Case

Name: Noman Khalid

Course: Accounting for Decision Making

ERP ID: 01212

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Main Campus, MBA II

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Date: 13th February 2013

Analysis - Carver Consulting Company

Q1. Not all voluminous expenditures can be capitalized and its impact shifted from income statement to balance sheet. For any expenditure to be capitalized, it needs to meet a few conditions, including:

1. It must be defined and separate from other assets. The expense of training is not an asset which could be separated from the employee who is being trained, so we will need to capitalize the employee altogether.

2. The company must control/own the asset and be able to transfer their control. As long as the employee is working for Carver, it can control him but it is not transferable like other assets, e.g. buildings

3. It must be possible to predict future economic benefits of the asset. The element of uncertainty is very high in the case of training as we cannot state with certainty the employment span of the employee, his ability to effectively deliver the trainings to other clients and his ability to generate revenue for the firm

4. Any impairment of the asset’s value can be determined. If the employee who has received training get a major injury resulting in loss of limbs, we cannot accurately determine the value of this impairment

Quantifying the value of knowledge gained through training is also subjective. Another impediment in capitalizing training costs is that how the company should appreciate the value of the trainer after the training has been completed. Lastly we capitalize expenditures which result in economic benefit for more than one accounting period, however the trained employee might leave before completing an year. We can also think about training as the maintenance cost of the asset, and the actual hiring costs can be classified as the purchasing cost of the employee....