The effect of accounting for high performing employee services as a right of use asset on the balance sheet on nonprofessional investors judgments

• Published date: 01 July 2023
• Author: Akwasi Ampofo,Reza Barkhi,Joseph Nketia
• Date: 01 July 2023
• DOI: http://doi.org/10.1002/jcaf.22623

Received:  December  Accepted:  February 

DOI: ./jcaf.

RESEARCH ARTICLE

The effect of accounting for high performing employee

services as a right of use asset on the balance sheet on

nonprofessional investors judgments

Akwasi Ampofo1Reza Barkhi2Joseph Nketia3

University of Connecticut, Hartford,

Connecticut, USA

Virginia Tech,Blacksburg, Virginia, USA

St Edwards University, Austin, Texas,

USA

Correspondence

Akwasi Ampofo, University of

Connecticut, Hartford, CT , USA.

Email: akwasi.ampofo@uconn.edu

Institutional Review Board at the

educational institution where this survey

was administered approved the use of

human subjects. We appreciate very

helpful comments from reviewers. All

remaining errors are our own.

Abstract

We examine whether accounting for high performing employee services as a

right of use (ROU) asset and related liability on the balance sheet provide

decision-useful financial statement information to nonprofessional investors

(NPIs). We compare accounting for the right to use employees services as an

asset on-balance-sheet (ONBS) and off-balance-sheet (OFFBS) to examine the

extent to which a ROU asset and related liability provides NPIs with decision-

useful information in assessing investment opportunity and likelihood to invest

in a company’s stock. Weanalyze one hundred and fifty-f iveusable responses of

which  are in OFFBS control condition and  are in ONBS treatment condi-

tion. We find that accounting for high performing employees services as a ROU

asset ONBS or OFFBS provides decision-useful information to NPIs that is not

statistically different. Further analysis indicates that accounting for high per-

forming employees as a ROU intangible asset presented ONBS, measured at fair

value, or amortized cost with enhanced disaggregation and roll forward disclo-

sures provide decision-useful information to NPIs. The likelihood to invest in

a company’s stock significantly increases if the ROU asset is measured at fair

value with changes recorded in net income. Results have economic and practical

implications for investors, standard-setters, and researchers.

KEYWORDS

decision-usefulness, high performers, nonprofessional investors, resource-based theory, right

of use asset

JEL CLASSIFICATION

M, G, C

1 INTRODUCTION

The Financial Accounting Standards Board (FASB) has

an active research project on accounting and disclosure

of intangible assets, which investors have expressed the

need for improvements in the presentation, and disclosure

requirements (FASB ). Individual investors economic

balance sheet reflect human capital asset measured as

the present value of expected future labor income, and

a related liability for future consumption in asset alloca-

tion decisions (CFA Institute, ), yet most companies

balance sheets do not properly account for employees.

High performing employees provide above averagejob per-

formance that leads to disproportionately high outputs

232 ©  Wiley Periodicals LLC. J Corp Account Finance. ;:–.wileyonlinelibrary.com/journal/jcaf

AMPOFO  . 233

(Call et al., ), and high level of productivity (Groysberg

et al., ). High performers consistently achieve supe-

rior results relative to mediocreor average performers (Call

et al., ) through efficient and effective problem solv-

ing, time management, and improved focus to add value

to organizational objectives. Prior research find the death

of a talented decision-making corporate executiveis associ-

ated with abnormal changes in share price (Johnson et al.,

). The high performers are the most valuable asset of a

company (Hobson, ) as a source of competitive advan-

tage to the firm (Michlitsch, ). Despite the great value

of strong performers, a company’s contractual right to use

the services of those employees is not recognized as an

asset on the balance sheet.

This paper has two main objectives. First, we compare

current off-balance-sheet accounting with a proposal to

account for high performing employees as right of use asset

on-balance-sheet. Second, we evaluate alternatives for

classification, measurement, presentation, and disclosure

attributes of accounting for high performing employees as

a right of use asset and related liability on-balance-sheet.

Specifically, we examine whether accounting for high per-

forming employees services as a right of use asset (and

related liability) on-balance-sheet provide decision-useful

informationto nonprofessional investors.

