The following three issue concern the chairman of Carver consulting in lieu of first year operations of the newly

formed National training center: Training cost of the first year of operations at National training center is greater than the expected cost. Decision whether to capitalize some or all training costs. Establishment of management control system for the center to gauge its performance.

1. Criteria for capitalizing training cost: In order to reach a conclusion first we need to understand what prohibits us from capitalizing the training cost. In my opinion training cost should be capitalized if the following conditions are met: CC expects to earn future benefits from investing in employee training. Assets take businesses into future which provide cash or cash equivalent to them when needed. Trained employees will provide a competitive edge and hence possible higher future earnings. Moreover trained employees will be considered a hallmark for CC. This cost can be capitalized as intangible asset and the company can expect to earn greater economic benefit from trained employees in the future. Second consideration is whether CC could actually control this benefit or not. CC Should have economic control over their trained employees (assets) and should have the right to receive future cash flows from their services. So the CC should ensure that trained employees remain with the company till the charges of training have been amortized. For this a policy needs to be devised which has been further discussed in successive sections. An intangible asset such as trained employees must also be identifiable. If this comprehensive training provides added value to the employee in the current market and other employers are willing to pay higher due to this added training, then this could certainly be considered as identifiable intangible asset. Since CC would use external trainers and state-of-the-art recognized training program. This in addition to augmenting value of employees will also fulfill the criteria of separately acquiring intangible asset externally.

Thus since the above four criteria for CC are met, the training cost should be capitalized to add value to the firm. 2. Costs to be capitalized: In my opinion only the fees required for external trainers should be capitalized. It also forms the major portion of the training cost. Following are the reasons why it could be capitalized: Since this training is intended to obtain substantial future benefits to CC than those associated with routine training and is extended for the whole accounting period.

The professional training given by external trainers will be able to fulfill the requirements of capitalization as per the previous section and help identify trained personnel as an intangible asset. However in this case employee could not leave CC until the cost of training is amortized.

Local training staff charges cannot be considered for capitalization as it will not be recognized or identified externally. Similarly payment to office staff will be considered as an expense and cannot be capitalized as it does not provide any long term benefit to the company. 3. Policy: A staff consultant should be bounded by a contract to serve the company for at least four years after the training. For amortization purpose useful life of this intangible asset should be defined as four years and using straight line method the actual amount can be calculated to expense out. If an employee leaves the company earlier than the useful life, he would be required to pay a part of the training cost spent on him. This would be the amount that has not been amortized till the point employee leaves. Thus CC will be able to have economic control over the benefits received to the company through training and amortization of the training cost will not be a problem since employee will have to pay the remaining amount when he leaves the company. One week training for principal makes sense, as they will have greater experience and are more probable to leave the company. The same contract policy should be used as in the case of principals as well. In order to encourage employees to agree for the contract, following points should be highlighted: Externally recognized training adding value to employees portfolio and increasing his market value Added compensation and long term benefits provided to trained employees working for CC.

4. Effect of capitalization on cash flows: Following are some implications of capitalizing the cost of training. If CC opts to go for capitalization of training cost, it will have higher net income as compared to expensing. This would result in higher payouts to partners (higher equity) due to higher profits since all the training cost will not be expensed out (only the amortized expense will be reflected in the Income statement). Taxes will be more since the training cost will not be expensed out. (However in the long run tax implication will be the same) CC will have as higher amount of total asset resulting in greater ROA and ROE initially. In case of capitalization, the cost will be included in cash flow from investment resulting in lower cash flow from investment and higher cash flow from operations.

5. Difference between expected and actual cost per participant: Following reasons could be attributed to the difference between actual and expected cost per participant: There is a difference of almost 240 staff members and 768 partners between expected and year one operations resulting in different average cost per participant. This could be due to estimation error in proposal, employee turnover or reluctance of employees to attend the training. Depreciation cost has not been taken into account in the National training center proposal.

6. Tracking the cost of training:

7. Management Control System: