Should Human Capital Be Recognized As An Asset? #essay

We often hear managers refer to employees as their company’s greatest “asset”. However, they are rarely recorded as such in the balance sheet, and in times of financial difficulty employee expenses are often amongst the first to be minimised. For example, in the wake of five consecutive years of poor financial performance, blamed primarily on poor student retention, Victoria University recently announced that 115 academic positions would be cut. Whilst it is generally accepted that human capital is not treated as an asset, this accounting treatment is not consistent across all industries. For example, Manchester United lists in their 2015 annual report under Note 16 “Players’ registrations and other intangible assets” as having a net book value of £204,572,000.

Evidence suggests that certain individuals, and/or the companies they represent, do consider their personal (and often highly specialised) skills and attributes to be assets. For example, football (soccer) players David Beckham and Cristiano Ronaldo have reportedly insured their legs for $70m and $144m respectively, whilst dancer Michael Flatley insured his for $60m. Pianist Lang Lang has reportedly insured his hands for upwards of $15m, and “The Boss” Bruce Springsteen insured his voice for $6m. Teeth-whitening company AquaFresh insured the smile of their star celebrity endorser, America Ferrara, for $10m, and evidence suggests that the appointment of a new CEO who “talks the talk” can drive share prices up by on average 12.6% (or $6.6b on the US market).

Whilst human capital is not commonly recognised as an asset, clearly there are some economic benefits to be obtained from the skills and attributes of certain individuals. Is there any difference between a celebrity endorser with a perfect smile, and a service provider who smiles and greets every customer/client by name? A footballer who has trained their whole life to kick goals on the field, to a scientist who has trained their whole life to kick goals in their field?

You have been approached by a journalist by the name of Tony Trainer, from the local newspaper. This journalist would like to publish a piece on whether human capital should be accounted for as an asset, and would like your expert opinion, as an accountant, on your interpretation of the Accounting Standards and Conceptual Framework regarding this issue.

To get you started I have provided a couple of resources that may be helpful – these are by no means exhaustive, and are certainly not the best in their field. You are encouraged to use these as a starting point to find your own references.

1. Write a letter to Tony addressing the question: “Should Human Capital be Recognised as an Asset?”. In your response you should address both sides of the argument (with appropriate references), before coming to your own conclusion. This letter should in proper letter format, and given that its contents may be published in the local newspaper, should be written in a professional manner. It will be published in the business section of the newspaper so you may use accounting terminology.

2. Your letter should be referenced appropriately, as Tony is a scrupulous journalist who needs to cite his sources.

5^th April 2017

Tony

Local news reporter,

Email address- Tony @gmail.com

Phone num- XXXXXXXX

The success and failure of an entity is always depends upon its employees. Even almost all the organization depict in their annual reports about their key executives, managers and other employees and appreciates their effort for the success of the company. Early evidences depict that human resource’s replacement cost is substantial. In a survey, it has been found that if a company is paying $ 500 million as a payroll than the real worth of that is around $ 1500 million.

It has been always analyzed that organizations sometimes treat the human capital as an asset and sometimes it do not even focus over the human capital. Organizations consider the human capital only for enhancing the final statements of the company and reduce the crisis over the company (Appuhami, 2007). The human capital is always used by the companies to enhance, expand the business and for save the business from the financial crisis.

When businesses think about their asset classes they consider only stocks, bonds, commodities and real estate. Investors have researched a lot on the risk and return profiles so that they could analyze and classify the common assets in order to construct a portfolio for their clients (Baron, 2007). But one topic is always disturbed their research and that is if they must include the human capital of the company in their research to identify the best result of the portfolio.

Human capital is the knowledge, skills and experience acquired by an individual or a group. It is a set of skill for an organization (Kaye, 2012). The great the skills and talent of an organization’s employee would be the more the company would be able to enhance the business and profits. Often people have been found to say that the human capital of an entity is the utmost asset of an organization whilst organizations do not mention human capital as their asset in their financial statement.

