeroll:

I Write Code's picture

Mathematician: "four, for average values of two."

t0mmyBerg's picture

Right.  Everything is therefore an asset.  Wheee.    Up is down, left is right.  Democrats are small l liberals, Repubnicants are small state conservatives, cats are dogs.  Children are adults.  The sun is cold.  Global warming has never happened before in the geological history of the earth, it is totally something new and must therefore be caused by man.  Global warming models accurately predict the future.  Ok.  I get it now.

Bobbo's picture

How did actual people become the managed assets of a legal person called THE CORPORATION ?!

But that is Managerial Accounting, isn't it.  SPOKEN managerial accounting.

In Financial Accounting, actual people are a costly (and wasteful?) expense to Mr./Ms. CORPORATION.

disabledvet's picture

How did housing become a "financial product."

What part of "we're Wall Street and we only have money because the accountants say we do" do the professors keep forgetting to put in their financial textbooks?

That and "constructing a proper bailout regime as your business model."

nmewn's picture

Many think the same way (and rightly so) about "the people" employed by the corporation called .gov.

Its costly & wasteful ;-)

LawsofPhysics's picture

It's all mark to fucking fantasy and fuedal lords...

As a "limited liability person" I really don't give a fuck because moral hazard is a real motherfucker.

Get long sharecropping guillotine manufacturing, beat the rush.

Salzburg1756's picture

Customers are a company's biggest asset.

I am a motivational speaker.

darkpool2's picture

Hmmmmm....you "rent" employees, you dont "own" them. There can be no NPV. Nuturing them with respect, decent pay and conditions does improve your prospects , but they remain an expense.