Abstract: Investors consider workforce investments a necessary part of creating long-term shareholder value. A large investor group recently sent a letter to the FASB, requesting that a standard-setting project on reporting workforce costs be added to the technical agenda. This article explains why investors want more detailed information on workforce costs and how companies can expand their disclosures to provide greater transparency. A sidebar highlights the reason the FASB unanimously voted against delaying the updated lease accounting rules for a third time for private companies.
Request for expanded disclosures
Investors consider workforce investments a necessary part of creating long-term shareholder value. The Human Capital Management Coalition (HCMC), a global group of 25 institutional asset owners and asset managers representing over $6.6 trillion in assets, recently sent a letter to the Financial Accounting Standards Board (FASB). The letter urges the FASB to add a standard-setting project on reporting workforce costs to its technical agenda.
The term “human capital” refers to the collective knowledge, skills and experiences of the workforce. Workforce-related expenditures are increasingly important to corporate value creation, according to the letter the HCMC sent to the FASB in September 2021.
“Investors and other financial statement users have cited the need for disaggregation in the income statement, in the statement of cash flows, or in the notes to financial statements, specifically a breakdown of cost of sales and selling, general and administrative expenses,” said a spokesperson from California State Teachers’ Retirement System, which co-chairs the HCMC.
The FASB’s project would require companies to provide more details about total workforce cost, which are generally already included in selling, general and administrative expense and cost of sales figures. HCMC would like to see this information presented “in a way that evinces a discernible through-line from the company’s audited financial reports to issuer disclosures, with key components provided in tabular form in a footnote.” Currently, this type of disclosure isn’t required under U.S. Generally Accepted Accounting Principles (GAAP).
HCMC sent its letter in response to the FASB’s Invitation to Comment (ITC) No. 2021-004, Agenda Consultation. The ITC was issued in June 2021 to solicit broad public feedback about its five-year technical agenda.
COVID-related concerns
At the crux of the issue is the COVID-19 pandemic. Investors wanted timely information about workplace challenges that were created by the pandemic, including increased reliance on remote working arrangements, the need for furloughs and layoffs, and potential changes to business models related to the use of a workforce.
HCMC’s letter cites recent workforce disclosures provided by Amazon, Walgreens, CVS Health and McDonald’s as lacking in detail that would be useful to investors. For example, Amazon disclosed in the spring and fall of 2020 that it would fill 175,000 and 100,000 new positions, respectively, to meet COVID-19 demand. But the company didn’t provide turnover or absenteeism data to help determine whether it was replacing or expanding its workforce. The letter indicates that Amazon may experience approximately 150% turnover per year — at least twice the turnover of competitors in the retail and logistics industries.
International guidance
A suggested starting point for the FASB to consider when drafting an updated standard is International Accounting Standard (IAS) 19, Employee Benefits. This standard requires companies to report the total value of such items as salaries, bonuses and pension benefits.
Specifically, HCMC wants to see total employee compensation broken down into the following components:
- Salaries and wages,
- Health care and other benefits
- Employer’s contribution to Medicare and Social Security
- Value of equity-based compensation
- Commissions and bonuses
- Perquisites
- Overtime
- Severance payments
- Retirement, and
- Training and development expenses
The presentation “should also provide a clear delineation between costs for full time, part time, and contingent workers to ensure companies are capturing the full breadth of labor resources used during the reporting period.”
Stay tuned
The FASB plans to discuss the responses to its ITC in the coming months. Contact us for the latest developments and ways to improve the transparency of how your company reports its investment in workforce assets.
Sidebar: No delay to lease standard for private entities
Accounting Standards Update No. 2016-02, Leases, was issued in 2016 to require the full magnitude of long-term lease obligations to be recorded on balance sheets. Public companies had to adopt the changes in 2019. The effective date for the updated standard was deferred in 2019 and 2020 for nonpublic entities after companies flagged implementation challenges.
On November 10, the Financial Accounting Standards Board (FASB) unanimously voted against delaying the updated lease accounting rules for a third time for private companies. A two-year deferral was previously requested by a state CPA society. The request cited concerns that private companies were forced to obtain new sources of financing amid the COVID-19 pandemic and asserted that they’d need more time to work with lenders to waive or modify debt covenant agreements that might be impacted by the changes.
FASB members rejected the request, because, if approved, another delay would mean that investors would need to wait almost eight years for the more transparent information the rules afforded. “One of the challenges with multiple deferrals is there’s always the expectation there’s another deferral coming. One of the reasons I was happy this came in was to take that off the table so people do realize there is some certainty of adoption,” said FASB Chair Richard Jones.
The vote means private companies must continue plans to adopt the rules for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
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