Human capital is not allowed to record in the financial statement of the company according to the accounting standards. The AASB 138 depict about the Intangible asset. According to the AASB 138, intangible asset are those assets which could not be physical in nature such as patent, copyright (AASB, 2017). It explains that all those asset of the company which could enhance the value of company must be recorded into the financial statement of the company and must be treated as asset of the organization.

This AASB argues in the favor of the human capital and depict that if patents, goodwill and copyrights could be treated as asset than human capital is utmost important component (Martin, McNally and Kay, 2013). It must be recorded in the balance sheet of an organization at asset side. It is also argued by the analyst that human capital is the one which is always focused firstly at the time of crisis so it must be recorded in the balance sheet to understand the financial performance of the company easily.

Human Capital and Asset Classes

A human resource trainer argues that human capital is a recognition of people which is important for every business to operate the businesses. It contributes the growth and development of business, physical assets such as machinery etc (Morrissey, 2015). so he argues that it must be recorded by the companies as if it would not be with the company than there would be no existence of company. An entity without the help of human capital is uncompetitive (Wasko and Faraj, 2005).

A currently research over the organizations describes that the talent is valuable for every organization. It also argues that if the most valuable asset of a company is not disclosed by the company than the final statements are not of worth. Earlier, people used to invest less in intangible assets but currently it has been found that UK companies have invested £ 137.5bn in intangible assets and in that 25% was for the human development such as training and skill development (Namasivayam and Denizci, 2006). So this argues that it must be recorded in the balance sheet as intangible assets.

But some analyst argue that it would become a great headache for them to investigate about the company with their human capital and human capital of the company could be recorded by the accountant by taking the help of creative accounting (Ployhart and Moliterno, 2011). It is not possible for the companies to identify the real worth of the human capital of the company. AASB 136 argues that the impairment cost must be recognized of an asset and then only an asset could be recorded to the final financial statements of the company (AASB, 2017).

According to the AASB 136 rules, it is not possible for an organization to evaluate the real worth of human talent and skills in organization as the skills and talent could not be measure in terms of accounts (Gallego and Rodríguez, 2005). So analyst argues that if company would started recording the human capital as asset than company would be able to enhance the final statements according to the requirement such as if company want to enhance the asset, it would exceed the value of human capital and if company want to show lesser assets than it would decrease the amount of human capital (AASB, 2017). From decades, employees are always treated as a liability by the organizations due to their salaries and other expenses. But it has not been analyzed by the organizations that they are the pillars of the company.

It has been found through a survey that human capital involves many costs such as training cost, recruiting cost, evaluating cost, rewarding cost, mental development cost, conserving cost etc which is never recorded in the final statements by the company. This human capital is also not recorded as an asset due to theses costs (Chen, Ibbotson, Milevsky and Zhu, 2006). Analyst suggests that companies could record the human capital separately but recognize it as an asset must manipulate the reliability of final statements.

The Importance of Human Capital

A financial officer argues that if they would record the human capital in the balance sheet than it would be tough for the company to identify the real worth of the human capital and all the expenses of human capital such as training cost, recruiting cost, mental development cost, skill development cost etc would be recognized and thus the amount would be in balance. From decades, employees are always treated as a liability by the organizations due to their salaries and other expenses. But it has not been analyzed by the organizations that they are the pillars of the company (Corrado, Hulten and Sichel, 2005). It has been also argued that human capital could not be intangible asset as the human could leave the organization at any time and thus it would offer a negative impact about the company.

It has been also argued that companies spent a lot amount over the hiring and training of the humans but few people stay in the entity for a long. And fresher employees never have the talent so the record of them would be worthless (Bozbura, Beskese and Kahraman, 2007). Many reasons have been offered by the people to not to record it in the balance sheet such as companies which are people based are still not close for establishing a proper system of people based accounting, accounting standards such as GAAP, FASB has not made it compulsory to record it as an asset and if the CEO’s would agree to record it as asset than the amount would be manipulative and the understandability of final statement would decrease (Heckman, 2005).

