Paper F2 Financial Management: Candidates Have Struggled to Answer Questions on Human Asset Accounting in Recent Sittings, but It Is a Key Topic, So the Examiner Is Unlikely to Let Students off Lightly in Future Papers

By Howson, Jayne | Financial Management (UK), April 2011 | Go to article overview

Paper F2 Financial Management: Candidates Have Struggled to Answer Questions on Human Asset Accounting in Recent Sittings, but It Is a Key Topic, So the Examiner Is Unlikely to Let Students off Lightly in Future Papers


Howson, Jayne, Financial Management (UK)


When I ask the question "are you an asset to your employer?" in class, my students are often disappointed to learn that the answer is "no". In fact, students, like all employees, are an expense-and often a large one at that. At least we can all take some comfort in the knowledge that we aren't liabilities either. Which brings us to a topic often tested in F2 papers-and, therefore, dear to the examiner's heart: human asset accounting and the recognition problems it poses.

As recently as November 2010, candidates were asked to discuss why the narrative element of a company's financial report is likely to include comments about staff being a company's key asset-and what problems of recognition prevent such an asset from being included in the statement of financial position. While some candidates made some excellent comments about these issues, far too many showed that they didn't have a clue. The topic was also covered in an optional question in November 2009's F2 paper-and it wasn't answered at all well in that case, either.

It is important to note that this topic covers a key aspect of the syllabus-section D: developments in external reporting-so it could continue to be examined in different ways. When a particular area is covered in one exam, never assume that it will not be tested again in the next sitting.

What is human asset accounting?

It is an attempt to recognise the human resources of an organisation in monetary terms and put them on its statement of financial position as an asset.In the past employers have shown some interest in placing a value on factors such as their employees' experience and income-generating potential. Unfortunately, the concept has failed to develop because the process of recognising and measuring such resources is so problematic.

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Service industries such as advertising, which rely on the talent and experience of employees, find this topic particularly important. (Apparently, so do kidnappers, as one candidate pointed out when answering a recent question. He argued that the valuation aspects would cause them the most problems. Perhaps I'm not in tune with the average master criminal, but I'd imagine that the last thing they would consider as they scribbled the ransom note is how to account for their victims in their next set of financial statements.)

What could the examiner ask?

The examiner will undoubtedly latch on to the problematic aspects of human asset accounting. The real unknown in any question is the perspective from which you should be considering these problems. But there is a limit to this and, when you read previous questions on human asset accounting, you'll see there are different angles to them. Let's consider some of the approaches that the examiner might take:

* The company's perspective. Are they an asset? What are the measurement problems?

* An investor's perspective. Are they an asset? What are the measurement problems? What are the problems when comparing with other investment opportunities, including ratio analysis?

* A rival's perspective. What are the comparability problems using different valuation methods?

* Advantages and disadvantages. What are the pros and cons of including/not including them as an asset? What are the pros and cons of valuation using different methods?

* Different industry sectors. How do the valuation problems faced by manufacturing companies and service providers compare?

How should such questions be tackled?

The great thing about answering written questions, as opposed to numerical questions, is that one good-quality, relevant, specific and concise comment will earn you one mark. …

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Paper F2 Financial Management: Candidates Have Struggled to Answer Questions on Human Asset Accounting in Recent Sittings, but It Is a Key Topic, So the Examiner Is Unlikely to Let Students off Lightly in Future Papers
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