ascertaining the ‘value’ of a ‘workforce’
TRANSCRIPT
ASCERTAININGTHE ‘VALUE’
OF A ‘WORKFORCE’
“‘Workforce’ though not reflected as an asset in an organisation’s Balance Sheet certainly has an economic value attached to it. Workforce is one of the most
important asset for any organ--isation. A worker’s economic value comprises of his skills,
education, experience, loyalty and other attributes that are of
considerable value to any business.
APRIL 2020
BACKGROUND
Over the last few years, the markets havewitnessed a surge in mergers & acquisit--ions (‘M&A’) activities across the globe. Many organisations view this as vehicle for driving strategic growth of their busin--esses, optimising costs and for increasingtheir stakeholders value.
Within the framework defined by IFRS 3, an independent appraiser needs to perform a ‘Purchase Price Allocation’ which involves breaking down of the purchase consideration for all identifiableassets and liabilities. The appraiser has tothus identify and measure the fair value ofall tangible and intangible assets, as wellas all liabilities that are to be acquired in abusiness combination and allocate the residual value of the purchase consideration to goodwill.
Considering ‘Assembled Workforce’ is not a separately identifiable intangible asset and cannot be sold or transferred indepen--dently, any economic value that is attribut-able to it, gets subsumed in the value of goodwill at the time of ‘Purchase Price Allocation’ as per IFRS 3. The most common method that is used to determinethe value of an ‘Assembled Workforce’ is the ‘Replacement Cost Method’ under the ‘Cost’ approach. This discussion paperexplains the valuation of an ‘Assembled Workforce’ by way of anillustrative example.
An appraiser needs to understandthat despite not being a recognisableintangible asset, it is quintessential toestimate the value of a workforce. The estimated value of a workforce is required to assess the contributory asset charges on other intangible assets (valued using ‘income approa--ch’).
“
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IFRS 3 ‘Business Combinations’ provides a rather complex andextensive valuation exercise to be performed for financial reporting purposes to account for such acquisitions.
ECONOMIC VALUE OF
ASSEMBLED WORKFORCE
In order to estimate the value associated with an ‘Assembled Workforce’ using the Replacement Cost Method, it is important to understand what goes into creating a workforce. By ‘replacement cost’, we mean, the actual amount that would be required to replace an existing asset with a similar asset having the same economic utility. The key aspects that need to be analysed for determining the cost to rebuild an organisation’s workforce include the following:
Training costRecruitment cost Cost of produ--ctivity loss
The fair value of an ‘Assembled Workforce’ is usually determined by identifying the costs associated with different groups of employees that are classified into groups on the basis of their skills, geographies, employment tenures, level of management etc. The calculation of the value of an ‘Assembled Workforce’ can be explained with the help of the below illustration:
Grade # of Empl--oyees
Assembled Workforce Valuation - Replacement Cost Method
Employee Data as on Valuation Date Recruitment Cost Cost of loss productivity Training Cost
(CTC) per employee*
Monthly Cost
5,000,000
2,500,000
1,000,000
500,000
5
200
a
III
IV
416,667
208,333
83,333
58,333
41,667
"Est. time to reach full productivity (in mths)"
Initial Efficiency
f =d*(1-e)/2*(a*b)
Productivity loss Total training cost
Total Replace--ment Cost
200,000
105,000
25,000
15,000
12,000
-
100,000
50,000
-
-
c
Total Recruitment Cost
200,000
205,000
75,000
15,000
12,000
d e g c + f + g
Total (in INR million)
507,000
0.51
0.5
0.5
0.5
1.0
1.0
75%
75%
50%
25%
25%
130,208
325,521
1,041,667
4,375,000
3,125,000
33,333,333
15,625,000
5,000,000
3,500,000
833,333
33,663,542
16,155,521
6,116,667
7,890,000
3,970,333
8,997,396
9.00
58,291,667
58.29
67,796,063
67.80
700,000
25
100
200
I
II
V
Total 530
Total (in INR million)
507,000
0.51
Grade
b d e f =d*(1-e)/2*(a*b) g c + f + g
Consultancy Cost
Relocation Cost
CONCLUDING REMARKS
Human capital is one of the key intangible assets that an organisation possesses. The mostcommon method for assigning any value to a workforce is the ‘Replacement Cost Method’. In practice, workforce, though non-existent on an organisation’s Balance Sheet, has an economic value attached to it, which is required to be ascertained for businesscombinations.
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