It has been found through these studies that human capital must be recorded by the organization as asset. From decades, employees are always treated as a liability by the organizations due to their salaries and other expenses. But it has not been analyzed by the organizations that they are the pillars of the company (Bourdieu, 2011). A company could not run without the effort of the employees. If organizations would record the human capital as assets than the final statements would be more attractive. The true worth of an organization could be depicted only if all the information of a company has been disclosed by the company whatever it is. The investors could make better decision regarding the organization with the help of all the relevant data (Bourdieu, 2011). It would be easy for the organization to get a positive environment as the employees of the asset would feel better and the financial condition would be better and thus the financial performance would also enhance of an organization.

The human capital must be recognized due as the assets of the company because it would provide an overall enhancement of the company. The conceptual framework also depict that the final statement must have 4 characteristics i.e. reliability, curability, relevancy and understandability. If an organization would record it as an asset than the financial statement of that company would be more effective and efficient. So organizations must record the human capital as an asset.

Best Regards,

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Your Address

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Your Phone Number

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References:

AASB. 2017. Impairment of asset. Retrieved as on 5 April 2017 from https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf

AASB. 2017. Intangible asset. Retrieved as on 5 April 2017 from https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf

Appuhami, B.R., 2007. The impact of intellectual capital on investors' capital gains on shares: An empirical investigation of Thai banking, finance & insurance sector. International Management Review, 3(2), p.14.

Baron, A., 2007. Human capital management: achieving added value through people. Kogan Page Publishers.

Bourdieu, P., 2011. The forms of capital.(1986). Cultural theory: An anthology, pp.81-93.

Bozbura, F.T., Beskese, A. and Kahraman, C., 2007. Prioritization of human capital measurement indicators using fuzzy AHP. Expert Systems with Applications, 32(4), pp.1100-1112.

Chen, P., Ibbotson, R.G., Milevsky, M.A. and Zhu, K.X., 2006. Human capital, asset allocation, and life insurance. Financial Analysts Journal, 62(1), pp.97-109.

Corrado, C., Hulten, C. and Sichel, D., 2005. Measuring capital and technology: an expanded framework. In Measuring capital in the new economy (pp. 11-46). University of Chicago Press.

Gallego, I. and Rodríguez, L., 2005. Situation of intangible assets in Spanish firms: an empirical analysis. Journal of Intellectual Capital, 6(1), pp.105-126.

Heckman, J.J., 2005. China's human capital investment. China Economic Review, 16(1), pp.50-70.

Kaye, L. 2012. Time to start valuing human capital s as asset on the balance sheet. Retrieved as on 5 April 2017 from https://www.theguardian.com/sustainable-business/valuing-human-capital-asset-balance-sheet

Martin, B.C., McNally, J.J. and Kay, M.J., 2013. Examining the formation of human capital in entrepreneurship: A meta-analysis of entrepreneurship education outcomes. Journal of Business Venturing, 28(2), pp.211-224.

Morrissey, H. 2015. Human capital is the ultimate intangible assets. Retrieved as on 5 April 2017 from https://www.telegraph.co.uk/finance/comment/11413191/Human-capital-is-the-ultimate-intangible-asset.html

Namasivayam, K. and Denizci, B., 2006. Human capital in service organizations: identifying value drivers. Journal of Intellectual Capital, 7(3), pp.381-393.

Ployhart, R.E. and Moliterno, T.P., 2011. Emergence of the human capital resource: A multilevel model. Academy of Management Review, 36(1), pp.127-150.

Wasko, M.M. and Faraj, S., 2005. Why should I share? Examining social capital and knowledge contribution in electronic networks of practice. MIS quarterly, pp.35-57.