Decades of prior research argue to “put people” as

an asset on the balance sheet (Roslender & Monk, ;

Sollosy et al., ; Chen & Lin, ; Roslender &

Dyson, ; Kolay, ; Gambling, ;Robinson,;

Flamholtz, ; Likert & Pyle, ; Hekiman & Curtis,

), and yet the cost of employee services are largely

expensed as a period cost under FASB ASC . While

proponents of human resource accounting argue that

employees provide a present right to economic benefits

to the organization (Douglas, ), opponents cite the

lack of ownership of employees, and related measurement

complexities as reasons for off-balance-sheet accounting

for employees (Rhode et al., ; Schultz, ). Prior

research also indicate that it is complex to ascribe value to

an employee services asset (Graham & King, ;Gam-

bling, ), and differentiate the values of the multiple

elements of the employment contracts (Kolay, ). Yet,

the Infosys company already records software profession-

als and support staff as human capital assets since 

under IFRS (Sollosy et al., ). Weutilize a pay for perfor-

mance matrix (Albright & Burgess, ) to measure a level

 fair value (exit price) of a ROU employee service asset in

the context of resource-based theory.

Resource-based theory (RBT) states that “employees as

a valuable human capital play a very important role in

the company’s innovativeactivities” (Safari Gerayli & Gho-

lamrezapoor, ). Under RBT, high (low) performers

are a source of extraordinary (inferior) productivity that

increase (decrease) economic benefits to the firm (Hansen

et al., ). The high performing employees provide ser-

vices that are heterogenous, valuable, rare, and inimitable

as a source of competitive advantage for the firm (Werner-

felt, ). Although prior research argues to put people on

the balance sheet (Roslender & Monk, ; Kolay, )at

amortized cost, we believe that market participants use fair

value when buying businesses. Accordingly,we estimate a

level  fair value of a ROU asset as the aggregatenet present

value of excess market over regular compensation of high

performing employees in similar job grade levels over the

service period. This level  fair value is an application of

current practice under ASC  that should be operable.

A right of use employee services asset is an employer’s

contractual right to present economic benefits from an

employee’s superior job performance relative to peers in a

competitive market. Former Chairman of the IASB said:

“One of my great ambitions before I die is to fly in

an aircraft that is on an airline’s balance sheet,”(Nish,

). Consequently, ASC  (IFRS ) were issued to

require companies to record a right of use asset and related

lease obligation on the balance sheet (FASB, ;IASB,

). The Boards emphasized the right of use rather than

ownership of the leased asset consistent with RBT.Accord-

ingly, we predict that accounting for an employer’s right

to use high performing employees services as an asset

(and related liability) on-balance-sheet rather than off-

balance-sheet provides more decision-useful information

to NPIs.

We design a  X  between-participants experiment

in which NPIs review financial statements and related

footnotes with and without a ROU asset (and related lia-

bility) recorded on-balance-sheet. Results indicate that

accounting for high performing employee services as a

ROU asset (and related liability) ONBS or OFFBS pro-

vides NPIs with decision-useful information that is not

statistically different. Analysis of ROU asset treatmentcon-

dition indicate that a ROU intangible asset on the balance

sheet, measured at fair value with changes in fair value

reported in net income or other comprehensive income

(OCI) provide decision-useful information to NPIs. Also,

a ROU asset measured at amortized cost, and disclosed

using disaggregation and roll forward provides decision-

useful information to NPIs. Finally, we find that NPIs are

more likely to invest in a company’s stock if a ROU asset

is measured at fair value with changes recorded in net

income.

This paper contributes to prior research as follows. We

apply an operable level  fair value measure of ROU

employees service asset in the context of RBT. This is the

first paper to find that recording a right of use employee

intangible asset on the balance sheet at fair value, or amor-

tized cost provides decision-useful information to NPIs.

234 AMPOFO  .

Also, firms that record a ROU employee asset at fair

value with changes included in net income could attract

more stock investments from NPIs. This paper contributes

to accounting research and standard-setting on human

resources.

The remainder of this paper is organized as follows. Sec-

tion provides a review of pertinent prior research and

develops hypotheses, and Section describes the method

and data analysis. Sections and examine the results o f

the study, and develop conclusions and recommendations

for further research.

2BACKGROUND AND HYPOTHESES

DEVELOPMENT

2.1 Prior research on human resource

accounting

Prior research in human resource accounting spans over

half a century in the eclectic fields of economics, account-

ing, finance, and human resources (Roslender & Monk,

; Okeke, ; Douglas, ;Graham&King,;

Roslender & Dyson, ; Kolay, ; Gambling, ;

Robinson, ; Flamholtz, ; Likert & Pyle, ; Pyle,

; Hekiman & Curtis, ; Schultz, ). Alfred Mar-

shall, the great economists, reportedly noted people as

the most valuable asset of an organization, and yet peo-

ple are not recognized as assets on the balance sheet

(Douglas, ; Lev & Schwartz, ). Accounting for

high performing employees as a right of use asset with

a related liability is conceptually sound, in part, because

human capital asset and related consumption obligations

are recorded on economic balance sheets that professional

analysts use in making asset allocation decisions for indi-

vidual investors(CFAInstitute, ). Also, like cancelable

leases recorded as a right of use asset and related liability

under ASC , employee contracts are subject to vol-

untary or “at will termination” though wage and salary

workers had a median tenure of . years to . years in

the private and public sector respectively (U.S. Depart-

ment of Labor,). Finally, resource-based theory (Safari

Gerayli & Gholamrezapoor, ) and prior research sug-

gest employees are a strategic asset that should be recog-

nized on the financial statements (Sollosy et al., ;Lev

& Schwartz, ). Part of the difficulty in recognizing peo-

ple as assets on the balance sheet is because employees are

not owned by companies, and measuring people assets is

a complex task (Douglas, ;Graham&King,). For

example, while proponents of human resource accounting

argue that employees provide a present right to economic

benefits to the organization like any other assets (Douglas,

), opponents cite the lack of ownership of employ-

ees, and related measurement complexities as reasons for

off-balance-sheet accounting for employees (Rhode et al.,

; Schultz, ). Rather than people assets, we believe

that high performing employees provide incremental eco-

nomic benefits to which a firm has contractual right to use

(Michlitsch, ) in the context of resource-based theory.

In fact, the Infosys company already recognized on the bal-

ance sheet the value of software professionals and support

staff as human resource asset since  (Sollosy et al.,

) under International Financial Reporting Standards

(IFRS) using Lev and Schwartz model. Appendix  is a brief

summary of prior research on human resource accounting

and right of use assets. (Supporting Information)

2.2 Resource-based theory and high

performing employees

Resource-based theory (RBT) states that “employees as

a valuable human capital play a very important role in

the company’s innovative activities” (Safari Gerayli & Gho-

lamrezapoor, ). Under RBT, a firm is a collection

of resources that are processed into profitable products

(Wernerfelt, ;Barney,; Cecchini et al., ).

Land, labor, and capital are traditional economic inputs

to the production process that along with technology

determine superior factor productivity and competitive

advantage (Bowman & Toms, ). The administrative

and productive resources of the firm (Hansen et al., ;

Cecchini et al., ) can be harnessed to create or destroy

value in firms’ outputs. The inputs, processes, and outputs

of the firm are sources of competitive advantage or disad-

vantage (Barney,; Bowman & Toms, ;Toms,)

that underpin superior financial performance. Appendix

 is a brief review of prior research on RBT. We apply

RBT concept of “outliers” (Hansen et al., )tosep-

arate employees’ job performance into high versus low

performers within a given job grade.

High performers provide disproportionately high out-

puts (Call et al., ) and high level of productivity

(Groysberg et al., ). Given similar resources, the

high performers consistently achieve superior results than

mediocre or average performers (Call et al., ) through

efficient and effective problem solving, time management,

and improved focus to add value to organizational objec-

tives. High performing employees provide heterogenous

services that are valuable, rare, inimitable, and organized

to enable the firm to achieve sustainable competitive

advantage (Peteraf, ; Wernerfelt, ). Steve Jobs of

Apple, Bill Gates of Microsoft, and Elon Musk of Tesla,

superior product engineers and many other high perform-

ing employees arguably provide more market value to

firms than average performing employees (Peteraf, ).