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Gabel Company: Can training be an asset? Why or why not?

Gabel Company spent money to train its employees so that they can be productive workers. Such expenditures are often referred to as investments in human capital.

Required:

a. Do you think that Gabel Company's trained employees meet the definition of an asset? Explain. In your answer, discuss the characteristics of an asset and whether you think they meet each of those characteristics.

b. Most accountants would say that human capital is valuable, but that it is difficult, or even impossible, to measure the value of human capital. Given that you cannot determine an amount to place a value on the Gabel Company's employees, but you think that they are assets, what would SFAC No. 5 tell you to do? Should you report them as an asset in the company's balance sheet? Explain.

c. If a value can be estimated for Gabel Company's trained employees,
i. Would that value be more relevant or more reliable to a prospective investor? Explain.
ii. Would the company's assets reported in its balance sheet be more representationally faithful if they include the human capital than they would be without reporting an amount for the employees? Explain.

I need the most direction on answering part c.

Solution Preview

a. Do you think that Gabel Company's trained employees meet the definition of an asset? Explain. In your answer, discuss the characteristics of an asset and whether you think they meet each of those characteristics.

No. An asset is something purchased by the firm (legal title) which has future value. Training is not something that the firm can "own." Employee's knowledge is not something that the firm owns. It "enjoys" it as an intangible benefit just like it might enjoy a favorable political climate or being close to the railroad. These are REAL intangible business benefits but they are not financial assets because they are not owned.

b. Most accountants would say that human capital is valuable, but that it is difficult, or even impossible, to measure the value of human capital. Given that you cannot determine an amount to place a value on the Gabel Company's employees, but you think that they are assets, what would SFAC No. 5 tell you to do? Should you ...

Solution Summary

Your tutorial is 439 words and explains why training is never an asset, how this related to SFAS No 5 (including quotes from the concept statement) and whether this is relevant and reliable.

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