Assets and Liabilities

3/27/2023

What is an Asset?
By: andrew -  twitter.com/pureparalogism

"As markets learn to manufacture intelligence, politics modernizes, upgrades paranoia, and tries to get a grip"
-Nick Land, Meltdown

In classical accounting fixed assets are something real and tangible that a company can utilize after either purchasing something or creating something. This asset is then placed on the balance sheet and depreciated over the useful life of the asset.  Since the industrial revolution the quintessential asset is property, plant, and equipment. Your company spends $3,000,000 and now has a machine that will make cardboard boxes for 7 years before needing to be replaced.

How does this apply to the knowledge economy? What are the major assets of a law firm? an accounting firm? a consulting firm? an investment bank?   - The people that work there

How are human assets accounted for in financial statements? For one, they aren't considered assets, but an expense that shows up on the income statement as a line item. Second, on financial statements companies are not given credit for all of the time and money they spend acquiring and developing their human assets. In any knowledge economy firm it will cost roughly 50% of a new employees yearly salary to onboard, train, and assimilate that employee into the company before they are a productive employee. Those expenses directly result in an *asset* that a firm will use to generate value. Training and developing talent are better thought of as capital expenditures for fixed assets, rather than merely a wages expense.

Once a firm has expended capital to develop their workforce, they now have a real tangible asset that will generate revenue. The useful life of that human asset is akin to the depreciation schedule of a classical asset (ex. cardboard box machine).

If financial statements reflected modern reality, and not the archaic standards of the industrial revolution; training and development of human talent should show up on the balance sheet as a real human asset that is depreciated over its useful life. Say the average employee tenure is 7 years, the resources expended producing a productive team member would show up on the balance sheet as a human asset, and depreciated over 7 years. 

This radically changes the optics of considering reductions in force, and layoffs in general. Today, if a company lays off employees they are directly impacting their bottom line, eliminating a wage expense... that's it. 

Under this new framework, laying off an employee would be the equivalent of; disposing of a perfectly good piece of machinery that cost a lot of capital to train and develop, and has a tangible runway of value that would be contributed to your firm. Eliminating one of these highly skilled and value producing employees is like taking a sledge hammer to your box making machine: The box making machine costs $50 a day to operate, if I destroy the machine I will save $50 a day. In reality you are also destroying $3,000,000 in assets to save $50 a day.

In the knowledge economy, we need to radically rethink what is an asset and what is an merely an expense  -- Humans are your assets and sources of long term value.