You have probably been drawn to this article based on the people, teams, leadership & coaching words in the title - but what follows is really all about accounting and finance. Whilst it relates directly to people, teams, leadership & coaching – if the title had been ‘Amortisation and impairment of intangible non-current assets’ would you even have read this far? Please suspend your preconceptions and beliefs for two minutes and read a little further – and then draw your own conclusions about whether accountants really do understand the value of people, teams, leadership and coaching to organizations.
Added on 10 October 2016 by Steve Seymour
‘People are our most important asset’ – a mantra which appears in CEO speeches, in company’s annual reports and on countless websites – but which, from an accounting perspective, is far from the truth. For most businesses, people represent a cost in the profit & loss account rather than an asset on the balance sheet. The more ‘valuable’ the people, the more they are paid – thus the more revenue the business needs to generate to make a profit. Clearly accountants don’t understand the value of people and the benefits they bring to an organization – otherwise they would account for them differently. Perhaps though, they are more astute than you think.
There is an exception to the rule that ‘people’ don’t appear on the balance sheet as assets, and that relates to sports stars - such as Premier League footballers. In accounting jargon – ‘the costs associated with the acquisition of players are capitalized as intangible fixed assets’. In other words, the transfer fee paid to acquire a player appears on the balance sheet as an asset – and is then written off [amortised] year by year over the life of a player’s contract.
It’s just like if you purchased a car for £12,000 which you intended to use for three years – you would charge £4,000 depreciation in the profit & loss accounts for each of the years you made use of the vehicle. It’s exactly the same for the footballer – although, perhaps oddly, footballers are categorized as intangible assets and ‘amortised’ over time, rather than as tangible assets which are ‘depreciated’.
Whilst transfer fees are recorded on the balance sheet and amortised – accountants seem to understand that a player can’t play on his own. Using the words from one Premier League team’s annual report – ‘The [club] does not consider that it is possible to determine the value in use of an individual football player in isolation as that player … cannot generate cash flows on his own’.
Essentially, to be able to generate cash flows – the primary financial rationale for an organization to own any asset – accountants recognize that you need a team of players, along with a stadium and some training facilities. The accounting rules therefore explicitly highlight that individuals on their own are of limited value to an organization. Rather their value is derived from them forming part of a high performing team.
The financial view then isn’t that different from that of the HR professional. It is people working effectively as members of teams which creates value for an organization – not individuals operating on their own.
Leadership and coaching
‘The role of leaders and coaches is to develop team members and teams to work more effectively, and thus to create more value’.
That sentence could have been written by either an HR or a finance professional as it appears that the views of both professions are aligned. It’s just that the finance people seek to quantify value numerically.
However, what happens if things go wrong?
Under IFRS [International Financial Reporting Standards] assets on a balance sheet are subject to an annual ‘impairment test’. Essentially the test looks to compare the value at which an asset is shown on the balance sheet and compares it to the value of future benefits [cash flows] the asset can generate for the business. If the value of the future benefits is lower than the recorded value of the asset, the asset is impaired and has to be recorded at the lower value on the balance sheet, with the difference appearing as an expense in the profit & loss account, thus reducing profit.
This sounds very technical – but consider what happens if a new leader or coach is appointed and an existing player doesn’t fit in with the new coach’s plans. According to the accounting policies:
‘In certain rare instances there may be an individual player whom the [club] does not consider to be part of the first team squad going forwards …. This is normally due to a permanent career threatening injury, a serious and permanent fall out with the [club’s] senior football management and directors, or where [the club’s] senior football managers and directors have decided the player is not part of the club’s plans…’
In such circumstances the perceived value of the player to the club plummets [is impaired] and the reduction in value appears as an expense in the profit & loss account.
It might appear harsh, but a recent [September 2016] Manchester United FC press release announcing the fourth quarter and full year financial results for the club – which included a record full year operating profit of £68.9million – also highlighted an ‘… impairment charge regarding a reduction in the carrying value of a player no longer considered to be a member of the first team playing squad’. When a player falls out with the new coach, Jose Mourinho, it can be very expensive for football clubs, such has Manchester United.
Summarizing what is it that the accounting rules are trying to reflect? Perhaps it is that:
People on their own are not assets – it’s what they contribute to a team which creates value for an organization
The role of leaders and coaches is to develop team members and teams to work more effectively, and thus to create more value
When a leader believes that an individual is no longer able to contribute effectively as a team member, their value to the organization is reduced [or impaired]
On reflection therefore, finance and HR professionals do appear to have very similar views about the value of people, teams, leadership & coaching to organizations and perhaps the accountants haven’t got it so wrong after all.
Steve Seymour is the Program Director for our 3-day open program Financial Drivers which aims to demystify finance and to explain terminology, concepts and principles in a way that is simple and easy to understand.