Read the following article from Australian CPA.

While rugby stars are heroes to many, when checking the books they become a complex intangible. Rosalind Whiting and Kyla Chapman investigate the merits of Human Resource Accounting in professional sport.

Australia, New Zealand and rugby union — a combination guaranteed to stir patriotic feelings across the Tasman! But what if we add accounting to this equation? Rugby players are the teams’ most valuable assets, so should we be placing their value on the balance sheet? And if so, does it make any difference to the decisions that users of financial statements make?

Human resource accounting in professional sport

Professional sport has been prevalent in the United Kingdom and the United States for nearly 200 years. However, professional sport arrived later to Australia and New Zealand. In particular, the Kiwis only entered this arena in 1995 when the New Zealand Rugby Football Union (NZRFU) signed the Tri Nations sponsorship deal and removed all barriers preventing rugby union players being paid for their services. Player contract expenses in New Zealand now amount to over NZ$20 million annually, according to the NZRFU.

In the United Kingdom and the United States, the professional teams’ financial accounts quite often incorporate human resource accounting (HRA). HRA is basically an addition to traditional accounting, in which a value for the employees is placed on the balance sheet and is amortised over a period of time, instead of expensing costs such as professional development.

There is debate about the merits of this process and the arguments are in line with those we have been hearing about intangibles in general. More recently, there has been worldwide movement towards recognising acquired identifiable intangible assets at fair value in the financial statements. So why not include an organisation’s human resources? While (thankfully) most people agree that employees are valuable, there are accounting difficulties with the concept of ownership or control of the employees (asset definition) and the reliability of measurement.

Despite these concerns, one area where HRA does have some international accept ability is in accounting for professional sport, mainly because of the measurable player transfer costs. But there is still some variability in the reporting of human resource value, ranging from the capitalisation of signing and transfer fees through to player development costs or valuations.

To the authors’ knowledge, HRA is not currently practised with Australia and New Zealand’s professional sports teams. The absence of transfer fees between clubs when trading players may explain this.

Decision making

Accountants are required to provide information that assists users in assessing an organisation’s financial and service performance and in making decisions about providing resources to, or doing business with, the firm.

The big question is whether HRA information is more useful to the decision maker than the alternative expensing treatment. Supporters of HRA argue that capitalised information is useful for strategic planning and management of employees, and provides a more accurate measure of the firm’s status and total performance.

Those against HRA say it is too subjective to be useful and that it just imposes another cost on the organisation. Some detractors argue that it makes unprofitable organisations appear profitable simply because smart people work there. But those who believe in the efficiency of the market would argue that investors are not naive, and decisions would be unaffected by the way in which human resource information is presented.

Required:

Discuss whether rugby players are ‘valuable assets’ of a business, or an expense. Use the definitions of assets and expenses to show which of the elements of the financial statements ‘human resources’ should be classified under.