Human Capital: Strategic Asset Assignment 2022

Human Capital: Strategic Asset
Running Head: HUMAN CAPITAL 0

HUMAN CAPITAL
Student name
Student Address
Phone number
August 10, 2019
Mr. Tony Mount
Journalist
Newspaper name
Re: Response to Human Capital to be recognized as an asset.
Dear Mr. Mount
Almost 7.7 billion people reside in the world, but among them, only a few percent’s are the on
topmost position. Why some people are paid higher than others, do they possess some skills and
attributes, which can be called as an asset? The objective of this letter is to provide a more
practical assessment procedure by which the raised question can be answered. Every person has
some worth, some skills and talent within them. First understanding the real meaning of human
capital is necessary. The human capital is the capital intangible in nature not listed in the
financial statement. Human capital represents the skills and expertise of an individual employee
that he possesses and adds value to the organization he works with. Humans are propelled by the
brainpower that needs to be recognized in the financial balance sheet. A financial statement
mostly takes the quantitative aspect of the organization leaving out the qualitative aspect like
human skill, talent, faithful representation, satisfaction. Human is capable of manipulation and

HUMAN CAPITAL
can be manipulative sometimes, with time and experience they contribute to the growth and get
advanced in own personal attributes of human capital. An individual’s capital represents one’s
economic productivity, the competence of producing goods and services, generation of ideas. To
survive individual ‘lease’ their human capital to an employer who will further convert it into
economic benefit for the organization. For an organization, human capital is a sum of all present
and future economic value of employee’s skills and talent that they possess that makeup the total
workforce of the organization. Human capital represents a tripartite framework consisting of
Intellectual, Relational and organizational capital.
The financial statement reports provide information to potential investors, stakeholders about the
future cash inflows and outflows of organizations (FLAMHOLTZ, 2004). To help these
stakeholders in assessing the generation of cash inflows, financial reporting provides information
about the assets, liabilities, and equity (Igbalajobi, 2015). The ability to create, covert and
capitalize on human skills and expertise is the basis of competitive advantage. The International
Federation of Accountants summarized that knowledge is the basic source of getting an edge
over competitors (O'REGAN & O'DONNELL, 2001). The asset is defined as an economic
resource, tangible or intangible competent of being controlled to produce money worth and held
to have reasonable economic value and a trained employee meets this definition. Human capital
investment means investing the funds for educating and providing on-the-job training to the
workforce.
Now the real question comes in the frame, whether recognition of human capital as an asset in
the financial statement is to be made or ignored. Dealing the question systematically, looking at
the positive aspect first, of recognizing human capital in the balance sheet of the company. There
is a shift in a society working from an industrial society where machinery was the primary source

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of wealth, to a knowledge-based society where the primary source of wealth is human capital
(Igbalajobi, 2015). These people innovate new things just like Apple Company I phones,
develop new software and products. These workers have value. Even in this 21st-century era, it
has not been worked out how to value their work (Kaye, 2012). Besides, human capital in its
multiple aspects deals with the creation and application of skills and knowledge that are the focal
point of the economic growth process (Banks, 2010). Due to the transition in the thinking
pattern of people, employees are now considered as an investment instead of cost, continuing it
into the accounting of human capital investment as assets that generate a return in the upcoming
period. Human capital is important as it is observed that it increases productivity and thus
profitability of the organization. The key point in favor of reporting human capital as an asset in
the balance sheet is as follows:
 The value created by human capital will suggest a new set of financial ratios. This can be
explained with an example; the degree of labor intensiveness can be calculated by the
ratio of human to nonhuman capital factor. It is believed that the proportionate degree of
labor and capital intensity inside countries affects world trade. The above ratio assigns
different weights to different employees according to their income variation. Thus, labor
intensity calculation will reflect the quality as well as the quantity of the labor force (Lev
& Schwartz, 2014).
 Human capital presented in a financial statement provides information about any change
in the structure of the labor force. Age distribution among the workforce also plays an
important role. The age distribution would affect the value of human capital. The aging
firm is the phenomenon concept described in the organization theory. The aging firm of
an organization affects the growth rate and proportionate share in the industry.