Copyright Newsweek
Layoffs have become commonplace in the U.S. economy. The U.S. Bureau of Labor Statistics reports that over 150,000 employees were laid off in every month of 2024. In 2025, the trend is continuing, with notable firms like Amazon having just announced a 10 percent labor force cut among its white-collar workers and John Deere laying off 200 factory employees. Managers claim these layoffs are in the long-term best interest of the firm. But, research shows how difficult it is for investors to evaluate these transactions. Investors have difficulty in part because, despite how common and important layoffs are, accounting regulations distort financial statements so the layoffs' impacts on the firms are not clear. Despite years of pleas from investors for more information related to the firm’s employees, the Securities and Exchange Commission (SEC) has not made any meaningful changes to regulations and the 2020 proposal for additional employee-related disclosures is unlikely to be passed by the Trump administration. In light of these delays, investors should pressure regulators to craft new mandatory disclosure rules that would force firms to shed more light on their downsizing decisions and should pressure managers for more voluntary disclosures related to layoffs in venues like conference calls. The reason that investors currently get so little transparency into layoffs is because accounting regulation for physical assets is very different than it is for their human assets. The SEC requires firms to account for physical capital in transparent ways. If a firm were to sell a factory, two parts of the financial statements would change. Both changes would occur on the balance sheet. Accounting Tricks Make Layoffs Look Profitable but That Isn't Always the Case First, they would record the loss of a physical asset. This means they would lose the value of the factory they sold. Then, they would record the value of the cash they gained in the sale. Together, these two transactions could result in increased or decreased firm value. It might even result in no change to the total value of the firm. Because of these two clear transactions, investors are given a great amount of detail about the true net impact of the action on the firm. When a firm lays off employees, the SEC does not require the firm to do any of that. Unlike other transactions which require double-entry accounting, layoffs do not. When companies conduct layoffs, only one part of their annual financial statements changes. On their income statement, their employee expenses decrease which mechanically results in more profit. This is because, by definition, profit equals revenue minus expenses. The firm is not required to recognize any losses. As a result, laying off employees will always result in the firm being relatively more profitable on paper than they would have been otherwise. There are two other disclosures required for layoffs, but they are not in a firm’s annual statements. One comes from the Worker Adjustment and Retraining Notification (WARN) Act which requires a 60-day warning of upcoming layoffs that impact more than 50 employees at firms with over 100 employees. After employees are notified, firms are also required to release a public announcement (also known as an 8-K). However, this announcement only requires the disclosure of the date of the layoff and estimates of any future cash costs associated with the layoffs such as severance payments. These two accounting treatments are different because current accounting regulations allow firms to record the cost of their physical capital as assets but require firms to treat the cost of their employees as expenses. Money spent on physical capital is not really spent. It is just changed from one asset type to another. In contrast, almost all money spent on employees is gone entirely with nothing to show for it. This is true even though the money spent on employees produces human capital, which is defined as the knowledge that employees create in their jobs. An example of human capital is when a programmer at Apple is working on software for the iPhone. While doing her job, she learns more about the specific coding for the iPhone and comes up with new ideas for the next generation of the phone that she would not have had if not for working at Apple on this project. These ideas are key to Apple's future product lines. When firms lay off employees, they lose all the human capital associated with each of them. If Apple were to lay off this programmer, for example, her ideas about how to improve the next iPhone are gone. The next iPhone may not be as innovative as it would have been with her help or may take longer to produce. When Intel laid off 15 percent of its global workforce in 2024, its profits improved on paper. However, in their layoff announcement, the CEO, Pat Gelsinger, voluntarily told investors that they are going to reduce the amount of research conducted at the firm. Despite the departure of highly capable scientists, Intel is not required to formally record any losses. This is true even though it’s obvious to investors that the human capital at the company will be dramatically reduced and its ability to conduct long-term profit-maximizing research is diminished. When firms conduct layoffs, they are not just reducing salary expenses. They are also losing important human capital assets, but the current accounting rules hide this loss. Investors should not accept this level of opacity. They should actively demand more details about layoffs in conference calls and by contacting firms’ investor relations departments. In addition, the SEC should change regulation. While the SEC may not be able to make the same rules for employees as they can for factories, they can still require additional disclosures about the composition of the layoffs. Specifically, they require firms to provide details about not only the total number of employees being laid off but also what type of employees those are. Next, they should be required to detail how losing these specific categories of employees will diminish the capabilities of the firm. They should also be required to discuss what types of increased risks the firm now faces without these employees. Doing this will mean that managers are required to explain what human capital has been lost. Formally recognizing these losses would help investors better understand the effect of the layoff on future profitability and price the firm accordingly. Lisa LaViers is an assistant professor of accounting at the A.B. Freeman School of Business at Tulane University.
